Ofwat published their ‘Water 2020’ proposals for regulatory and market reform for the water sector in December 2015[1].  This included a range of suggested changes to how water resources are managed, focusing on the role of much greater competition.  The consultation on this closed in mid-February and will now be considered for implementation in the next round of water company business plans, from 2020 onwards.

In this, the last of my three blogs on the changing landscape for water resources, I will present some of the challenges and issues that Ofwat’s proposals present.  I will refer to CIWEM’s consultation response[2], to which I also contributed.

The central premise of the proposals are that markets have a greater role to play, and could result in benefits that are not currently being realised, particularly by removing barriers to water trading.  Ofwat also state that market information would also reveal new/better information on performance, enable a more efficient use of existing resources, and ensures investment occurs at the right place and time.

This all sounds positive, but as CIWEM point out, there is very little evidence to show that this works in other similar markets, and nothing to show how it will deal with the specifics of water resources – particularly with regard to drought management and environmental protection.

Effective water management is fundamental to society in terms of public health, commercial activity, and environmental protection.  These fundamentals can become compromised in drought due to the scarcity of water.  The UK has experienced moderate drought events over the last twenty years, and just avoided a major drought in 2012 after an extremely dry period was followed by the one of wettest spring/summer on record[3].  More severe and frequent droughts are expected in the future (so much so that many companies are moving away from water resources plans based on historic data).

I agree with CIWEM, who state that “It is to these challenges to which market based and other solutions need to be addressed and tuned, not to everyday supply-demand cost questions.”

My other main concern is that the market for does not, and will not capture the full costs and benefits of supply.  Abstracting water from the environment has an environmental cost that is not accounted for, and cannot be traded directly.  As a result it is necessary to introduce regulatory instruments or incentives to account for these.  I am concerned that increasingly complex market structures will fail to account for externalities effectively.

On a more positive note, competition is likely to drive increased water efficiency, as new entrants look to reduce their customers’ bills in a number of ways.  Business Stream, who have been the principal retailer in the Scottish non-household market since 2008 estimate that 20 billion litres of water has been removed from use over this time[4].  Retailers will also have to understand their customers’ supplies better, and this should result in a better understanding of supply and distribution systems, leakage and consumption.  There are opportunities for innovation here  – for example through the use of smart meters.  Customers (especially those who operate multiple sites across several incumbent companies) should get a better service.

The key question is whether the concerns highlighted here will be offset by the benefits.  We will now a lot more when the market becomes fully operational in 2017.  And it’s likely the pace of change will continue to be fast: there is already a head of steam to open the household market to competition.  This opens up a wide range of significant concerns for the industry to wrestle with, such as the cross-subsidy which means that all customers pay the same unit rates in an area. [5]

Any changes that come out of the competition programme will need to be delivered alongside the evolving water resources plans and in the context of abstraction reform.  In the past I may have been heard complaining that water resources planning was getting a bit boring…it is possible that in the next few years we will be struck by the curse of living in interesting times.

[1] Water 2020: Regulatory framework for wholesale markets and the 2019 price review – summary

[5] See more from the All Party Parliamentary Group on Water here –http://connectpa.co.uk/water/