Defra’s strategic policy statement lacks ‘precision and priorities’

Utility Week hears the initial thoughts from the water sector on the first draft of Defra’s strategic policy statement to Ofwat, with commentators warning that it lacks the detail required to trigger the investment needed at PR24 if the government is serious about tackling river pollution and decarbonisation.

The first draft of Defra’s latest Strategic Policy Statement (SPS) was released last month and is currently under consultation. The early response has been far from glowing, with the lack of detail or timescales suggesting it will become yet another missed opportunity for change in the water sector.

The SPS to Ofwat ahead of PR24 was intended to lay out the government’s expectations and priorities for the regulator to set in the price review. However, industry commentators told Utility Week that as it stands, the draft SPS fails to do so.

While some parts are widely welcomed, such as the focus on resilience and environmental protection, there is no precise plan or schedule for realising these aims, and crucially, no clarity on what the government expects to happen.

Another omission is any mechanism to hold Ofwat to account for delivering what is in the SPS.

One sector commentator notes that last SPS in 2017 lacked the priorities it was supposed to set meaning there was no correlation with what happened in PR19.

They say Ofwat’s accountability “tends to be a little ambiguous”, with a something of a “democratic gap” that needs to be addressed. On the one hand, Ofwat is accountable to parliament, but it also has a close relationship to Defra. The chair of the board is appointed by the secretary of state, but there is no parliamentary mechanism to hold the regulator to account.

The statement requires Ofwat to report progress to its board and through its annual report and accounts. The source tells Utility Week this will be insufficient to ensure the regulator follows through on its responsibilities: “(It) remains quite woolly, so Ofwat could say it has complied with the vague obligations without actually doing very much and not expect to be held accountable.”

In the run up to the publication of the SPS, there were very encouraging noises made by government in support of investment in cleaner rivers. This included Philip Dunne’s private members bill on pollution, which was incorporated into the workings of the upcoming Environment Bill.

There was also a series of Environmental Audit Committee sessions that called expert witnesses and stakeholders as well as the representatives from the regulatory bodies. These sessions heard that the monitoring of pollutants from industry, agriculture, highways and wastewater treatment was not fit for purpose.

The sector was heartened by this focus, hoping that precise goals in the SPS would trigger the necessary investment in the next price review. However, there are now concerns that a lack of precision and prioritisation in the SPS will mean it does not translate into action.

Investment will be essential to deal with combined sewer overflows (CSOs) and sewage discharges in the wastewater networks that will come at a cost. Water UK estimated separating the combined sewer networks could have a price tag of £100 billion.

Richard Emmott, director of corporate affairs at Yorkshire Water says: “We’d like to see government be more precise in terms of what it wants, then Ofwat to be more precise about how it’s going to work with the sector to deliver that.”

He adds that while there is “some excellent content” in Defra’s SPS, the company would like to see more.

“There is clearly a public demand for cleaner rivers, and we would like more emphasis on what the secretary of state expects water companies to invest in order to achieve this,” Emmott adds.

“We would also like to see a clearer sense of the order of the government’s priorities – that would give Ofwat a much better framework in which to conduct the next price review. We’d also like to see more mechanisms for Ofwat to be accountable for how it delivers on the SPS.

“That may be through publishing an annual letter setting out how it’s delivering on government objectives or, ideally, through an annual hearing at the Defra select committee which it could come under scrutiny for its workplan and how it’s delivering on objectives.”

The need for accountability and clarity is also picked up by other commentators.

Darren Rice, Anglian’s head of policy and regulatory strategy, describes the SPS, in its current draft, as a missed opportunity to promote investment in the environment and carbon reduction in the current decade. He says the draft needs significant improvement before it is laid in parliament later this year.

“Positively, the SPS recognises the need for future investment to deliver long-term environmental and social value. This needs to be facilitated by a stable, predictable regulatory regime which incentivises investment at the scale required to address the future challenges facing society and the environment,” says Rice.

“However, the draft presents a long list of issues which, effectively, are left to Ofwat to balance off alongside its statutory duties. This does not seem helpful to the achievement of government’s policy priorities, nor particularly useful as guidance for Ofwat.”

He suggests an “unequivocal steer on the importance of delivering a small number of key priorities for PR24” as a preferable approach. Those priorities should firstly focus on enabling the sector to deliver the additional investment needed to meet its net zero carbon by 2030 target.

Secondly, they should see water companies playing their role in a collective effort to safeguard chalk streams and reduce pollutions – adopting nature-based solutions where possible.

Thirdly, they should bring forward a blend of water demand management initiatives and investments in supply-side enhancements so that all regions are resilient to a one-in 500-year drought event well before 2040 – which is the date proposed in the current draft.

“Ofwat should also be able to show, during the process and before the die is cast in the final determinations for PR24, that these priorities are being met,” Rice adds.

“There is some positive and welcome language about the need for more long-term thinking in both Ofwat’s initial discussion document on PR24, and in the SPS. However, there is no clear definition or prioritisation of desired outcomes in the SPS, which is essential to address.

“In addition, the kind of changes needed to the regulatory system to unlock the scale of investment necessary have not yet been proposed by Ofwat, although we hope that this may emerge as Ofwat develops its PR24 approach.”

Speaking from a water-only perspective, Portsmouth’s chief executive Bob Taylor says the company was expecting more see more from both the SPS and Ofwat’s initial consultation on PR24,

While river health is essential to the whole sector, the recent emphasis on pollution, Taylor points out, relates more to the companies treating wastewater than the water-only companies.

“We hope we won’t see this price review overshadowed by the drainage and river water quality arguments, because in that one topic alone there are very large investment needs that don’t particularly affect us. We don’t want the whole process focused on that area because there are plenty of others that we need to be considering as WOCs.”

One concern Portsmouth has is its need to invest in the infrastructure and water resources required to enhance resilience and deal with the impacts of climate change.

“Already we are feeling there are a lot of pressures from investment further down the track for us at PR24 and beyond,” Taylor said. “The SPS is not particularly clear on investment. It sets out ambition on the environment without being clear on the direction of travel for bills and what the bottom-line result is of the need to do more in certain areas – particularly the environment.”

The company’s regional drought status was recently changed by the Environment Agency to water-stressed, which will mean an expansion of the company’s metering coverage with a universal metering programme from 2025 and beyond. The costs of decarbonisation are another set of expenses the sector is facing this decade after committing to net zero emissions by 2030.

“There’s a lot of investment drivers and a wave of investment is needed to replace our infrastructure. We’ve been continuously replacing our networks but a relatively low pace over many years.

“We’ve always looked forward to a time in the future when we could accelerate that and have the capacity to do that, but that hasn’t really happened. Our investment rates in renewals are still quite low and that’s going to come and bite us at some point in the future. All these things are adding up to a need for further investment.”

He says there is no lack of willingness to invest in the industry: “But it could have an upward impact on prices as well as inflation, interest rates and the direction of travel there.”

He says being a low charging business put Portsmouth in a difficult position after two price reviews that focussed on bill reductions, which would be hard to sustain for another AMP.

One theme highlighted in PR24 discussions and Ofwat’s consultation is the need to do more for vulnerable consumers. As well as committing to decarbonise, the sector is working towards eliminating water poverty by 2030, supported by work by CCW including its proposal for a single social tariff to assist those who are unable to afford their bills.

Although no one in the sector disputes the need to keep bills affordable, Taylor says this should be used as a reason to hold off on investment.

“There are ways of dealing with vulnerability and working with these customers to help them, but that shouldn’t overshadow the whole customer base. Our customers are supportive of the need to invest and improve infrastructure so I think we will get customer support for modest increases in charges. We can then invest more whilst doing more for our transitionally and long-term vulnerable customers.”