The new trilemma posed by PR24

Ofwat faces a difficult trade off between affordability, financeability and deliverability in assessing water company business plans for 2025 to 2030.

This is the view of commentators at PA Consulting after analysing the individual PR24 plans submitted to the regulator last week.

These set out £96 billion total expenditure, including £9 billion on tackling storm overflows. As our coverage last week showed, the plans all propose bill increases to pay for this near doubling of investment from the current price control, with some as high as 64%. Several companies also challenged Ofwat on the maximum level of returns to investors, arguing for more leniency given the scale of capital required.

With Ofwat now considering the plans, Utility Week asked three partners at PA Consulting what stood out for them.

Greg Bradley, asset management and supply chain expert, pointed to the sheer scale of investment represented by the plans, with spend on the enhancement programme more than tripling on the sewerage side between AMP7 and AMP8. He added: “That appears to be sustained, if not growing, through AMPs 9, 10 and beyond.”

Liz Parminter, regulatory expert at PA, said if this magnitude of expenditure was to be approved by Ofwat it would pose questions about both the affordability and the deliverability of the plans.

“The level of investment and the increase in the cost of capital from PR19 means you’re seeing 25% to 30% increase in customer bills across the five years, and in some cases a really significant step change in just the first year of AMP8”, she said.

“We think there’s something like 32,000 new jobs that will be created across the sector and supply chain in delivering these plans, which means this has to be an attractive sector to work in. There are obvious challenges there given where public trust in water companies is.”

Anthony Legg, regulatory economics expert for the consultancy, stressed that as well as increasing bills, the plans will require substantial new investment.

He said: “Tens of billions of new capital need to be injected into the sector and for that you need investor confidence. Some companies have suggested that Ofwat’s early view on the allowed rate of return is insufficient, but of course any further increase in the allowed cost of capital is going to increase customer bills all else equal, so it will be interesting to see how Ofwat balances that.”

He added: “The question for Ofwat is how you square the circle. You’ve got increases in bills that look very difficult to afford in the context of a cost of living crisis, you’ve got all the politics that go with an election year sitting in the background as well. But the need for the investment is clear. How do you deliver those improvements, tackle affordability and make the sector attractive for both investors and a future workforce? That’s a really challenging position to be in.”

Parminter summarised that the plans “present the industry with a new trilemma – affordability, financeability and deliverability”.