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UTILITY Week 31st October 2014

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14 | 31sT OcTObEr - 6Th NOvEmbEr 2014 | UTILITY WEEK Policy & Regulation Market view I t is not oen that good news about the water industry gets buried. Yet that is just what has happened to one of the most significant advances in water management since privatisation. It is an element of business plans that is easy to overlook, and which has signifi- cant but potentially risky consequences. It is also a success story that places water companies in England and Wales as global leaders: delivering on the twin track to supply-demand planning. The twin track – managing demand for water as far as possible before bringing for- ward timely resource-side investment – has been an evolving plank of government policy since the late 1990s. But it has always met with opposition. Critics say the evidence base for water effi- ciency is not reli- able enough, and, sotto voce, they see that it relies heavily on revenue spend and little on capex. However, a much stronger evidence base has recently been developed aer numer- ous trials by water companies – collated and hosted by Waterwise – and this has overcome the first objection. There is now a much clearer sense of what different options cost, and how much water they save. Fur- thermore, in a major endorsement of Ofwat's totex approach in PR14, the removal of the capex bias has overcome the second whis- pered objection. In 2009 most water companies were fore- casting in their water resource management plans (WRMPs) that daily per capita con- sumption would remain broadly static or increase over the 25-year planning horizon. Fast forward, and more recent Environ- ment Agency analysis has shown that com- panies are forecasting in their 2014 WRMPs, without exception, that daily per capita con- sumption will fall for most of the planning period (see figure 1). This puts the English water sector among the few in the world where this has happened without state inter- vention or the use of tariffs to drive down demand. The consequence is that the mix of options to secure water supplies is weighted, for the first time, towards demand manage- ment (see figure 2). What's not to like? Less water to pump from the environment, treat and distribute with all the costs and carbon that brings. And although population growth will, over time, erode the savings and potentially increase demand, it still means that better use is being made of scarce resources. However, there is a potential downside. The forecast reduced water consumption relies on assumptions about how custom- ers will behave, about how they will react to having a meter installed (compulsorily in some cases) and how they will respond to messages from their water compa- nies about how to not waste water. Then, although the reduction in daily per capita consumption is relatively modest (too little, too slowly some would say), it still adds up to a significant volume that would otherwise need to be supplied from resource development. What we are seeing is, in effect, a nation- wide controlled experiment in which the first five years to 2020 will set the scene for dec- ades. If the savings materialise as forecast, then it will give renewed confidence in the twin track approach and reassure compa- nies, regulators and government that it is viable as well as sustainable. However, if customers do not respond as modelled, or if a company fails to hold its nerve and does not invest in working with them to maintain the momentum, then dif- ficult decisions will be required in the next planning round. Other options will need to be brought forward, provided that a com- pany can demonstrate to regulators that it has done everything it reasonably could to deliver the demand-side measures. There will be close scrutiny of how the savings match the forecast, and why it is that some companies delivered and others, per- haps, did not. Customer engagement in the future will need to be not simply a quinquen- nial exercise to justify an approach to invest- ment in a business plan, but an ongoing and developing relationship with household and non-household customers alike. Calculating risk If customer response to the need to reduce consumption were the only risk then it would be manageable with some course correction, as necessary, in the next set of WRMPs. However, the plans each company devel- ops must take into account a wide range of risk factors. They must take the worst drought known in an area, add on a mar- gin, make forecasts about demand over 25 years, make assumptions about the potential impact of climate change and other factors which might affect the yield of sources, and then add on a safety factor or, headroom, which is a reflection of the uncertainties inherent in the various assumptions. This is a gross simplification of a sophisticated and complex process, but it does illustrate that planning for secure water supplies is not an exact science. Fundamentally, it boils down to a compa- ny's appetite for risk, and the feedback from its customers as part of the statutory consul- tation process. Customers have said clearly that they do not like hosepipe bans and they are adamant that supply failure is not an option. Consequently many companies have said in their plans that standpipes and rota cuts are "unacceptable" and they are not planning to have them – ever. If only it were that simple. There are few water managers who, pri- vately, would not admit that at times they have come close to a supply failure. As a drought develops and resources dwindle, stress levels rise as companies fol- low their drought plans, always planning and acting for the worst, but hoping for the best and praying for rain. And almost always, as in 2012, it has rained just in time and life goes on. Water supply security What shocks might lie ahead for the UK's water system, which would result in that most unthinkable of events – failure of supply? Ian Barker investigates. There are few water managers who, privately, would not admit that at times they have come close to a supply failure

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