Meeting environmental targets and cutting the use of combined sewer overflows (CSOs) have been outlined as key priorities for Ofwat to incentivise in the next price review.
Defra has instructed the regulator to make environmental planning and pollution reduction top objectives, in its draft strategic policy statement (SPS) for PR24 and beyond.
Protecting and enhancing the environment, resilience, protecting vulnerable customers, and driving efficiencies through innovation also feature.
Given the swell of public interest there’s no surprise chalk streams and CSOs are emphasised.
To “get the basics right” Defra proposes incentivising companies to improve environmental performance to meet targets set by the Environment Agency. The most recent Environmental Performance Assessments (EPAs) showed continued failings by some organisations.
Environment minister Rebecca Pow said: “We need water companies to take much more robust and ambitious action to improve the water environment and protect the nation’s water supplies in response to the risks posed by climate change. That is why I am clearly setting out the government’s expectations through our strategic statement to Ofwat.”
She added that companies must work to tackle climate change as well as delivering on flood resilience, protecting water resources and addressing water quality issues.
“Our priorities for Ofwat build on the work I have already undertaken to reduce harm from storm overflows and sets a clear expectation for water companies to significantly reduce the frequency and volume of sewage discharges from storm overflows.”
The draft stipulates that the most harmful CSOs should be addressed first and companies must outline improvement plans to cut discharges in their drainage and wastewater management plans. Defra says Ofwat should incentivise companies to reduce the frequency and volume of CSO use significantly.
Pollution from nutrients, which significantly damages chalk streams and waterways, are highlighted as in need of collaboration between water companies and other stakeholders to tackle.
Reflecting recent criticism that improvements to the water environment have stalled in recent years, the SPS says companies must prioritise environmental planning and delivery to reduce pollution and considerably improve their performance.
Nature-based solutions
As early PR24 guidance hinted, nature-based solutions should be increased. Defra says companies and regulators should explore these “even where the risks are uncertain” and lessons learnt must be shared.
Companies will be encouraged by Ofwat to look for investments in natural assets that deliver multiple benefits and have the potential to attract co-funding.
Funding and investment
On funding the SPS proposes that environmental investment by the sector should be maximised through co-funding with other sectors and green finance opportunities. Partnerships, as some companies have already emphasised as key to their ongoing strategies, are highlighted as beneficial to improve catchments.
Defra says it expects Ofwat to provide the regulatory conditions to “foster an investment culture which gives proper consideration to the long-term and balances the interests of current and future customers fairly”. Recognising the ambitions set in the SPS cost money, government urges Ofwat to exercise powers to balance the costs to keep bills fair and good value. It adds that long-term investor confidence should also be sustained.
Market forces
The government wants to see the sector and regulation explore market-based tools fully, including direct procurement, which was first included in PR19, and competition where appropriate for supporting longer-term ambitions.
Improving customer conditions
As well as keeping bills affordable, the draft SPS stipulates protections for vulnerable customers should be strengthened and CCW’s Affordability Review conclusions should considered.
Data sharing and proactively managing customer debt, which Ofwat had previously emphasised as a priority, are also underlined.
Resilience
The SPS says a shift towards long-term adaptive planning is required to improve resilience of assets to both flooding and drought as well as pollution. This is supported in the proposals to the revised WINEP that suggest companies could have up to 25-years to implement and see results from environmental schemes.
Increasing water supplies alongside reducing demand is advocated with Ofwat expected to support regional groups and recognise the need for investment in supply and demand solutions set out in water resource management plans (WRMPs).
It asks the regulator to drive innovation around boosting resilience as well as encouraging and incentivising a move away from abstraction that harms the environment.
Demand management
Defra proposes Ofwat hold companies to account on lower per capita consumption towards a 2050 goal of 110 litres per person per day. Defra omitted this from its recent water efficiency report that did not include requirements for new housing stock to be built to this target.
Non-household and NAV market
Collaboration between the business retail market and wider stakeholders to improve how market rules, processes and structures can be improved will be encouraged.
The SPS instructs Ofwat to continue its work with the sector to resolve frictions and improve customer experience, as well as incumbent operators to support market development.
Further engagement between new appointments and variations (NAVs) and incumbent companies will be encouraged. Ofwat should explore extra customer protections including for those struggling to pay bills and how complaints are handled.
Water UK chief executive Christine McGourty said: “The WINEP and SPS represent an incredibly important opportunity to set in train the ambitious reforms we need to see in the next price review and beyond. We look forward to working with government and regulators to ensure the final documents provide the best possible foundation for water companies to deliver the investment needed to help meet the significant environmental challenges ahead, while working towards a shared vision for the future.”
Giles Stevens, director of policy at the National Infrastructure Commission (NIC), called for statutory duties to complement and support the work of regulators.
He said: “In the draft SPS for Ofwat, we welcome the focus on long term environmental and climate resilience, which reflects the emphasis we have recommended should be baked into such duties across all sectors.
“The proposed statement builds on recent examples of closer collaboration between regulators to meet the pressures of the future, particularly improving drought resilience by enhancing the capacity of the water supply system as the Commission has recommended. We hope that this strategic and coordinated approach can be replicated for drainage and wastewater to meet the challenge of improving the aquatic environment and believe that the draft statement indicates an important step in this direction.
“We further welcome the continued commitment to increasing competition where feasible, which should also be applied to the provision of strategic infrastructure, recognising the need to protect customers’ interests while meeting growing future challenges.”
Defra will finalise the long-term strategic priorities in the autumn following a consultation period that runs to September.