The only way is up

Ofwat’s draft price decisions for 2025-30 allow an average 21 per cent bill rise to fund bumper water spending, reports MEUC ’s Water Adviser, Karma Loveday

The water price landscape is changing. Although bills will remain far below those for other commodities for large users, a combination of factors is coalescing to drive water prices up.

These include historic underinvestment, as lower bills have been preferred in the past to higher levels of investment; climate change-related factors necessitating decarbonisation and higher spending on building resilience to heat, storms, flood, and droughts; and changing societal expectations on the health of the environment and public access to recreational waters.

On 11 July, regulator Ofwat gave provisional approval to an average water bill rise of 21 per cent between 2025 and 2030, when it issued its draft determinations in the 2024 price review (PR24).

This was one-third less than water wholesalers pitched in their business plans and will add ￡94 over the period to the average household bill, rather than the ￡144 championed by companies. There are no equivalent figures available currently on wholesaler charges for businesses, but the direction of travel on price will be the same in most instances.

The sector-wide bill rise average masks great variation. Two wholesalers are set to see bill cuts by 2030 under Ofwat’s draft decisions: SES Water (15 per cent) and Wessex Water (2 per cent). The biggest increase is at Southern Water (44 per cent) followed by Welsh supplier Hafren Dyfrdwy (32 per cent). The table shows the price change allowed for each water wholesaler in the draft decisions:

Price drivers

The principal driver of the price increases is increased investment, supplemented by higher financing and operating costs, including those for energy and chemicals. The draft determinations allow ￡88 billion of expenditure between 2025 and 2030, a 50 per cent increase on the spending in PR19, which ran from 2020-25, but a 16 per cent (￡16 billion) cut from company business plan proposals that totalled ￡104 billion (see chart). Ofwat said it had cut expenditure it considered inefficient, not properly justified, not required, or previously funded.

The box below shows key items of planned expenditure.

Service expectations

Alongside the cost allowances, Ofwat set out a series of service targets for water wholesalers, most of which are incentivised with rewards and penalties. These include a 13 per cent cut in leakage, a 30 per cent cut in pollution, a 41 per cent reduction in storm overflow discharges, and a 4 per cent cut in per capita consumption.

Of particular relevance for business customers are:

? A first-time target for wholesalers to deliver a 4 per cent reduction in business demand. Ofwat said this represented a reduction of 123 litres per business connection. Details on how this will be approached are yet to be confirmed.

? The creation of a new measure of experience, called BR-MeX, which will reward or penalise wholesalers according to how well they serve business customers and water retailers. Each wholesaler will be benchmarked against the sector’s median performer, with rewards for those above the median and penalties for those below. Scores will be calculated 50 per cent based on survey results from business customers who have contacted their wholesaler, and 50 per cent based on feedback from retailers.

? For business customers in Wales, where the competitive retail market does not operate except for the very largest users, Ofwat has targeted a 1 per cent improvement in customer satisfaction scores.

Next steps

Ofwat will issue its final, binding decisions on 2025-30 prices on 19 December. Between now and then, an intense process of negotiation will take place between regulator and regulated, in which the latter will try to secure adjustments to their draft settlements. This is likely to result, if anything, in further upward pressure on prices, should Ofwat allow more of the expenditure companies seek and as it finalises its financing calculations with more up-to-date data. Businesses need to start budgeting for a higher water bill landscape and consider what they might do to offset this uplift through closer water management.

This article appears in Buying and Using Utilities Autumn 2024 issue

Read more ??Buying and Using Utilities Autumn 2024