Utility Week

10 | AUGUST 2022 | UTILITY WEEK Policy & Regulation Analysis Water companies must compete for net zero funding O n 7 July, Ofwat released its dra methodology for the PR24 price control, in which it revealed plans to enable water companies to compete for additional funding for net-zero invest- ments that go beyond its baseline target for decarbonisation. Ofwat said it has four key ambitions for PR24: focusing on the long-term; deliver- ing greater environmental and social value; re ecting a clearer understanding of custom- ers and communities; and driving improve- ments through e- ciency and innovation. Accordingly, the regulator said water companies would be required to set their ƒ ve-year business plans within the context of 25-year long-term delivery strategies with adaptive pathways. Their delivery strategies and business plans should be informed by – and align with – the existing strategic plan- ning frameworks, including water resource management plans and drainage and waste- water management plans. Common performance commitments Ofwat has also proposed to introduce new common performance commitments on key environmental issues, such as improving bathing and river water quality, reducing the impact of storm over ows and lower- ing greenhouse gas emissions, as well as a new BR-MeX performance commitment for English water companies to improve perfor- mance in relation to wholesale services pro- vided to retailers and business customers. The regulator says it will provide spend- ing allowances for companies to meet the new emissions target, but it is also proposing to allow companies that wish to go further to bid for additional funding from a net-zero challenge pot. It says this extra funding will be con- centrated on the most e- cient companies to ensure faster emissions reductions are achieved at the lowest cost. Learnings from these investments would then be shared, allowing all companies to implement solu- tions that prove e' ective during future periods. Despite the introduction of new common commitments, Ofwat says it expects the over- all number of performance commitments to be cut in half due to fewer bespoke targets – at most two or three per company. Ofwat is also planning to extend the enhanced Outcome Delivery Incentives (ODIs) introduced at PR19 to all companies for a select group of well-established com- mon performance commitments. Enhanced ODIs, which o' er stronger incentives for exceptional performance, are currently applied at the request of water companies. The regulator says enhanced ODIs will o' er rewards only for outperformance and will not include penalties for under- performance, as is the case for the current asset management period. The thresholds for enhanced ODIs will be set on a "consist- ent and streamlined basis", o' ering rewards to companies only for "frontier-stretching" performance delivered through "genuine innovation". Ofwat says it expects to manage ODI risk primarily at an aggregate level, only apply- ing individual collars and caps to perfor- mance commitments on a targeted basis. It is not proposing to use dead bands for any performance commitment. Its initial proposal is for aggregate incen- tives beyond plus or minus 3% of Return on Regulatory Equity (RoRE) to be shared 50:50 with customers, with 90% of incentives beyond plus or minus 5% of RoRE going to customers. "Water and wastewater companies provide an essential service for customers across England and Wales. We've listened to people's concerns and ambitions for the water sector. We understand the urgency of the environment and climate change challenges and the pressure on people's fi nances. In PR24, companies need to step up to meet these challenges by fi nding new and innovative ways of delivering reliable and resilient services." David Black, chief executive, Ofwat "We're really pleased to see a much greater emphasis on involving consumers in the key decisions. The collaborative research we've been working on with Ofwat has been a very positive step forward and the proposal for open challenge sessions has a lot of potential. "The cost of living crisis has put an intolerable strain on many households' fi nances so it is good to see Ofwat recognising the importance of aff ordability in its methodology. The sector needs to accelerate its eff orts to help those struggling and we're delighted to see the regulator putting down a clear marker for companies to pave the way for a new water aff ordability scheme." Mike Keil, senior director, CCW innovative ways of delivering reliable and resilient services." David Black executive, Ofwat putting down a clear marker for companies to pave the way for a new water aff ordability scheme." Mike Keil, CCW Ofwat sets out its thinking for the next price review, and its focus is on long-term sustainability.

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