Ofwat insists customers can’t subsidise multi-sector reservoirs

A report into the feasibility of developing multi-sector reservoir (MSR) systems has warned there are likely to be “trade-offs” between the benefits of collaborating and the risks that could be introduced.

In responding to the analysis, Ofwat stressed that public water supply customers must not end up subsidising other users’ access to a MSR.

CEPA and Agilia were commissioned by the Regulators’ Alliance for Progressing Infrastructure Development (RAPID), Anglian, Northumbrian and Yorkshire Water and Water and Water Resources East to develop a commercial and legal model for the development of MSR systems. These are defined as collections of reservoirs and associated developments that benefit users outside of water companies, so are developed collaboratively with resulting economies of scale and multiple investors. This could incorporate large industrial use, agriculture, flood storage or leisure and tourism among others.

Two proposals currently being developed as part of the RAPID gated process are the Fens Reservoir by Anglian and Cambridge Water and the South Lincolnshire Reservoir by Affinity and Anglian.

The report concludes that there are no specific legal or regulatory barriers to the creation of MSR systems but that such projects would present various challenges.

Most notably, the report predicts difficulties in designing a solution that represents best value for each user and that if careful consideration to each participant isn’t give at an early stage, water billpayers could end up subsidising others’ use of a reservoir.

It cautions that all of the international examples it has identified have been “extensively” supported by public funding. To fund an MSR system under a private finance model, the report stresses that revenue risk would need to be allocated appropriately. It warns that this could jeapordise the development of MSRs if some third-party are unable to commit to these risks at an early stage.

Specifically, it identifies the challenge of creating a structure that allows small scale users, such as agricultural irrigators, to participate in an MSR project. It notes that the storage needs for individual irrigators would be relatively very small compared to those of a water company and therefore they may need an intermediary to contract directly with the entity delivering the MSR system.

Responding to the report, Ofwat said there were clear potential benefits for customers and the environment of progressing MSRs so has called on water companies to continue to investigate potential models for funding and delivering these projects. It wants to see companies firstly establish the clear case for MSRs and identify potential participants and funding streams.

It proposes carrying out a critical review of the models identified in the report, the barriers and risks, and where RAPID may be able to unlock any barriers or make recommendations to do so.