December 2021 issue

This website includes excerpts from the latest edition of THE WATER REPORT

Full coverage is available only in the print and digital editions of the magazine. SUBSCRIBE HERE

PUBLISHED BY

KEW PLACE

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Flexible friends

In her Beesley lecture, Ofwat’s PR24 lead Aileen Armstrong called on the          sector to meet agile regulation with adaptive planning, to pursue                         uncertain, long term outcomes together.  

“The main question we should be asking ourselves at the next price review and          beyond is, what is the best way to meet long term outcomes given firstly, the              wealth of future uncertainties ahead of us, and secondly the need to protect               current and future customers. This is about moving on the                                            conversation at price reviews to focus on that question. It’s about                                 accepting that investment will be needed, but sequencing those i.                                 investments appropriately.”

So said Aileen Armstrong, Ofwat’s senior director for company        performance and price reviews, giving a lecture late in                    November as part of the annual Beesley series on                           economic regulation.

The world we’re in for PR24 is different 
from the past.”
                                Aileen Armstrong

The world we’re in for PR24 is different from the past. We need to embrace the challenges affecting the sector now,” she argued. Armstrong identified two main factors driving change. First, that expectations of water companies are changing  – including on environmental performance such as sewage pollution, and corporate

behaviours including high dividends and executive remuneration. “Ofwat needs to respond accordingly,” she reasoned. “We have to look more broadly at issues so we can drive the sector to maximise the value it can deliver,” including on public health, the environment and economic contribution. 

On the case 

Armed with a new equity injection, Ian McAulay is determined to complete Southern Water’s transformation and ensure the company is not defined by its legacy court case.

All water companies have faced unprecedented scrutiny over recent weeks as sewage pollution – and what the Government proposed to do about it in the Environment Bill – hit the headlines and social threads. But none more so than Southern Water; there was barely an article written which didn’t within a few paragraphs mention the company’s historic pollution failings, Summer court case, and record breaking fine. Ian McAulay has been at the helm since 2017 and the transformation he got underway shortly after his appointment is well progressed. And while there is clearly a lot more to do, an equity injection from new owner Macquarie makes further improvements much more reachable.

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McAulay: "We had to change."

McAulay says he has cracked a notoriously difficult nut in the process of transforming the company's culture, to put customers and the environment first. “In the Environment Agency’s annual report, it’s actually mentioned that the cultural transformation has been successful,” he says. “Also, in their view, that was very necessary. I agree wholeheartedly, we had to change.” 

 

Culture is always critical, but in Southern’s case is particularly pertinent given the deliberate misreporting and cover-up in some

of the historic cases. McAulay says employee engagement scores have improved quickly to the point where the rate of change is assessed as “outstanding” by cross-sector benchmarks. The company also now leads the industry on pollution self-reporting, topping 90%, an indicator McAulay cites as evidence of commitment to transparency being delivered. Extensive training, a chief executive open-door policy and a new “Speak Up” scheme have paid off, with 90% of employees saying

they would comfortably raise an issue. 

Kicking up a storm

A major wastewater compliance investigation is putting boards in the spotlight – while there’s no cost benefit from tackling storm overflow spills. 

“The stench of the sewage scandal grows stronger,” screamed the  press release sent out to accompany Surfers Against Sewage’s (SAS) annual water quality report for 2021. This reported that water companies issued 5,517 sewage discharge notifications over a 12 month period, an increase of 87.6% – rendering one in six days ‘unswimmable’ during the bathing season. But SAS also heralded the “people power” and citizen science that secured a stronger Environment Act and has now made sewage pollution a public, political and media interest issue. 

Tthis "sewage scandal" is not going away, despite the provisions of the Environment Bill now being settled. In the past four weeks, as well as the SAS report and the Environment Act's passage into law, we’ve had a Westminster Hall debate on sewage discharge. That came on the back of a petition that secured 111,434 signatures. 

 

And Thames Water has been fined £4m for discharging 0.5Ml of raw sewage into Oxford streams in July 2016 after maintenance failures caused a blockage. Meanwhile there’s been a Parliamentary question on fines to water firms for sewage discharges since 2018 (there have been 11, all pretty low until 2020). 

These matters are increasingly being linked to private ownership and the associated issues of governance, profit maximisation, high dividends and executive pay, and under investment.”
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Titanic opportunities

Northern Ireland Water has a favourable wind in its journey to low carbon. Does it need a political steer, asks Trevor Loveday?

Investors in their droves are looking favourably at Northern Ireland as a place to put their money. The honeypot is the £850m in funding from central government, Stormont and local partners that has started to flow into the region under the so-called City Deal for the Belfast region established in 2018.


City Deals are “bespoke packages of funding and decision-making powers” that seek to “help harness additional investment, create new jobs and accelerate inclusive economic growth.” Partner at consultant, EY, Colm Devine, said:

“Hundreds of organisations are wanting to come to Northern Ireland as part of this wonderful opportunity we’ve got.” 

But: “There is one constraint: we don’t have the right water services; we don’t have clean energy. And if we look at public capital markets, they are now saying, ‘unless it’s sustainable we won’t invest’. It’s becoming the condition precedent,” Devine warned. “So to make Northern Ireland flourish we must give the market the ability for those investors to be able to say ‘yes’.

So all eyes turn to Northern Ireland Water (NI Water) – the province’s largest energy user. It is in a position at least to catalyse the changes needed to create the desired sustainability

credentials. Its energy strategy has, according to Devine, been creating a stir that has attracted attention globally.

 

Speaking at NI Water’s recent launch of its strategy report, The Power of Water, Devine told how he hosted, earlier this year, a forum of all chief executives of Australian water companies who, he reported, were eager to hear what was happening at NI Water: “Because the control centre, the integrated energy strategy, they’re world firsts in some cases. And the world’s looking from the outside in – to the credit of NI Water – into what’s the intellectual property we’re developing in Northern Ireland?”

If we look at public capital markets, they are now saying, ‘unless it’s sustainable we won’t invest’. It’s becoming the condition precedent.”                                        Colm Devine, Partner, EY

The water sector debuted on the global climate stage at COP26, brimming with ideas to make a contribution. 

For all the bells and whistles, the formal global outputs from COP26 were underwhelming at best, negligent at worst – given the compelling evidence and powerful first-hand accounts of the impacts of climate change shared in Glasgow.  But the story is more positive for water.

 

For while it made few headlines, the global water sector did succeed in putting itself on the climate conference map for the first time. This included for the role it can play in mitigation as well as mitigation. There was evidence of international and cross sector collaboration, and a sense of urgency under both the ‘Race to Zero’ and ‘Race to Resilience’ banners. 

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From nought to 26

Where the smart money is

New research from Arqiva, Waterwise, Frontier and Artesia shows smart water metering is economic and desirable.

“Hey water sector! New research:…smart water meters are NOT too expensive! £1.73 benefit for £1 spent! Positive investment case, sector-wide and in every water company area! Come ON let’s have a smart water meter in every home PLEASE.”

So was the plea from Waterwise managing director Nicci Russell on Twitter following the launch of two pieces of research commissioned by Arqiva at a Waterwise smart metering webinar last month. Both had extremely promising results for the future of getting smart.

Positive pile up

The headline finding was from a cost/benefit study, conducted for Arqiva by Frontier Economics and Artesia: compared to a base case of continuing current metering policies, a coordinated roll-out of water smart metering (defined as AMI) across England and Wales in the period 2025 to 2030 would deliver benefits of £4.4bn compared to costs of £2.5bn.

 

So net benefits would be  close to £1.9bn, or £1.73 of benefit for every £1 of cost incurred.

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Spring is poised to get an innovation party started in water, say Shaunna Berendsen and Steve Kaye.

Spring: into action

Shaunna Berendsen likens the imminent launch of Spring – the water sector’s new Innovation Centre of Excellence – to creating a party and inviting others to come. As Spring’s client project director,

she has been part of a small team which has been working

flat out for months making the idea – which arose out of the

water sector’s 2050 Innovation Strategy – reality. Come 20 December, a minimum viable product will go-live, effectively throwing open the doors to the party.

There is already quite a bit to celebrate. Spring could be

game-changing for innovation efforts in water: welcoming new players in, sharing knowledge and best practice, hastening change, eliminating duplication and driving efficiency. Spring’s stated mission is to "connect, integrate and augment existing excellence within and outside the water sector, injecting innovation into the industry through learnings and best practices”. 

South East Water is part way through the co-creation with stakeholders of an environmental strategy, in the form of a 25 Year Plan. Head of environment, Emma Goddard, says the company wants to ensure it has a framework within which in can enhance the environmental resilience of its supply area “over the long term and at the right pace”.

 

This follows work on its PR19 business plan, where the company wrote a chapter on environmental resilience and publication of Defra’s 25 Year Environment Plan (25YEP). South East Water borrowed the 25 year timeframe and is pursuing a strategy that aligns with Government ambitions there and in the Environmental Bill.

The plan will be broad, going beyond what is provided for under

Goddard: long term and at the right pace”.

are often complex and fixing one aspect of the environment can lead to an adverse environmental impact in another area.”  It will set short and long term milestones “for all integrated aspects of the environment rather than trying to fix limited aspects of the environment in a splintered and short term way.” 

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will keep you on top of the threats and opportunities emerging from retail and upstream competition.

It's the eye on the competition.

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Ready for the road

The Retailer Wholesaler Group has been working on delivering the headline actions identified at the start of the year to boost business water efficiency, including through finding out what customers think.

To get customers to take up water efficiency services, there “needs to be a push” from either the retailer or wholesaler, says Everflow’s head of regulatory affairs, Lois Gill.

 

She is one of a number of retailer and wholesaler representatives who have been working on developing the Water Efficiency Action Plan published at the start of the year by the Retailer Wholesaler Group.

 

Together with Wessex Water’s head of customer insight and participation Aimee Shaw, Gill has co-led the task and finish group working on actions 3 and 5, as set out in the plan. As a reminder, the five headline actions are: 

1. Develop a shared view with policy makers and regulators of the scale of short term and longer term non household (NHH) water efficiency ambition. 

2. Improve understanding of the nature of NHH water consumption through smarter use and better sharing of data. 

3. Improve engagement of retailers in the water resource planning process.

4. Address wider regulatory and other relevant barriers to NHH water efficiency, including reviewing tariffs, targets, incentives and penalties. 

5. Understanding customer needs and raising the profile of water efficiency with businesses and their customers. 

Customers are not going to drive water efficiency, but if it is driven they will respond.”                                                                                                       Lois Gill, head of regulatory affairs, Everflow

“It’s time to act”

MOSL told this year’s chief executive officers' forum that the time has come for everyone to rally round the flag of getting the retail market into a better place. 

No one disagreed with MOSL’s assertion at its CEO Forum this year that “It’s time to act” to resolve ongoing frictions and address fundamental design aspects that are holding the non household (NHH) market back. MOSL’s view, circulated in a strategic narrative ahead of the event, is that the market is fixable without legislation, which implies prompt change is possible, if there is a will for it.

Opening the meeting, chair Anne Heal noted two key developments since the last in-person Forum in 2019: that Covid had revealed

fragility in the market; and that environmental ambition had rocketed. She called for the market to be considered fully as part of wider policy, asserting that as consumers of 30% of all water put into public supply “these customers are not ignored”. She touched on the part MOSL specifically could play in providing data-based insights as well as participating in market governance and strategic direction. Heal said it was “crucial we revisit some of the choices made at market opening”.

Market Performance Framework: is it time to start afresh?

The market could be in for quite a shake up in terms of how performance is defined, monitored and incentivised. 

What performance levels should be expected of water wholesalers and retailers as they serve business customers in the water market, and how should wholesalers and retailers be treated when they fail or exceed these performance levels? These key questions are now up for debate. The market seems to collectively accept – to one

degree or another – that the current set of arrangements, known as the Market Performance Framework (MPF), is not delivering the outcomes customers want. A "Call for Inputs" (CFI) has been issued, with a view to redesigning the MPF as the market heads towards its fifth anniversary in April 2022. 

THE
WATER REPORT
HARD. WATER

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