WICS: Scottish Water needs c£1bn a year to meet asset and net zero challenges

Scottish Water faces a “significant asset replacement challenge” if it is to play its full part in Scotland’s achievement of net zero carbon emissions by 2045, regulator the Water Industry Commission for Scotland has said.

In the latest of a suite of Decision Papers it is publishing to inform the outcome of the Strategic Review of Charges 2021-27, the Commission concluded Scottish Water needs to transition to a “long term level of asset replacement” by 2045, to begin to respond effectively to the climate emergency highlighted by the Scottish Government.

It also identified an additional milestone: that there is a maximum window of eight to16 years to prepare for the replacement of the short to medium life assets. This is because it found an average asset life of 18-26 years is appropriate for short and medium life assets and the Commission’s review of historical investment suggested such assets are likely to be around ten years old on average.

This paper concludes that, within an initial eight to 16-year timeframe, Scottish Water needs to target asset replacement investment of around £480m per year in 2017-18 prices. On top, the water company will likely require around £300m annually to achieve the water quality, environmental and customers service improvements required, and to meet the demand for new connections. “The Commission has therefore concluded that, within the eight to 16 year timeframe, Scottish Water should achieve an initial milestone of delivering an annual investment programme (replacement plus enhancement) of around £780 million in 2017/18 prices.”

The Commission estimated long-term asset replacement requirements as between £620m and £770m per year for the existing assets. “Allowing for the ongoing average enhancement expenditure of £300m per year and the replacement costs of the new assets that the enhancement expenditure provides, the Commission’s analysis suggests that the long-term target range for investment should be between £1 billion and £1.1 billion per year. This includes an assessment of the scope for ongoing efficiencies in the delivery of investment.”

The regulator praised Scottish Water’s progress to date on getting a better understanding of its assets. It also noted it understood Scottish Water would have to prioritise investments, and that: “The Commission is clear that this process should ensure that all investment that is both urgent and important should be progressed expeditiously. In the Commission’s view, such an approach should ensure that customers’ bills remain as low as practicable over the long-term.”