Ofwat looking at ‘shipwreck clauses’ for PR24

Uncertainty mechanisms which are commonplace within the energy sector could be introduced during the water sector’s next control period, Utility Week can reveal.

Ofwat senior director for PR24 Chris Walters told Utility Week that the regulator is “actively talking” about introducing uncertainty mechanisms such as re-openers or “shipwreck clauses”.

He said they would work similarly to provisions Ofgem made in RIIO-ED2, allowing the regulator to make changes after it publishes its final determinations for PR24 business plans in December.

Walters explained Ofwat wanted the flexibility to be able to intervene in a more active way in between price control periods.

This, he said would allow it to call out good behaviour and achievements by the sector as well as take action swiftly if changes need to be made.

It reflects the fact that requirements for water companies to comply with remain under discussion, particularly around environmental commitments such as nutrient removal targets,

The environmental regulator and government are continuing discussions with the sector to confirm what work needs to be done and a timeframe for it to meet environmental targets.

Walters explained companies should brace for more changes between the draft and final determinations than were made at PR19.

This is due to work still being finalised for how the water industry national environment programme (WINEP) should be implemented for the best outcomes.

“The situation with WINEP is not yet resolved, so more so than in previous price reviews we will see changes between draft and final determinations as that situation resolves itself,” Walters said.

Ofgem included uncertainty mechanisms in its RIIO-ED2 final determinations intended to “allow investment to adapt quickly to support higher volumes of low-carbon technologies if networks are faced with sharper uptakes in demand for new connections”.

The number of these mechanisms within RIIO-ED2 were recently criticised by the chief executive of Northern Powergrid, Phil Jones. He described the uncertainty as “non-stop” and called for a move “back to some braver, bolder regulatory decisions that do put clarity out there.”

Speaking at Utility Week Forum in January, Jones said there were too many uncertainty mechanisms that risked overwhelming the already resource-stretched regulator and left too much on-going work for both sides.

Chris Walters sat down with Utility Week to discuss how the price control process was going as the regulator prepares the draft determinations for PR24. Read the full interview later this week in our Digital Weekly edition.