Water customers can’t cross subsidise other users in multi-sector reservoirs

Public water supply customers should not subsidise other users in multi-sector reservoir (MSR) systems, RAPID has emphasised following the publication of a study undertaken by CEPA and Agilia for the regulatory alliance in partnership with Anglian Water, Northumbrian Water, Yorkshire Water and Water Resources East. MSRs are being considered by companies such as Anglian Water for is proposed South Lincolnshire and Fens Reservoirs, because of the potential they offer to deliver public value at lower cost than single-purpose schemes.

The study examined the legal and commercial models that could facilitate the delivery of MSR systems, including regarding funding, financing, development and delivery within the existing legal framework. It considered how each of these elements might be affected by the inclusion of different types of user (for example, flood management, irrigation, industrial users, leisure/tourism), and different models that might be pursued for incorporating various beneficiaries.

RAPID said costs and risk must be fairly shared between users, noting this may prevent MSR schemes from developing where third parties are unable to commit their involvement early in the design and development of the reservoir: “Their early involvement and commitment to funding will be important to ensuring all the MSR benefits can be designed and built into the reservoir from the outset.”

The study – which scrutinised value for money, funding adequacy, financeability and bankability, delivery and contractual models, and risk allocation – observed MSR systems will be challenging because of the complexity of obligations and risk they present. There were three key findings.

Identifying and designing a water resource solution that represents best value for each user may be difficult – economies and additional benefits will need to be traded off against complexity and risk and therefore the case for including each user needs to be tested.

Developing a financeable model when non-water company and non-public sector off-takers are added to the scheme may be challenging as all international examples to date have been extensively supported by public funding and financing. To obtain private finance for an MSR system, each funding stream needs to be sufficient to cover the additional cost of incorporating the use case, and revenue risk needs to be allocated appropriately. RAPID said: “The contribution of each off-taker would need to reflect the uncertainty they introduce into the financing structure to avoid water customers subsidising higher risk users.”

Small users are unlikely to be able to participate in a MSR system without an intermediary.

Despite the challenges, RAPID backed further investigation of MSR systems by interested companies given the potential benefits. It said it would carry out a critical review of the models identified in the report, and look at where it may be able to unlock any barriers or mitigate risk.