Water for Life: The Supply Chain and the Water White Paper
On 8 December 2011, the UK Department for Environment, Food and Rural Affairs (Defra) published its long-awaited “Water for Life” White Paper. Although the proposals set out in it are not as radical as some industry commentators had wished, it nonetheless represents an important statement of the UK Government's vision for future water management. Our key observations are as follows:
- The move to more effective competition in non-household water and sewerage services should incentivise greater supply chain innovation.
Defra plans to implement a range of comprehensive reforms designed to improve the current water supply licensing regime and remove barriers to effective competition for non-household customers. This will include removal of the infamous “costs principle”, which has historically driven wholesale charging and proved a significant barrier to competition between water companies and to new market entrants. The threshold level of water consumption for non-household customers in England to be eligible to switch water suppliers will be reduced from 50 million litres p.a. to 5 million litres p.a. and (in a future Water Bill) to zero. Defra also plans to establish a new market for retail water and sewerage services in partnership with the Scottish Government, via mutual recognition by The Water Services Regulation Authority (Ofwat) and the Water Industry Commission for Scotland (WICS) of each other’s licensees.
S+W is very closely involved in the competitive market for non-household customers that already exists in Scotland, and that experience suggests that business customers in both England and Scotland will now start to expect better, more tailored services and potentially lower prices. This will put water companies under more pressure to deliver efficient treatment and abstraction processes, and accordingly put a greater premium on supply chain innovation. We have also seen the buy-side demand for water efficiency advice and audits increase in a competitive market in Scotland- so expect greater take-up of those on both sides of the border too, continuing the general trend of significant water consumers seeking to manage water use on their asset-base more proactively and cost-effectively (including via automatic water meter reading (AMR) and other remote monitoring solutions).
- Independent water and sewerage infrastructure supplied under the inset regime should become a greater source of supply chain revenue going forward.
Defra have asked Ofwat, the economic regulator of the water and sewerage sectors in England and Wales, to push forward current proposals to impose or strengthen the guaranteed service standards which water companies make available to developers. Reforms to the way in which wholesale prices are calculated should also help make building and operating independent water and sewerage infrastructure a more viable option. The supply chain should be alert to this potential change in its customer base going forward, especially in light of the potential concentration of the traditional water company market (see below).
- There may be more mergers between traditional water companies.
The current UK merger controls on water and sewerage companies (WaSCs) and water only companies (WoCs) with a turnover of at least £10 million are particularly stringent, requiring automatic referral to the UK Competition Commission. Defra will be taking forward further consultation on the reform of the merger regime, including whether to increase the threshold to £70 million and/or to allow undertakings to be given in lieu of a referral to the Competition Commission. It is considering liberalising the rules which would allow mergers between these companies to take place more easily, creating greater opportunity for efficiency savings and for different funding arrangements. This is particularly likely to affect the UK’s 14 WoCs, which in many cases are significantly smaller-scale operations than the WaSCs. From the supply chain’s point of view, this would concentrate the traditional water company market even further, and potentially drive down margins on large framework agreements due to further enhanced water company buying power. Non-traditional customers such as independent water infrastructure companies (see above) and new players in water abstraction (see below) may become more important as a driver for supply chain growth, together with unregulated sector customers on the water buy-side seeking efficiencies and cost savings in a competitive market.
As a counterpoint to this, the White Paper does contemplate increased interconnection of water supply between water companies, to facilitate water trading via bulk transfers. Ofwat estimate the potential savings over the lifetime of the new infrastructure that will be required to be up to £960 million. That will clearly create significant opportunities to market “green” energy-efficient large scale pumping solutions to WaSCs and WOCs, as well as innovative solutions to the biosecurity issues in part hindering this today. Crucially, the White Paper encourages Ofwat to provide positive support to interconnection through its use of incentives for water trading in its next price review.
- There is likely to be an increase in water trading.
Defra will be taking forward plans to increase flexibility and liquidity in the management and trading of water abstraction rights. Those who have or who require access to raw water resources, including many power generators and farmers as well as the water companies, may see their ability to extract it change and/or their opportunities to sell it increase. Defra will be establishing a national advisory group to help manage reforms in this area, which are planned to start with new legislation in 2013 and a new abstraction regime in place within the decade. The White Paper contemplates the introduction of a new “network licence”, to enable alternative water suppliers to own and operate their own water infrastructure (mains, pipes, storage and treatment) which is connected to a water company’s network. All this could create a new generation of water infrastructure customers for the supply chain.
- But - much will still depend on the outcome of Ofwat's Future Price Limits work...
Separately from the White Paper, Ofwat has engaged in a wide-ranging project looking at ways to improve its regulation of the incumbent, monopoly, providers. The various areas under review include the incentives put on those companies to measure and improve customer service; to trade water and make use of others' infrastructure; and to distinguish the costs and efficiencies in different parts of their business. Ofwat is designing its new framework to be compatible with the White Paper reforms, but the detail of the changes it brings forward under this project should have an impact on the profitability and incentives for innovation in those areas covered by the White Paper. The time and resources it will take Ofwat and the water companies to make any changes may also have an impact on the timing for delivery of the White Paper reforms.
- Last, and least clear- the environmental agenda continues to emphasise the importance of new, energy-efficient water technologies.
The White Paper name-checks a host of water technologies, including the following:
- Sustainable Drainage Systems (SuDS) - the UK Government wishes to encourage the use of SuDS “wherever they will be effective”. Further action will include: consultation on national standards for SuDS; a new approval system for sustainable drainage; greater dissemination by Ofwat to WaSCs of cost and benefit data in respect of SuDS; potential removal of regulatory incentives for water companies to implement traditional piped drainage solutions; and Defra fostering a “consortium of sustainable drainage ambassadors or champions, who can provide advice and information on the options available”.
- Smart water meters - the UK Government “is interested in the potential of smart water meters to improve water company network management and encourage more sustainable water use by consumers. We look to companies to demonstrate the business case for implementation with the agreement of their customers”.
- Thames Water AMR equipment project - the 12 month AMR trial at certain UK Government buildings is designed, in part, to allow Thames to test the methodology for delivering an enhanced water management service to customers, as part of a more automated, on-line approach to water cost-efficiency and sustainability.
- Anaerobic digestion (AD) - the White Paper refers to the OFT Market Study on Organic Waste and its recommendation that regulatory barriers to harmonisation of the treatment of sewerage sludge and other organic waste be addressed, with a view to potential co-digestion of these currently distinct classes of AD feedstock. The UK Government commits in the White Paper to taking this forward once the European Commission’s current assessment of whether the EU Sewage Sludge Directive should be reviewed has been completed and published.
- Reverse osmosis - the White Paper highlights the role of the reverse osmosis plant at McCain Foods’ Whittlesey factory in cleaning used process water to a level suitable for re-use, to reduce site demand for mains water supply by 25%.
- £3.5 million innovation competition in water security - this will be launched by the UK Technology Strategy Board in March 2012, with the target being step-change solutions that have the potential to recover 1,000 megalitres per day from the blue water cycle in any aspect of the water cycle (including wastewater treatment and recycling).
Recommendations for maximising these opportunities:
- Get involved in the consultations and debates arising from Defra’s action points in the White Paper. It is crucial that stakeholders from different parts of the supply chain represent their interests to Defra, at this critical crossroads in water policy. The White Paper states that "The Government will also work with Ofwat and the water companies to consider measures to smooth out investment cycles in the water sector to reduce costs". The supply chain also needs to make sure that it is part of that dialogue. Please let us know if you would like to discuss how best to achieve this.
- Keep a watching brief on Ofwat's Future Price Limits consultation, which is currently open until 15 February 2012. We will keep supply chain participants updated on progress.
- Increase your focus on non-traditional customers such as (i) independent water and sewerage infrastructure companies, (ii) new players in water abstraction and (iii) a more water-conscious unregulated sector, in the form of significant non-household water consumers. Over-focus on traditional water company customers could restrict growth, as well as eroding margins. However, increasing interconnection between water companies will boost infrastructure spend and should continue to present a significant opportunity for the supply chain, if the numbers add up following Ofwat’s next price review.
- Follow the progress of the UK Government’s AD Strategy and Action Plan (June 2011) in light of the European Commission’s assessment of whether the Sewage Sludge Directive should be reviewed. If the existing barriers to co-digestion of sewerage sludge and other organic waste are broken down, then the AD market will receive a huge boost, and could become a significantly larger customer for the UK water and wastewater supply chain. What is not yet clear - and will depend in large part on Ofwat itself, via future price reviews - is whether it will be the WaSCs or the waste management companies (who currently have little or no presence in the wastewater treatment market) who most benefit from that harmonisation. Either way, a growth in UK AD capacity (or retrofitting of existing sewerage sludge digesters) will clearly benefit the supply chain significantly.
- SuDS developers should explore the opportunities for partnering with the Government via the Defra-approved consortium of sustainable drainage ambassadors. This seems an obvious opportunity not only to raise profile in a growing sector, but also to keep abreast of the new regulatory parameters which will define its development.
Jerry Bryan, Executive Chairman at Albion Water, whose Knowle village sewerage project was highlighted as an inset regime success story in the White Paper, commented:
"The Government has now signalled that the water industry should play its full part in the greening of the economy and Albion is excited by the prospects for change in an industry that has long resisted innovation. If you’re a customer or part of the supply chain, now is the time to ask where you might benefit from these changes."