Ofwat consults on the water sector of the future to inform PR24

What will the water sector look like in 2040 and how will it get there? These are the questions posed by Ofwat as it starts to design the framework for the next price review.

The regulator, which previously hinted that nature-based solutions and greater consumer engagement will be required at PR24, has now launched a forum for stakeholders to suggest how the sector should evolve over the next two decades.

Ofwat will outline its initial views around the framework and approach to PR24 in May 2021 and plans to release the draft methodology in summer 2022.

Ahead of that it is inviting input to its Future Ideas Lab forum to explore how regulation can support companies reaching climate goals, delivering on net zero, improving water efficiency and cutting leakage.

Ofwat identified four challenges for PR24, building on the goals the sector worked towards in previous reviews.

These are:

• Protecting and improving the environment in the context of climate change
• Achieving public confidence and affordability in the face of cost pressures
• Innovating and collaborating to transform performance for customers
• Anticipating and adapting to uncertainty and change.

Ofwat noted the resilience the sector displayed during the pandemic and added there will always be a need to anticipate and adapt to uncertainty and change. It said innovation “at a greater pace”, as well as making the most of smart networks, nature-based solutions and markets will help the sector thrive.

On the environment, the regulator noted the “almost uniquely strong position” water companies are in to protect and enhance the natural world through statutory investment programmes and opportunities to work with environmental stakeholders.

As previously mentioned by chief executive Rachel Fletcher, companies will be encouraged to adopt nature-based solutions with catchment management, systems-based solutions and customer behaviour changes prioritised over hard asset projects. Ofwat added collaboration with third parties to co-design, co-create and co-fund schemes will be encouraged.

The need to balance necessary investment with keeping bills low was central to arguments around PR19, which are continuing through the four appeals to the Competition and Markets Authority.

Ofwat recognised the need to raise public confidence in the sector, especially as consumers of all businesses are increasingly expecting added public and social value.

It noted water resource management plans, reaching net zero and halving leakage by 2050 as well as changing how storm overflows are used as cost pressures at the next price review.

Ofwat said companies will have to think about “how they prioritise investments and where markets can create value”.

It said gains may be made by boosting productivity through data and technological improvements such as smart networks to deliver services differently.

David Black, chief regulation officer, said: “The customer voice must be heard more clearly, both by the regulator and by water companies that provide such an essential service. We are committed to exploring how best we can do that and look forward to working with the sector, including consumer groups to ensure that is the case.”

This was welcomed by CCW’s head of policy and research Mike Keil, who said the work complemented that of CCW. He added: “Adopting a more collaborative approach to research has the potential to deliver better outcomes and greater value for consumers. Companies also need to be in constant conversation with the communities they serve so they always have their finger on the pulse of customers’ evolving views.”

Christine McGourty, Water UK chief executive, highlighted the urgent action needed on climate change and said more focus will be needed to prevent and adapt to droughts and floods.

“It is also good to see Ofwat’s commitment to learning lessons from PR19. It is vital that we approach this with an open mind and ensure the views of everyone inside and outside the sector are heard. Any process as complex and important as this will be open to improvement, and we look forward to discussing ideas for making processes simpler and more sharply focussed on the things that matter most.”

Ofwat is welcoming stakeholder input on:

• What could the water sector look like in 2040, and how can Ofwat and water companies work towards that vision?
• How do we best regulate to help companies to achieve long-term goals such as adapting to climate change, reducing leakage, improving water efficiency and delivery of net zero?
• How do we encourage companies to ensure services are affordable for all, both now and in the longer term?
• How can we encourage companies to innovate and to take advantage of technological change to increase productivity, reduce costs and improve resilience, service and the environment?
• How do we encourage companies to improve service to customers and operational resilience?
• How can we encourage companies to best take account of customer needs and priorities, while ensuring services are comparable across companies?
• What, if any, could the role of the price review be in encouraging or incentivising companies to better deliver public value?
• How do we better use markets to deliver better value to customers and the environment?
• How can we best account for specific issues, circumstances and Government policies/priorities in England and Wales?
• How can we best align the interests of investors with delivering for customers, the environment and society?
• How do we encourage companies to collaborate and work in partnership with others, such as on nature-based solutions, to better achieve outcomes for customers and the environment?
• How can we simplify the price review while increasing value to customers, the environment and wider society?