Driving down water demand and encouraging innovation will be central to the next price review, with the regulator ring-fencing a total of £400 million for water efficiency and extending the innovation competition.
Ofwat has released the final methodology for its 2025-30 price review setting out expectations for water companies around improving environmental stewardship to be more resilient to the ravages of climate change.
The methodology includes a shift towards outcomes-focused incentives for performance commitments that Ofwat said would cover key areas such as river and bathing water quality, biodiversity and operational emissions. The number of commitments will be streamlined and have “meaningful” financial outcome delivery incentives (ODIs) attached to each.
The regulator highlighted the need for greater ambition on reducing the risk of harm from combined sewer overflows (CSOs) and driving down leakage to meet the growing expectations of customers and stakeholders.
It set a provisional allowed return on capital at 3.29%, higher than the current rate, to reflect change to interest rates. Ofwat said the early figure provides a number to be attached to company plans and illustrates the application of its methodology, but stressed it may alter “if the recent levels of market volatility persist”.
The regulator has set out a £100 million fund to stimulate novel approaches to cutting water demand and boosting efficiency together with expectations to set and deliver “aggressive reductions” in leakage against the backdrop of the long-term resilience challenge. The innovation fund introduced at PR19 will be extended to AMP8 with additional resources attached: at least £300 million to stimulate “sector-changing ideas”.
Chief executive David Black said companies had so far fallen short of expectations and needed to “seize the opportunity to transform their performance at PR24”.
He added: “The sector needs to act now – in advance of PR24. Significant improvements are needed to drive down water demand, improve customer service and reduce pollution incidents. We are looking to companies respond to urgent need for change and set out ambitious plans to improve outcomes for customers and the environment”.
Commitments, Black said, should be made by all companies to address risks to waterways from storm overflows to match the most ambitious pledges by the sector.
The PR24 methodology reflects much of the draft version published in July with environmental commitments on CSOs, improving biodiversity, better bathing water quality and cutting emissions. Improving customer services and listening to billpayers will be encouraged via two public meetings hosted by each company next year to discuss plans with their stakeholders.
Companies will be incentivised to maintain and improve asset health, and Ofwat will drive a greater focus on asset stewardship for the long term alongside action in the price review.
There will be separate stretching performance commitments for cutting leakage and promoting water efficiency to both residential and business customers.