Ofwat proposes £200m innovation fund

Water companies could be granted permission to increase customer bills by up to £200 million to stimulate innovation in the sector between 2020-2025.

Ofwat has proposed a competition and/or an end-of-period reward for the successful rollout of innovative projects. If both were progressed the £200 million would be shared between the two projects.

The proposals, which relate to the 17 largest regulated water companies in England and Wales, are included in a consultation from the regulator, the launch of which was flagged up by Utility Week earlier this month.

The consultation also looks at the potential for a sector-wide joint innovation strategy as well as considerations of a company-led innovation in water centre of excellence and how the industry can gain greater insights from the data it holds.

It also asks in what way regulation can act as an enabler for innovation, including the potential to provide advice to fledgling projects and help to break down barriers to rollouts.

Ofwat has identified three areas in which its sees opportunities for companies to work better together and with stakeholders to develop innovative solutions – company culture; joint working within the sector and beyond and effectively rolling out new technologies, methods or approaches.

Under a collectively-funded innovation competition model, there would be an annual contest in which companies pitch projects to be financed by the mechanism. Ofwat said it expected this could be set up within the first year of AMP7.

The end-of-period reward payment would recognise companies that have demonstrated the most successful rollout of innovation to the benefit of customers over the five years. The regulator said it saw the potential to include this alongside the annual competition to stimulate scale rollouts, although it accepted there was a risk of double-funding.

On the centre of excellence, Ofwat proposes a facility providing expertise and potentially financial assistance to trial, test and scale new ideas. It could also have incubation facilities, the consultation suggests.

Ofwat said that the £200 million figure had been chosen because it “strikes the right balance between driving company behaviour and delivering for customers”. Its current estimate is that the average customer’s bill would increase by approximately £1.50 between 2020 and 2025.

The consultation, which opens on Friday (18 July) and closes on 20 September, has been welcomed by former Ofwat and Environment Agency director, Trevor Bishop. As part of his current role with Water Resources in the South East (WRSE), Bishop submitted a proposal to the regulator setting out a vision for a £35 million-a-year ring-fenced innovation fund and the creation of a dedicated centre of excellence.

Responding to the publication of the consultation, Bishop told Utility Week he was very supportive.

He added: “We need to look at the details but its clear Ofwat are keen to take a bold and long-term approach to innovation. As expected, Ofwat have put forward their own ideas but clearly a lot of similarities to our proposed model. I think Ofwat clearly want to see the sector at the tops of its game on innovation for the benefits of customers and the environment.

“It’s great to see some positive news. The sector now needs to think about how it responds to Ofwat’s consultation and take this forward.”

What is innovation?

As part of the consultation, Ofwat has also published a set of draft principles that would form the basis for additional financial support.

• Innovation should be understood to not just be about the development of new technologies. Innovation can also be developed by doing things differently and having the right systems, processes and people to support activities. A wide range of innovation proposals are encouraged, addressing the big challenges facing the sector and taking into account the strategic priorities and objectives of UK and Welsh governments.
• The purpose of any intervention is to drive transformational innovation that companies would not otherwise explore or invest in.
• Proposals should be just as much about the roll-out of innovations at scale as the early incubation of new ideas and solutions. Funding will be open and flexible and available to projects of all types or scale.
• Innovation fostered through these mechanisms must provide value for money for all customers in England and Wales, although the benefits for some customers may in some cases be indirect (e.g. from the sharing of findings across the sector);
• Companies will be required to fund a proportion of project costs to ensure risks are appropriately shared between customers and shareholders;
• Mechanisms will be time-limited to the 2020-2025 period. We will review the effectiveness of these mechanisms at least at the end of the period, and as required during the period;
• Companies will need to provide evidence of how they are working together and with others (including other water companies, their supply chain, companies in other sectors), and/or a commitment to transparent sharing of progress and findings with others within the sector and beyond;
• There will be an “open by default” approach to data and learning generated through customer-funded activities, including where projects have been unsuccessful