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Ofwat has warned water companies against overstating energy costs in their business plans for the 2025-30 price review.
It comes after several companies called for changes to the PR24 base cost models to reflect increases in wholesale energy prices.
Around 10% of water companies’ costs are currently spent on energy. Companies claim that the unprecedentedly high power prices over the past 18 months have led to higher outgoings across the sector.
Ofwat said it received feedback from companies that the PR24 base cost models need adjusting to adequately reflect increasing energy costs, which have shot up by 27% for the two years to March 2023.
However, the regulator has called out companies for not accurately representing their energy costs by excluding hedging arrangements and self generation in cost modelling.
Tim Griffith, PR24 cost director at Ofwat, said requests to adjust base costs overlooked that “water companies tend to manage energy costs through hedging arrangements, long-term offtake contracts and investing in self-generation. This means that over recent years water companies have on average paid far less than the wholesale price of energy”.
He said any adjustment based on wholesale energy prices could “significantly overstate energy costs to be incurred” over the 2025-30 period.
Ofwat has assessed data on costings dating back to 2011 and will update its models based upon this information and will add data up to 2023 when it becomes available.
Griffith said analysis indicated that adjusting historical base costs for forecast real adjustments in energy from 2023-24 onwards may not appropriately reflect future energy costs incurred by companies.
The regulator has requested further information from companies to give a fuller picture of how much they are spending on energy and their forecasts up to 2030. This will help Ofwat make decisions based on up to date information on companies’ hedging policies.
Last year, United Utilities said the 10% of its energy costs that were not hedged added £65 million to operating costs.
With the sector moving towards net zero emissions by 2030, companies have ploughed innovation and investment into adding renewables to their sites.
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