Expert analysis of the UK water sector
March 2025
Issue 113
Excerpts from the latest edition of The UK Water Report.
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Report | PR24
Eight expectations
Severn Trent and Pennon forecast they can outperform in AMP8.
By Verity Mitchell
At the opposite end of the scale from those who are starting their Competition and Markets Authority appeals against the PR24 final determinations, are those who think they can outperform in 2025-30.
Severn Trent has said it is confident of generating £300m of outperformance against regulatory targets. This includes £50m of rewards from Price Control Deliverables which will be delivered later in the price control period, and £250m of Outcome Delivery Incentives (ODIs).
The £450m of transition spend, funded by Severn Trent’s 2023 equity raise, has allowed management to accelerate improvements. It confirmed that, as a result of this, £25m of ODI rewards would be earned in the first year of the price control period, to March 2026.
The time and money spent on the price review is vast and distracts from the goal of improving water and wastewater services.
Severn Trent also confirmed that, not only would it deliver c45% real Regulatory Capital Value (RCV) growth (including agreed transition spend) in AMP8, but that management believes that investment needs would lead to a further c20% average RCV growth over the next 25 years.
Meanwhile Pennon expects RCV growth of 34% over the period. It is targeting 7% Return On Regulated Equity to 2030, based on outperformance in financing, totex and ODIs. It is re-shaping the business and integrating SES Water, aiming for £86m of run rate annualised savings to 2030. Pennon has issued £490m of new equity, maintaining the dividend in absolute terms and then growing it in line with CPI to 2030. It is aiming for a water business gearing of 60% - 65% and has already indicated £0.3bn of regulatory outperformance
Report | Regulation
On the leash
Treasury tells watchdogs to slim down and speed up to support growth.
HM Treasury has published an Action Plan setting out a new approach to ensure regulations and regulators support growth. The vision is to sweep away complex and duplicative regulation that stifles progress and innovation, and to end the scourge of regulatory uncertainty and risk aversion. In its place, Government wants to see a system that supports growth, is targeted and proportionate, is transparent and predictable, and adapts to keep pace with innovation “including artificial intelligence, digitalisation, decarbonisation and increased automation.”
To achieve the vision, chancellor Rachel Reeves said the Government will implement a package of reforms over the Parliament based on three key planks:
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Tackling complexity and reducing the burden of regulation – including a commitment to reduce the administrative costs of regulation for businesses by 25% by the end of this Parliament, and to remove or consolidate regulators where sensible.
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Reducing uncertainty – simplifying the duties of key regulators, including through the reviews of Ofgem and Ofwat, will be key here.
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Challenging excessive risk aversion – Government will overhaul accountability, by formalising and strengthening performance reviews which will be conducted by all sponsoring government departments, and by setting out the next stage of commitments secured by the Regulatory Innovation Office.
"Government wants to see a system that supports growth, is targeted and proportionate, is transparent and predictable, and adapts to keep pace with innovation."
By Karma Loveday
Report | Expert Forum
On the right road
The Water Report Expert Forum says the Independent Water Commission is heading in a promising direction.
By Karma Loveday
“A solid start” and “encouragingly comprehensive” sum up The Water Report Expert Forum’s overriding sentiments towards the first outpouring from the Independent Water Commission: its Call for Evidence, which is live until 23 April.
In fact, there was universal agreement from our Forum that the Commission had hit the nail on the head in identifying the key issues as follows: the need for clear long-term planning; the need for strategic coordination across sectors impacting or interacting with water; the need to sort out regulators’ functions and to improve the price review process; and the need for an improved infrastructure resilience framework.
We asked the Forum what it would like to see on each of the consistently raised issues and areas of possible change identified by the Commission. Among the many suggestions were:
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Planning – “The focus should be on longer term planning but there should be a balance between long term (25yr+) and short term (up to 5yr). Everything is changing so quickly we cannot foresee what the UK might look like in 25 years and what the challenges might be.”
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Coordination – “Currently water resources planning in England is very passive and uni-directional…'tell us what you need and we will provide’. There doesn’t seem to be any substantive steer to other sectors to focus water-hungry development in areas where there is water available.”
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Regulation – “The time and money spent on the price review is vast and distracts from the goal of improving water and wastewater services.”
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Resilience – “Resilience standards are crucial to be able to compare companies, highlight areas of weakness and allow fast resolution.”
The time and money spent on the price review is vast and distracts from the goal of improving water and wastewater services.
Report | CMA Appeals
Out of pocket
CMA appellants warn capital won’t turn out for water, if PR24 stands.
With Thames Water’s PR24 price appeal on hold, the Competition and Markets Authority has begun to scrutinise the Statements of Case submitted by the remaining five appellants: Anglian Water, Northumbrian Water, South East Water, Southern Water and Wessex Water.
Financeability – the risk/return balance and insufficient return – is the common thread running through all the cases. This is unsurprising given shareholders have been instrumental in pressing for the appeals, and because all companies have to attract an enormous amount of capital for the foreseeable. It is a fundamental challenge to Ofwat’s final determination decisions.
Other issues raised by multiple companies include resilience (most urgently raised by South East – its whole appeal is on the basis of water security jeopardy); and asset health/capital maintenance, where both Anglian and Northumbrian in particular sound at the end of their tethers, having raised the matter for years with Ofwat with little change resulting. Both of these issues are also fundamental matters for the CMA to adjudicate on.
"Financeability – the risk/return balance and insufficient return – is the common thread running through all the cases."
Interview | Peter Simpson, Glasgow World Water Congress
"There is a breakdown in trust at the moment with the sector, and sound science is a vehicle to cut through, navigate, reposition, and help everyone have independent data to understand the matter."
Research engine
New CEO Mike Rose wants to drive UKWIR’s impact forward by prioritising the most urgent research topics and deciding where to lead and where to fast-follow.
By Karma Loveday
It is certainly an interesting time for Mike Rose to be taking on the role of chief executive of UK Water Industry Research (UKWIR), the sector’s central, collaborative research body. This month, we enter a new five-year asset management period, where both expectations and scrutiny are running high and the work programme is supersized. There is an independent commission, on the brink of recommending a shake-up of central tenets of the sector, including regulation, management and planning. And all the while the Government is fixed on growth, which the water sector needs somehow to support.
What research can contribute in this landscape – how it can pitch in to the challenges and opportunities arising – must be front of mind for Rose as he settles in to his new post.
His initial view on what research can contribute against the challenging and uncertain backdrop is first and foremost confidence and impartiality. “There is a breakdown in trust at the moment with the sector, and sound science is a vehicle to cut through, navigate, reposition, and help everyone have independent data to understand the matter. I think our research, cast in that way, will help the sector immeasurably move forward.” Part of that, he adds, is “delivering on the promises that have been made, whatever they are”. Research will be essential to help deliver new levels of service and resilience, and to engage with new technology and innovation.
Second, research has a vital role to play in helping the sector prioritise its activities. “Yes, there’s a massive uptick in capital, but we're still going to need to prioritise, as a sector, the decisions that we make and what's most important. I think research can play a hugely important role in that.”
Report | Storm overflow
The dirty job of getting cleaner
2024 storm overflow data shows flat performance, as changes coming from the EA on pollution reporting will make things look worse before they get better.
By Karma Loveday
The sector took another hammering when storm overflow data for 2024 was released at the end of March, with environment secretary Steve Reed describing it as “disgraceful” and The Rivers Trust highlighting “no significant progress”.
There was in fact a 2.9% decrease in spill numbers to 450,398 compared to 2023, and the average number of spills per overflow was down from 33.1 to 31.8. But spill durations were up marginally (0.2%) and totalled 3,614,428 hours across the year.
In their commentaries, Defra and the Environment Agency highlighted forward factors that should lead to better future results, including the £10.2bn being spent across 2025-30 on storm overflow improvements; new storm overflow policy and Storm Overflow Assessment Framework guidance; deterrents in the Special Measures Act; and more active inspection and enforcement. Those factors should lead to storm spill improvements in the years ahead.
However, things will likely seem worse before they get better in the public perception as far as wider water company pollution is concerned, in light of changes to guidance on reporting and recording pollution incidents that have just been consulted on by the Environment Agency.
The changes are designed to increase transparency, simplify the reporting and categorisation process, and improve consistency – so the Agency can capture a more accurate picture of water company incidents and their impact on the environment. But ‘more accurate’ in this context will equate to ‘worse in appearance’, even if actual performance remains stable or improves.
There are three key changes:
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Dry day spills from storm overflows will be classed as pollution incidents and must be reported on as incidents on a monthly basis by companies.
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Water companies’ ability to use ‘no impact’ claims to have Category 3 water pollution incidents downgraded to Category 4 incidents, will be removed.
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Water companies will be required to report all water pollution incidents, no matter how small.
‘More accurate’ data will equate to ‘worse in appearance’, even if actual performance remains stable or improves.
Competition Watch
Report | Performance
Credit support and fragile finances
The CMA will hear Castle Water’s appeal against Ofwat’s credit ruling on wholesalers in difficulty.
By Karma Loveday
The Competition and Markets Authority (CMA) has granted Castle Water permission to appeal a decision by Ofwat on credit in the non-household retail market. It will make a ruling on the case by 2 May.
The appeal concerns Ofwat’s decision to reject a change to the Wholesale Retail Code that Castle proposed in light of wholesaler financial resilience jeopardy. The change sought to temporarily stand down the requirement for credit security to be provided by a retailer to a wholesaler if the wholesaler’s balance sheet falls below the credit rating required by Ofwat in the wholesaler’s licence.
Castle argued that potentially the credit posted could be vulnerable to being drawn upon beyond the sums due from the retailer to the wholesaler, and potentially, banks issuing letters of credit for retailers may refuse to do this (or charge a premium for higher risk) if the recipient wholesaler is a failure risk.
Ofwat rejected the change proposal, and Castle is challenging that at the CMA.
The credit posted could be vulnerable to being drawn upon beyond the sums due from the retailer to the wholesaler
CONTENTS
This months article - March 2025
Report
Statements of case to the CMA
4
Report
Financial resilience
9
TWR Expert Forum
Cunliffe endorsed
12
Industry Comment
A new course for water regulation
16
Report
Pollution reporting and spills data
21
Feature
Mayors convene clean-ups
24
Report
Global cities in climate peril
28
Feature
National Leakage Centre
30
Industry Comment
Biodiversity for big projects
33
News Review
Sewage class action lawsuit
35
Report
Capital Markets Days for Severn Trent and Pennon
8
Report
Regulating for growth
10
Industry Comment
Innovate to deliver
15
Comment
Water Commission brings totex transparency
18
Interview
Mike Rose, CEO of UKWIR
22
Report
Yorkshire Water proactive in sewage enforcement response.
27
Industry Comment
Drought guidance
29
Report
The Planning Bill
32
Report
Drinking water recommendations
34
Industry Comment
Sink or swim
36
Competition Watch
Report
CMA to hear Castle’s appeal
37
News Review
Cunliffe Commission moots business market contraction
38