Ofwat sets out PR24 decarbonisation aims

Ofwat has fleshed out its plans for incentivising water companies to achieve net zero emissions as part of the next price review for the sector.

Responding to an open letter to regulators from business and energy secretary Kwasi Kwarteng stating the government’s strategic priorities for utilities, Ofwat explained how its regulatory framework will complement the UK’s net zero target and interim carbon budgets.

The regulator underlined its expectation the sector must innovate to drive down operational and embedded carbon emissions at an affordable cost to billpayers.

For the 2024 price review (PR24), Ofwat intends to set a common performance commitment for operational carbon emissions, whilst also encouraging companies to propose bespoke commitments for embedded emissions if they can track them “robustly”.

The common reduction level will be designed to encourage efficient expenditure. Companies that wish to beyond this target will be able to secure additional funding by submitting competitive bids into a net zero challenge fund. Ofwat said this will ensure further gains are made at the lowest cost, with successful solutions being shared across the industry.

The regulator said capitalising on markets will be a key component of future price reviews. It said a market-based approach will let companies to focus on outcomes, whilst affording them the ability to innovate and tailor service delivery to local needs of consumers and the environment.

It said differences between companies and their geographies are expected to lead to diverse responses to the challenge of achieving net zero emissions, particularly in relation to the varying ability of the environment to facilitate nature-based solutions.

Ofwat said its regulatory approach to net zero has heavy focus on resource recovery from wastewater processing at the heaviest contributor to the sector’s emissions.

It said both its natural resources and indicative pathways to achieving net zero include actions by water companies to reduce emissions by adopting different ways of processing sewage, as well as better gathering and reporting of data, which it said will help to drive innovation.

Offsetting should be viewed as “the option of last resort” if reductions are prohibitively expensive or unfeasible in the short term.

Between 2025 and 2030, Ofwat said it expects progress to be made to develop a suitable metric for monitoring and reporting of embedded emissions in a “consistent and transparent manner”.

After wastewater processing, the biggest source of emissions for the sector are from energy usage within operations. As part of the current price review, companies have performance commitments for bioresources such as using anaerobic digestion to produce biogas. This market will be promoted further in PR24, Ofwat said.

The regulator noted that over the past decade companies have ramped up renewable energy generation by 43% and exported around 45% more electricity to the power grid.

Around 1% of UK emissions are directly related to the water industry. However, up to 6% of emissions relate to how water is used in homes. Ofwat therefore stressed the need to reduce domestic emissions by 95% to achieve net zero, including through improved water efficiency, particularly in relation to hot water.

The regulator said performance commitments to reduce total water demand will encompass business demand as well as leakage and per capita consumption (PCC), either separately or through a combined water demand performance commitment.

Ofwat said that while it expects companies to take ownership of reducing demand, this will also require governmental support such as through water labelling and building standards.

Decarbonising the utility sectors in a timely and affordable way is central to discussions at Utility Week Forum hosted in London, 8-9 November. To find out more and see the line up, read here.