The only way is up

MEUC Water Adviser, Karma Loveday, surveys the water price landscape for the years ahead.

April and the new financial year will bring wholesale water price rises for major users across the board. It’s very difficult to talk averages because there is considerable variation, depending on who your wholesaler is, what services you take, what tariffs you are on, how much water you use, and more. But large customers in England should expect minimum hikes of 5 per cent, stretching up to around 13 per cent, depending on the wholesaler.

The increases are principally driven by inflationary pressures and higher wholesaler operating costs (particularly for energy), and in some cases also reflect reward/penalty adjustments imposed by Ofwat for performance in previous years. Another factor is that firms tended to hold prices down through Covid and the height of the cost-of-living crisis but this year, some of that previously withheld revenue has been added back on.

Scottish Water has a simpler structure and will be increasing its wholesale charges by 8.8 per cent. As well as inflation, this is explicitly driven by a need to invest in climate resilience and ageing infrastructure and again, to catch up after bill suppression over the last two years.

Tariff trials

An interesting new development for the 2024-25 charging year is Ofwat has actively called for water wholesalers to test out new tariffs, with the twin aims of promoting water efficiency and supporting affordability.

Affinity Water was first out of traps, kicking off a rising block tariff trial for 1,500 household customers in October 2023. A few other water companies are starting trials this April. These are mostly in the household space given the affordability driver, so most wholesaler charging structures for businesses will remain unchanged. But there will be significant shifts at a few companies.

For instance, both Southern Water and South West Water have indicated they intend to phase out their water Large User Tariffs based on their water resource situation; these are effectively falling block tariffs which offer cheaper rates for bulk use. That type of tariff is at odds with demand reduction messaging, and in Southern’s case, it is also looking to offset a big price rise from 2025 onwards and suggests the removal of discounts for large users will enable it to reduce the increase in household water bills by 1 per cent.

Southern Water is also looking to introduce site area drainage charging, where charges are based on the area drained. Those with the largest areas will pay more, enabling Southern to lower wastewater prices for other users (by around 7 per cent).

South West Water will be trialling a seasonal tariff during the year, where summer rates are more expensive than winter rates. Along with being in line with peak summer demand, the move is tailored to the particular needs of Devon and Cornwall’s summer tourist economy, where holidaymakers swell the population in July and August and put pressure on capacity. But the change will impact year-round large users, and South West Water has indicated business customers won’t be able to opt out of trials.

From 2025, all water companies are expected to trial new and different charging structures, and to roll out the successful ones. This will mean an even more complex tariff landscape for business customers – especially national multi-sites – as on top of regional variation there will likely be different prices in different areas at different times.

Brace for impact

But brace yourselves, as this April’s price rises look set to be dwarfed by what’s coming down the track. Water wholesale companies have five-yearly negotiations with Ofwat, to set price limits and service expectations. The next price review is taking place this year, concluding in December 2024, and will set charge limits from 1 April 2025 to 31 March 2030.

The table sets out what the water companies have proposed in their business plans, which were submitted to the Regulator in October. The figures are staggering: a 63 per cent increase in total expenditure (capital and operating expenditure combined) to fund an enormous ￡96 billion investment programme. This drives an average price by 2030 of 31 per cent.

These rises are chiefly driven by growth in ‘enhancement’ spending – that is, the cost of building new things, with wastewater and environmental clean-up investment prominent here. Around ￡11 billion alone is due to go on reducing storm overflow discharges to rivers; that’s more than double the whole environmental programme for 2020-25. A huge amount of the investment is driven by statutory requirements – things that are legislated and regulated for, and for which there is little wriggle room.

It’s important to stress this is the industry’s pitch and not yet approved by Ofwat. In fact, Ofwat’s interventions are likely to reduce the companies’ aspirations, at the very least by challenging them on efficiency grounds. But the direction of travel is clear: there will be significant upward price pressure in 2025-30 and very likely well beyond that. This marks a significant change, as – excluding the impact of inflation – bills have basically been flat on average for a decade.

Investment to address water problems and face new challenges is to be welcomed – but customers should be aware this will come at a price.

This article appears in Buying and Using Utilities Spring 2024 issue

Read more: https://meucnetwork.co.uk/buu-spring-2024/