Ofwat sets out the detail of its leakage reporting overhaul

Ofwat has set out the details of the review of leakage reporting it flagged up before Christmas. The aim is to create a new methodology for use at PR29. Arrangements in AMP8 will be unaffected although there will be some shadow reporting in-period, potentially from 2026-27.

In a letter to regulation directors, Ofwat explained the current methodology – “a leakage estimation derived from a combination of real data, infilled data, samples, studies and assumptions” – dates to 1994 and is not suited to a water deficit world or the imminent rollout of smart meters.

Moreover, it has become overly complex and “does not incentivise companies to maintain sufficiently high levels of accuracy in all components of the water balance”. For 2023-24, 11 companies reported a water balance gap greater than +/- 2%, and five companies at greater than 3%. Ofwat said: “We believe that a higher degree of accuracy is required to deliver a better estimation of leakage.”

Ofwat said it had not pre-judged the outcome of the review, but would seek to: 

• Incentivise companies to continually improve the accuracy of data, minimising where possible the need for assumptions and infilling of missing data.

• Understand best practice for each component of the water balance and incentivise companies to maintain a high degree of confidence in their water balance. “In this we want to ensure the focus for leakage reduction is on the detection and repair of real losses, not apparent losses." 

• Simplify the calculation.

• Consider how best to incorporate smart meter data.

• Secure a consistent approach with environmental regulators.

• Consider international norms and their suitability for use here.

An information-gathering exercise will run through spring and summer, including a deep dive of each water company’s approach. Workshops and work streams will follow in summer and autumn, with the likely content to include:

• The emerging picture of best practice across all companies.

• A decision on whether to adopt a ‘top-down’ vs a top-down bottom-up’ approach, and detail of the calculation. 

• International comparators. 

• Components of the calculation, expected accuracy and incentivisation. 

• Upstream (trunk main and service reservoir) leakage.

• How to best use smart meter data. 

The findings from the workstreams will be drafted into a methodology for consultation in late 2025/early 2026. Ofwat will consider the consultation responses, before publishing the finalised methodology by summer 2026.