Artesia Consulting and Frontier Economics have undertaken a large collaborative project with almost all Water Companies in England and Wales investigating the impact of shock events and particularly Covid-19 on Per Capita Consumption (PCC). This metric has been fundamental for measuring and analysing water consumption in the UK. Artesia and Frontier have both conducted previous research that estimated an increase in PCC of 10-15% during the Covid-19 pandemic. Emerging from lockdown we have experienced new societal norms and further shocks in the forms of extreme consecutive summers and a cost-of-living crisis.
In this project we:
- Developed an analytical framework to quantify and justify shock events.
- Assessed the quantitative impact of three “shock” events through statistical modelling and qualitative evidence:
- Covid-19 and the new normal including greater home working.
- The cost-of-living crisis due to high inflation and poor real wage growth.
- Consecutive peak summers.
- Created a framework to assess the persistence of shock events and make predictions for AMP8 and beyond.
- Created a regulatory framework to determine the criteria for ex-post and ex-ante adjustments to PCC targets.
This study found that shock events in recent years have caused a disconnect between company activity to reduce PCC and the changes in PCC that companies have reported. We note that the combined aggregated net impact of shocks between 2020 and 2023 is greater than the year-on-year reductions in PCC determined for PR19. Without an adjusted regulatory approach, this could undermine investment incentives of the PCC Outcome Delivery Incentive (ODI) going forwards. We therefore set out a proposed regulatory approach for evaluating shock events and determining whether adjustments are appropriate for these individual shocks. While doing this we also recognised that a more holistic outcome measure may better reflect the relevant outcome behind PCC. We recommended a company specific ex-post adjustment to PCC for AMP7.
Using forecast variables for AMP8 we extended our analysis of shock events to predict the future impact of shock events. Whilst there are greater uncertainties when modelling future consumption, we assessed that the societal impact of Covid-19 will continue to have an impact on the PCC metric moving forward. We subsequently recommended an ex-ante adjustment to PCC targets for AMP8 and recommend a number of approaches for improving the financial incentives for reducing water consumption moving forwards.
