Excerpts from THE WATER REPORT
February 2021 issue 68
FULL STORIES AVAILABLE ONLY IN THE MAGAZINE IN PRINT AND PDF
CONTENTS full contents of the magazine
REPORT Post Brexit environmental regulation: where are we now?
TWR EXPERT FORUM Bridging the gap between green ambition and delivery.
REPORT CMA backtracks on the WACC.
INDUSTRY COMMENT Nature-based solutions and Wessex’s catchment market trials.
INDUSTRY COMMENT PA charts the path to 2050 net zero.
INDUSTRY COMMENT Accent on PR24 customer engagement.
INDUSTRY COMMENT Frontier pinpoints priorities to improve regulation.
NEWS REVIEW Anglian Water signs Terra Carta.
NEWS REVIEW Innovation in Water Challenge opens to entries.
INDUSTRY COMMENT Skewb seeks a better balance for water.
REPORT Standardising contracts to boost water trades.
Environment Bill delayed
Late last month, it emerged that the Government had opted to hold the Environment Bill in the Commons to carry it over into the next session, citing compressed time for debate because of the Covid crisis. Had the Bill moved to the Lords but failed to complete its passage, there would have been an even longer delay than the now expected six months, as the legislation would effectively have had to start its passage again from scratch.
That logic did not stop ire from green groups. Green Alliance, for instance, said the Bill had been “plagued by a catalogue of delays and consistently held back while other legislation has passed”.
Environmentalists have many outstanding asks of the Bill, including for legally binding milestones to be built in alongside ultimate targets including on water quality; for a “net zero” equivalent goal for nature; for the new Office for Environmental Protection (OEP) to have independence and teeth; and for environmental principles, such as acting with precaution and avoiding harm, to guide the actions of all public authorities and departments (there are loopholes presently).
Water companies have their own specific priorities, as recently restated by Water UK.
A second paper dealt with choosing a point estimate for the cost of capital, comprising a point estimate for the cost of debt (dealt with in the debt paper) and a point estimate for the cost of equity within a determined range. The CMA set the latter at around 0.25% above the mid-point of that range.
It argued its view remained that choosing a point above the middle of the range would be beneficial and result in “an appropriate balance of risk in the round across the determination” –though it noted that: “We consider that the risk of setting the cost of equity too low is not as high as we had implied in our PFs, since there is a greater probability that the right estimate is towards the middle of the range.”
REPORT Ofwat to expedite Covid debt decisions.
REPORT MOSL promises more for less in 2021-24.
FEATURE Bilaterals programme gets underway with the first process due through the hub by Summer.
NEWS REVIEW UU incentive schemes improve occupancy data.
INDUSTRY COMMENT Everlfow on weathering the storm in the retail market.
The AMP7 period will see substantial projected spending on new and refurbished assets of greater than £50bn. Further, the industry will be decommissioning large- and small-scale infrastructure. It is vital that both these activities recognise the opportunity to minimise emissions, by reducing embedded emissions, using carbon efficient materials, assessing the future carbon impact of the assets, adopting the principles of the circular economy and managing timely decommissioning, with a focus on reduce, re-use and recycle.
Further, there is also the need to adapt current and future infrastructure to both the physical and transitional risks that climate change poses.
However, it is becoming increasingly clear that public funding and regulated expenditure alone will be insufficient to turn the tide. And we cannot expect the gap to be made up by philanthropy. Market mechanisms that can mobilise private capital are needed to do some of the heavy lifting.
A crucial test for the price review and ELM design will be how well they promote and accommodate private funding for private goods, reserving public funding for the public goods where government needs to be the buyer. The key design risk is that prescriptive input- based schemes crowd out private investment. We have chosen to bring forward catchment markets in nature-based solutions to show how we can deliver more for the environment by using existing investment differently.
A few noted the contribution water makes is substantial, particularly compared to other sectors – for instance: “It is hard to think of ten companies that do more for the environment than the ten water and sewerage companies in England & Wales.” Others were at the other end of the scale, citing for instance “Mediocre performance and poor value for money” and “There's a world of difference between the rhetoric and reality. Companies talk up what they are doing, but…compliance with permits is poor and pollution incidents are at the same unacceptably high level as they were 12 years ago. Wastewater assets have suffered from chronic underinvestment since privatisation, and the frequency of spills from Combined Sewer Overflows can no longer be justified as an infrequent event. The only area where companies are making good progress is in reducing their carbon footprint.”
Ofwat would not be drawn on the likelihood of bad debt costs across the industry exceeding 2% of turnover – up to which point retailers have been told to deal with the impact themselves. It pointed out that “the scale of the customer bad debt issue for the business retail market is currently unclear” and that “bad debt costs can take time to crystallise and that it may take some time for a clear picture to emerge, including for example, the assessment of whether unpaid invoices have crystallised or are likely to crystallise as bad debt costs”.
Bad debt costs can take time to crystallise and it may take some time
for a clear picture to emerge." Ofwat
Head of planning John Gilbert emphasises that this shift has been a real team effort, steered by MOSL but with extensive input from trading parties and constructive support from Ofwat and Defra. “Everyone is trying to work towards this goal of having effective and efficient solutions,” he says.
This collegiate, collaborative approach is essential, says Gilbert. As with pre-2017 preparations for market opening, the market needs to move forward together if a centralised bilateral solution is to be a success. Moreover, the issues are thorny and complex – hence the earlier delays in getting the bilaterals programme off the ground. It’s all very challenging, and will continue to be, and the market won’t meet the challenge unless it works collectively.
It looks like this lockdown could be tougher for businesses, including water retailers, than the first. However, in some ways, they may be better prepared, although the support mechanisms aren’t the same as they were first time around.
Ofwat has confirmed that the temporary vacancy scheme will not return, the rationale being that more support is available from government.
There were also concerns about the household market cross-subsidising businesses through the scheme.
We do not yet know how far the market will be allowed to recover
bad debt costs."