A water industry shake up could be a blueprint for the wider economy – Inside track

This post is by Guy Thompson, group sustainability director at Wessex Water and managing director of EnTrade, a not-for-profit Wessex Water business.

The privatised water industry model is under unprecedented scrutiny.  Politicians from all parties are competing to talk tough about water companies and, with sewage pollution a salient electoral issue in many constituencies, the public will expect action after the general election. There is an opportunity for reform that enables water companies to become, in partnership, a driver of the green economy.

The industry model needs a reset

The water industry model is no longer fit-for-purpose and needs a reset. The reasons for this are obvious. First and foremost, we face climate and nature crises, environmental performance is going backwards and trust in the industry is at an all-time low.  Whilst the river health debate has led to an over simplified narrative (there is a range of factors causing environmental harm to our rivers and coasts besides storm overflows), it has also exposed a real challenge. Climate change, with lower river flows during the summer months and increasingly frequent intense storms, is exacerbating the effects of pollution on our rivers and coasts. Sources include agriculture, highways and private sewerage systems as well as treated and untreated discharges from water companies. Better monitoring is also revealing a host of water quality challenges, including persistent chemicals like PFAS.  Only last week, the Rivers Trust warned that no single stretch of river in England is in good overall health.

We are also in a cost of living crisis. There is the question of how to finance the investment needed to fix these problems in an era of high inflation and interest rates. The old utility model of ‘price = supply costs’ is no longer sustainable in a capital intensive industry.

Investment in long term, systemic solutions is essential for a water future resilient to climate change and a growing population.  There is a big job to, for example, re-plumb our sewerage system to separate rainwater from foul water (the intrinsic driver of the storm overflow problem), tackle the legacy of nutrients that will continue to drain out of rural catchments for decades to come and innovate to retrofit permeable surfaces in our towns and cities.

Regulation should drive cost effective solutionsIn an independently peer reviewed report for Wessex Water, Frontier Economics concluded that current regulation of the water sector leads to inefficient outcomes. It found that companies are not incentivised to choose solutions with the biggest environmental benefit at the lowest societal cost.

At the next Water Price Review (known as PR24), which will be determined by Ofwat at the end of this year, the water companies propose to invest £96 billion to improve performance on storm overflows, water quality and leakage between 2025-30. Wessex Water’s draft business plan reflects the national picture: a doubling of capital expenditure, requiring a 29 per cent increase in customer bills, driven almost entirely by statutory requirements.

Much of this planned investment will involve pouring environmentally unsustainable chemicals and concrete, increasing reliance on finite imported materials, driving up the carbon footprint of water companies and making it harder for them to hit their net zero targets.   This is because water quality regulation prescribes hard engineered solutions – such as expanding storm tanks and installing nutrient-stripping plants – and does not consider the carbon impacts or other environmental goals, such as restoring biodiversity.

Long term catchment approaches are the answerIt makes no sense to address water quality issues exclusively at end-of-pipe. In common with other water companies, Wessex Water has piloted catchment approaches, often in partnership with farmers, landowners and NGOs, which demonstrate there are more cost effective alternatives to traditional engineered solutions. These include nature-based solutions, such as wetlands and woodlands, to improve water quality and enhance wildlife.

A coalition of organisations, Sustainable Solutions for Water and Nature (SSWAN), has therefore come together to call for the next parliament to initiate regulatory reform to:

• Set water health targets at a national and catchment scale, ensuring the policy levers and incentives are in place to reduce pollutants and deliver targets locally.
• Link investment and targets across water quality, flooding, nature recovery, carbon, and climate to create new sources of funding.
• Ensure pollution is accurately apportioned to those responsible with detailed and transparent monitoring carried out by public bodies.
• Establish independent Catchment Advisory Boards to facilitate local decision making and deliver targets efficiently.
• Resource the regulators to drive compliance and sufficient investment in the water system, using existing enforcement tools.
• Set a framework to deliver long-term resilience, established by an independent body, and requiring water companies and regulators to deliver against the framework.

SWWAN is not saying the whole water regulatory system is broken.  What we are pointing to is the opportunity for a series of incremental improvements that could be made now – without primary legislation or institutional change – to enable better outcomes for society.

Water reform could be a template for the rest of the economyThe case for water sector transformation is unarguable. The Water Industry Act, which sets out the powers and duties of the water companies and Ofwat, is over 30 years old.  Water company licences reflect their purpose at privatisation, which was to take the liabilities off the public balance sheet and drive private investment in asset improvement.

The job of a water company is now far more nuanced and complex. It involves working in partnership with local authorities, housing developers and farmers to ‘slow the flow’, and with natural processes to improve the resilience of water company assets and river catchments.

Investment is needed.  Investors need certainty.  Changes to the regulatory framework are essential to unlock private investment in environmental outcomes without significantly adding to cost of living pressures and reducing the affordability of housing and utility bills.

Water reform could be a template for how the private sector can step up and enable a fair and efficient transition to a net zero and nature positive economy. To achieve catchment targets, the water industry will need to work with other sectors like farming, developers and flood and highways authorities. The model could form the basis for a policy framework that, over time, harmonises economic and environmental regulation across all sectors to incentivise more efficient delivery of environmental outcomes.

We need to get on with this. Two and a half years ago, I pointed out that there was a narrow window of opportunity to get the regulatory framework right for PR24. That window has long since closed. To make progress before the next Water Price Review in 2029, regulators, policy makers, the industry and its partners could start collaborating now to draw up a blueprint for a more progressive water industry model, to be implemented in the next parliament. By 2030, we will be halfway through the government’s 25 year environment plan.  We can’t afford to find ourselves here again then.