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Sharing a drink

Climate change and the impact of a growing population are going to be the big features of the next water industry spending round.
For the last 20 years the focus of water industry investment in England and Wales has been all about quality. The next 20 are going to have to balance the demands of climate change, carbon reduction, population growth and old fashioned maintenance with what the public can afford or be made to pay.
It is going to require a whole new approach from the water companies, their regulator Ofwat, the government and the civil engineers and suppliers who come up with solutions and implement them.

Which means the water industry is an interesting place to be right now.

“This is a big year for the industry” says MWH director of business strategy David Smith. “There‘s a lot going on.”

The list includes the start of negotiations for the next water company spending period – Amp 5, which covers the years 2010 to 2015. The conversations for Amp 5 are encompassed in what is known as the PR09 (periodic review 09). Ofwat has published the guidance on how it expects the companies to prepare for the review and the companies will put their draft business plans into the ring in August.

As a prelude to that, the water companies this month reveal their Water Resource Management Plans which outline how they are going to supply and manage water for England and Wales for the next 25 years. These are based on their Strategic Direction Statements which came out in 2007.

Added into the mix are requirements from the government’s Future Water strategy published at the start of 2008 which wants a big focus on reducing water use – demand management. And there is likely to be a legal requirement on the water companies after the Pitt Review this summer to protect critical water and sewerage infrastructure from flooding.

Sir Michael Pitt is reviewing the impact of the 2007 floods and there will be a special focus on water and power infrastructure. Last summer, a major disaster and public riots, particularly over lack of drinking water, were narrowly avoided after flood water knocked out installations.

And then there is another issue. “The big challenge coming through is sustainability,” says Grontmij deputy director of water Scott Aitken. “As civil engineers we are all used to sustainability being part of our various markets. But never before has it come right at the top of the agenda.

“But the big questions the stakeholders have to answer now is does meeting the sustainability challenge match with customers expectations of what they believe they can afford, or are willing to pay?

“There is going to be a tremendous debate between the water companies and Ofwat and customers about what is the right level of investment anyway, and now we are superimposing adaptation to climate change on top of already difficult questions to answer,” Aitken says.
Smith’s view is: “We are going to see increased spending on climate change impacts like flooding but there will also be a strong emphasis on capital maintenance. A lot of investment will go to maintaining existing assets rather than building new works.”

Innovation, particularly from suppliers is going to be key to keeping costs under control says Mouchel Utilities managing director Piers Clark (see below).

The Water Resource Management Plans give a clearer view of how the water companies are going to maintain supplies. In the high population density, water stressed regions in the south and east that is likely to include new and expanded reservoirs.

Thames is already determined on a new reservoir while Anglian has already said it will be abstracting 40% from one of its flagship sites – Rutland Water (NCE 17 April). Desalination is also on the agenda.
Thames has taken a lead and has plans for a plant in east London. Southern has proposed a membrane technology desalination plant for Brighton.

Looking ahead, Aitken says there are going to be some knotty issues for water companies and their engineer advisors to resolve. For instance can a preference for soft storage options sit happily with high intensity development?.

“Can we build the houses we have always built but at increased densities or can’t we? Or do we only allow development to occur where infrastructure and the land can cope with it? It’s going to require a much more holistic approach from everyone,” Aitken says.

The water industry in England and Wales is investing between £15bn and £16bn in the Amp 4 period. Customers are unlikely to wear an increase in their bills despite all the new demands for investment and predictions are that the Amp 5 numbers are likely to be of the same order.
Ofwat is totally focused on providing value for money for customers and is continuing its pressure on the companies to reduce their infrastructure investment costs.

Key to this in the upcoming PR09 debate is something called menu regulation.

“Already in use in the electricity industry this requires companies to identify a series of menu options for different capital programmes with alternative risk and reward trade offs,” says Clark. “As this approach is yet to be tested it will set a new challenge in the lead up to the final determination.”

“As usual,” says Smith “the devil is in the detail”. Menu regulation will require the companies to clearly explain how they get their base figure, what the particular local issues are regarding prices and how and why the numbers rack up as options are added.

The companies are effectively opening their books to Ofwat in much greater detail than before. Ofwat can then compare and contrast how efficient they are being.

A requirement to be seen to be mitigating or adapting for climate change is also in the guidance.
Adaptation is the change in the design of assets to cope with the effects of climate change such as drought and flooding. Mitigation is the reduction in greenhouse gas emissions via such things as energy efficiency, better treatment processes and managing carbon.

This even feeds through to the cost benefit analysis Ofwat is also demanding. The water industry contributes 2% to the UK’s carbon load and it needs to cut it in half. Therefore the benefits of doing capital works are going to be weighed against the carbon produced in implementing them. “There is a recognition this might change the optimum answer,” Smith says.

“Everyone is going to be looking at pouring less concrete and using less power,” says UK director for supply group British Water Paul Mullord. “A few years ago in the debate about the benefits of package treatment works versus septic tanks the Environment Agency (EA) preferred package treatment for the water quality benefits. Now it is saying it prefers septic tanks as they use less energy. The EA is prepared to accept a less perfect environment to save energy.”

The as yet unspoken issue in the PR09 discussions is going to be the cost of capital. The water companies borrow to fund their investment and in the current straitened credit environment it is not going to be a great time to be doing that. “Assumptions on the cost of capital in PR09 are going to be very important,” Smith says.

Controlling resources

MWH director of business strategy David Smith outlines the key themes of the water company draft resource management plans released this month.

The water companies’ draft water resource management plans released this month look ahead 25 years so the planning can begin to make sure we have enough water for future needs. And getting the right balance between demand management and resource development options will be a critical aspect. The important features of the plans are:

Demand management
- Only put into the network what is required Đ more pressure control, fewer leaks.
- Water efficiency and conservation programmes.
- Sustainable levels of leakage.
- Metering and working with consumers to reduce demand.

Supply management
- Making more of existing sources Đ reservoir raising schemes, aquifer recharge schemes and effluent re-use schemes.
- Climate change impacts have to be re-assessed and the impacts are probably greater than was previously thought.
- Resilience to floods is going to be a more important issue following June 2007 floods.

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