Scottish Water’s efficiency challenge ‘greater than PR19’

Scottish Water has been tasked with reducing its costs by 1 per cent annually in real terms over the coming price control period, which its regulator said is tougher than Ofwat’s PR19 determination.

The Water Industry Commission for Scotland (WICS) increased the permitted level of investment by 30 per cent to £4.5 billion between 2021-27.

This includes an average bill rise for customers of £9 annually, capped at £2 a month above inflation each year.

WICS’ final determination, which was published in December, said it expects Scottish Water to reduce its operating, interest, purchasing power parity (PPP) and reactive repair costs by one per cent each year in real terms. It said this efficiency challenge is “greater than is faced by the private water and sewerage companies south of the border”.

The investment increase of £1.095 billion compared to 2015-21 reflects the Scottish government’s prioritisation of combating the effects of climate change and reaching net zero by 2040.

Unlike English and Welsh water companies, Scottish Water does not have specific performance commitments for the six-year period. Scottish ministers decide on service levels and climate goals and the regulator sets the most cost-effective way to achieve these.

For this price control, WICS adopted a flexible approach to acknowledge that targets may need to change or adapt over the period.

WICS said the determination is “an important staging point” in the journey the Scottish water sector is on, including more open dialogue with stakeholders and its focus on climate goals.

The determination included a ringfenced allowance of £132 million for Scottish Water to prioritise carbon, natural and social capital spending.

The ringfenced allowance will be released if the company opts for spending that presents a higher net present value than the lowest financial cost.

Although having left the EU, Scottish ministers chose to closely mirror the water quality and environmental standards previously in place.

WICS said the permitted revenue level spreads the necessary cost of investment without disproportionately burdening future customers with the costs of achieving net zero and asset replacement.

“By ensuring such a transition in revenue, Scottish Water is looking after its future customers and ensuring that levels of service to current customers are not compromised,” the regulator said.

Scottish Water chief executive Douglas Millican said: “We face significant challenges in the future, not least as a result of climate change and our ageing infrastructure, to maintain the level of service we provide to customers and communities.

“Further investment over the long-term will be needed to secure the service we currently provide and to allow us to transform into an organisation that achieves net zero emissions.”