Thames Water has six weeks to agree survival plan with Ofwat
Thames Water has just six weeks to convince its regulator that it has a viable survival plan for its business, the Guardian can reveal.
While the company believes it has enough cash to survive for about 15 months, insiders and investors fear that it must move quickly to strike a deal with its watchdog to stave off insolvency.
The UK’s largest water monopoly must present a new turnaround strategy and business plan before 23 May – Ofwat’s final board meeting before it issues a verdict on how much water companies will be allowed to charge consumers.
Thames, which has 16 million customers across London and the Thames valley, has been thrown into crisis after its shareholders last month pulled the plug on a plan to inject £500m into the business, amid a deepening battle with the watchdog.
This has forced Thames’s holding company, Kemble Water Finance, to admit it will not be able to repay a £190m loan due by the end of April.
Thames holds cash reserves which should fund its operations for 15 months without a substantial increase in bills, but investors, including bondholders in the operating company, are understood to believe it may struggle to meet debt obligations if a deal is not struck by May.
Ofwat is understood to be sceptical that Thames’s current business plan for the next two years or its longer turnaround plan – aimed at revamping its management and infrastructure – are viable or fair on consumers.
Sources have claimed that Ofwat is concerned about bills rising without there being a clear strategy to overhaul how the business is managed, since this would risk the burden of poor business decisions being pushed on to customers.
Thames’s operating company, which is ringfenced by the regulator so it can continue even if Kemble collapses, is labouring under debts of almost £15bn, making it Britain’s most indebted water company. It was privatised in 1989 with no debt.
Investors in Thames backed out of providing £500m of emergency funding in March, after the regulator refused the company’s demands for a 40% increase in bills.
Investors, which include UK university pension scheme USS, Canadian investor Omers and China’s sovereign wealth fund, said Ofwat’s current position – to limit bill increases, levy fines and restrict payment of dividends – rendered the company “uninvestible”.
Ofwat reviews water companies’ business plans and holds a price review in order to set the amount the utility firms can raise their bills over the next five-year period.
Despite its rejection of Thames’s plan, it is understood that bills are still expected to rise by as much as 35%, on average, over the next five years.
Thames’s owners are running out of time because the regulator must issue its so-called draft determination on bill increases for each regional monopoly company in June. Those plans will govern how much water investors can earn and how much they must invest over the next five years.
If Thames and Ofwat cannot agree on a new financial plan and a fresh strategy for how to run the company by then, it will ramp up the likelihood of nationalisation.
Bondholders in the operating company have said they may be forced to write down their investment. A likely knock-on effect would be to increase borrowing costs for Thames, and bring forward possible nationalisation of the company via a so-called special administration.
Lenders to Thames argue that forcing them to incur losses on their debts would also drive up the cost of borrowing for all UK water companies, and potentially other utilities such as gas and electricity.
An Ofwat spokesperson said: “We do not comment on speculation. Ofwat is continuing to work on draft determinations that will be published in June.
“We will continue to monitor Thames Water as it seeks to turn around its performance for customers and the environment.”
The Guardian
Inside No 10’s emergency plans to save Thames Water
Downing Street’s emergency planning to save Thames Water includes putting the embattled utility company into special administration or finding new shareholders to prop it up, i has learned.
The crisis at the UK’s biggest utility firm continues to rumble on and make headlines, causing a headache for Rishi Sunak as he heads towards an election.
Thames Water has defaulted on debt payments with shareholders refusing to give the company any more funds because they believe the Government and water regulator Ofwat have imposed rules that have made it impossible to make the firm profitable.
The water firm has been criticised both by activists and politicians for a byzantine corporate structure that meant dividends were required to be able to service company debt, pushing the company into a perilous state.
Despite initial pressure on the Government to nationalise the firm, it is thought to be off the menu despite strong public support in polls on nationalisation, so a solution will need to be found in the private market.
Solutions including placing the company into special administration, persuading existing shareholders to continue funding the business, finding new ones or a potential FTSE listing are all being considered, Whitehall sources have told i.
Depending on the time of the election, the issue may be left to Labour to resolve. While the opposition has also ruled out nationalisation of the utility company, it is yet to disclose what its plans would be if it inherited the issue in Government.
Thames Water and its shareholders declined to comment.
Read the full article here
iNews
More than half of heat pump grant cash still unclaimed
Heat pumps are still getting a cool reception from homeowners with £183m in potential grants remaining unclaimed as the scheme reaches its second anniversary, according to data from Ofgem the energy regulator.
The Boiler Upgrade Scheme set up two years ago has issued just £127m in grants – despite having £300m on offer to persuade householders to ditch gas boilers in favour of low-carbon home heating.
An Ofgem spokesman said that 22,307 households had been given the grants in the 23 months to March. That compares with a target of about 55,000. The figure will rise only slightly when the latest figures are added this week.
The boiler upgrade scheme was introduced in May 2022 as a way of reducing the 68 million tonnes of CO2 emitted annually from home heating – about 18pc of UK emissions.
Most of those emissions come from the 25 million homes fitted with gas-fired boilers and another 2 million using oil-fired heating. The aim is to move all of them to low-carbon heating systems such as air source or ground source heat pumps which work by extracting heat from the environment.
Responsibility for the scheme rests with the Department for Energy Security and Net Zero (Desnz) which initially offered householders grants of up to £5,000 to replace fossil fuel boilers with heat pumps.
However heat pump installations typically cost between £10,000 and £15,000, whereas replacing gas boilers costs £2,000 to £4,000. It meant that, even with the grants, heat pumps remained expensive and uptake was low.
Just 18,900 heat pumps were installed between May 2022 and December 2023 under the scheme, less than half of the 50,000 installations that had been expected.
By contrast about 1.5 million new gas-fired boilers were installed, mostly to replace worn-out models, even though homeowners could have chosen heat pumps instead.
It comes as a think tank claimed that households with insulation, heat pumps and electric cars were more “energy patriotic” because they rely far less on imported fuels.
Analysis from the Energy and Climate Intelligence Unit (ECIU) found homes using heat pumps, insulation and electric vehicles make more use of British energy and use less than half the imported fuel of a household reliant on gas and petrol.
Last September Rishi Sunak announced that he was increasing the grants from £5,000 to £7,500 per household, hoping this would cause an increase in applications. Ministers say that since the increase, applications have soared by 75pc.
Lord Callanan, Minister for Energy Efficiency and Green Finance, said: “Demand for heat pumps is soaring, as we make it easier than ever to make the switch to electric heating without big upfront costs.
“Our boosted £7,500 grants are helping people create a warm home and lower their emissions. And with applications up 75pc, it’s clear our approach is hugely popular with many families.” However, Ofgem’s data suggests the response remains weak.
It shows that of the 35,741 applications received, only 24,709 had been approved and of those only 22,307 had been implemented. Ofgem said this was partly because of lags in the system but also because many applications had failed to gain approval.
Even if there is a surge, the original £150m overall cap on the scheme remains unchanged. This means the number of households able to claim the grants each year has actually gone down from 30,000 a year to 20,000.
The Daily Telegraph
Why building first new reservoirs for decades isn’t smooth sailing
For as long as Jim Stagg has lived in the Vale of the White Horse, Thames Water has been trying to build a reservoir in his rural pocket of south Oxfordshire.
The retired photographer and his neighbours have been fighting for decades against the water company’s claims that flooding their local environment is necessary to ensure the increasingly drought-stricken southeast of England has enough water storage to cope with rising population and a changing climate.
So far, the water regulator and planning authorities have been on the side of the Nimbys in these national disputes, with no new drinking water reservoirs opened in England for the past 32 years.
Water companies in England have repeatedly submitted plans for reservoirs only to see them rejected by planning officials or denied funding by Ofwat, the water regulator, which has the power to allow them to raise the money via water charges. They have often been told to focus on fixing leaks before embarking on large development projects.
Stagg, 71, who has lived in the village of West Hanney for the past 24 years and edits the parish magazine, said: “There are very few people here who are pro-reservoir. The vast majority are against it and a lot of folk here are very engaged, angry and cynical about claims from Thames Water that we will be able to go sailing and it will improve biodiversity.”
Things are, however, starting to turn in favour of giving new reservoirs the go-ahead. Recent efforts to streamline the planning system for nationally significant infrastructure projects and the growing realisation that climate change is creating hotter, drier summers has led to a resurgence in plans for reservoirs across the country.
Portsmouth Water and Southern Water are now building the first new reservoir in southern England since the 1970s. The Havant Thicket reservoir will take a decade to build and should be filled by 2029, supplying up to 21 million litres of water a day to 160,000 people, as well as protecting rare chalk streams in Hampshire by reducing the water taken from them.
Anglian Water is trying to get planning permission for two more reservoirs in the east of England, though they won’t be running until 2035 in a best-case scenario.
The National Infrastructure Commission (NIC) has calculated that at least £20 billion of investment is needed to close a capacity gap in the UK of up to four billion litres per day by 2050. It says that 1.3 billion litres per day of supply will need to come from new reservoirs and water transfers, where pipelines are built to carry water from wetter areas of the country to drought-stricken parts. The rest of the gap would be closed by reducing leakage in the existing system and reducing demand.
Draft plans submitted by water companies propose the development of nine new large reservoirs, two reservoir enlargements, three large inter-company transfers, 11 water recycling schemes and nine new desalination plants.
Stagg and almost every other local resident, councillor and MP in south Oxfordshire are against the proposed 150 billion-litre South East Strategic reservoir, which would require experimental 25-metre-high “bunding walls” — ridges of earth — to stop the water destroying neighbouring villages in a flood. The reservoir would span almost two miles across.
Campaigners against the £1.4 billion plans cite safety fears and the destruction of the local floodplain and environment, as well as questioning the reservoir’s ability to combat projected water shortages compared with less environmentally damaging schemes such as a proposed pipeline transferring water from the Severn to the Thames.
They also do not trust Thames Water’s motivations to build the reservoir, given its parent company’s dire financial situation. Kemble, which owns Thames Water, recently defaulted on a £400 million loan amid concerns that taxpayers could be left on the hook for billions of pounds if Britain’s biggest water company is taken into the government’s special administration regime, a form of temporary nationalisation.
“I think the huge concern is Thames Water is ploughing ahead with this because it’s an asset that will help their financial situation,” said Katherine Foxhall, a Green Party district councillor. “Thames Water have been planning this reservoir for decades but they still haven’t provided the evidence that it’s safe.”
A Thames Water spokesman said: “Investment in new infrastructure is the only solution. If we don’t act now, we face a real risk of the taps running dry, which would be catastrophic for the southeast’s economy and millions of customers. Local people are at the heart of our plans for the reservoir and we will work closely with them to address their concerns about local impacts.”
The Times
Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.