Ofwat calls on companies to put customers first as it backs new £1.6bn markets in bioresources and water trading

25 May 2016 12:54 PM

Ofwat has yesterday set out a number of major reforms to help boost resilience and secure a better deal for water customers, the environment and wider society.

As part of a package of measures introduced following public consultation, Ofwat has called for customers to be given an increased role in water companies’ decision making on an on-going basis. It is also recommending a strengthened role and remit for Customer Challenge Groups – committees of customers and their representatives who make sure consumer voices are heard and understood by water companies.

The regulator has announced it is backing new markets in bioresources – treated sewage – and water trading, which together could be worth £1.6 billion. Ofwat has also announced it is stepping away from the use of the RPI measure of inflation, towards a CPI measure.

Bioresources – also known as sludge – produces biogas, or green gas, which can be used to generate low-carbon electricity. When processed it can also be safely used in the agricultural sector as a fertiliser. Given the financial and environmental benefits, Ofwat wants to empower markets to unleash innovation and efficiencies, bring in third parties and promote the trading of bioresources. Bill payers could benefit too, with the cost of water services being reduced by these new markets.

Ofwat is also encouraging the trading of water between companies – to enable the movement of water from where it is plentiful to where it is scarce. By setting conditions to encourage water companies to trade between themselves and with third parties, we could see a smarter use of water reserves.

As part of the same work, Ofwat is encouraging the efficient management of supply too – promoting a market to improve demand management and tackle leaks. Using scarce resources more efficiently could boost resilience, help to keep bills affordable, deliver environmental benefits and provide new opportunities for investors.

Following its consultation, Ofwat has yesterday confirmed that it will phase out the use of the RPI measure of inflation and move towards a CPI based measure, in line with government and Office of National Statistics advice. RPI has lost its status as an official statistic and is increasingly an index which customers do not recognise, with CPI more commonly in use.

If the water sector is to meet the future challenges it is facing, including increasingly scarce water resources in the face of climate change and population growth, dealing with environmental water quality problems and customers who are struggling to afford their bills, it will need to change.

That is why Ofwat is encouraging bold action to support that change and to deepen levels of trust and confidence in the sector with an increased focus on pro-market regulation to promote consumers’ interests.

Yesterday’s announcement follows a long period of engagement and consultation with the public and the sector, and builds on the changes Ofwat made when it set prices in 2014. As part of that review, it put the onus on companies to focus on their customers and resulted in a five percent real term drop in bills and a range of service improvements.

Cathryn Ross, Ofwat Chief Executive, said yesterday:

“The challenges posed by climate change and population growth mean we need bold, creative and innovative action to ensure we have reliable access to resilient, affordable water services in the future. Today we unveil a package of reforms to help set the sector on the path to secure that goal.

“As the old saying goes, ‘where there’s muck, there’s brass’. We think there is something in that idea. The trading of bioresources could be a real breakthrough – economically and environmentally. By kick-starting this market, we could develop reliable, domestically sourced low-carbon energy generation and reduce water bills.

“While some may be squeamish about this, it is an industry we ought to support because it is safe, green, sustainable and economically attractive.”

Notes to Editor:

1. Forecasts suggest the bioresources market could produce benefits of up to £780m and the potential benefit from smarter water use through trading could be worth £800m.
2.  These forecasts are calculated using the mid-point figures for our benefits and costs, calculated on Net Present Value over 30 years, using the Social Time Preference Discount Rate of 3.5% and expressed in 2015-16 prices.
3.  The process to treat bioresources, also known as sludge.
   • Sewage is taken away from homes and workplaces to treatment sites.
   • It is put into tanks where the heavier sewage sinks to the bottom and the lighter sewage is skimmed off and treated with bacteria which naturally breaks down the sewage.
   • The heavier sewage is mixed with the same bacteria and is then often passed to an enclosed ‘digestion’ tank which contains no oxygen. The conditions encourage particular bacteria which can break down the bioresources and stabilise it – destroying pathogens and reducing odour.
   • This process results in treated bioresources, which can be used as a fertiliser substitute by the agricultural sector, and biogas – or green gas – which can be used to generate electricity or injected into the gas grid.

Press contact: Mark Anderson – 0121 644 7642 and 07884 117760