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The Topic: Totex TOTEX THE TOPIC 12 | 11TH - 17TH DECEMBER 2015 | UTILITY WEEK OUTSIDE IN: LONDON 2012 The London 2012 Olympic Games may be a source of inspiration to thousands of bud- ding young athletes and sports people, but they also offer utilities an insight into how to operate in a totex environment. A number of the venues, including the Marshmallow basketball court and the water polo arena, were designed to be temporary and plans for the lifetime costs were built in at the start. The Marshmallow (as it became known) was disman- tled after London 2012 and put up for sale for use at alternative sites. The water polo arena too was recycled after the Olympics and Paralympics. Northumbrian Water programme office manager Andrew Eastwood, who worked on the Olympics, said: "Someone had the foresight to question why all that money should be spent on an asset when there was a smarter solution, and that's exactly what happened." Contractor view: Totex changes the maths of existing facilities as well as new ones A longside the shi to totex, another key element of Ofgem's adoption of RIIO was extending the price control period from five years up to eight. The aim being to inspire longer-term thinking and provide more certainty for investors. However, one of the concerns of a longer price control period, according to Jefferies analyst Peter Atherton, is "locking in" poten- tially bad deals – either for consumers or the companies. He says this could be "pretty damaging" without a safety valve. Ofgem created the RIIO framework with one built in: the mid-point review. For the electricity transmission (T1) and gas distribution (GD1) price controls, the time to run a regulatory eye over the 2013 deter- mination is almost upon us. Ofgem started the ball rolling when it issued a consultation on 12 November setting out some issues with RIIO-T1 that a mid-point review could address. It said RIIO-GD1 did not have "any material issues", meaning the totex regime and price control settlement that came into force in April 2013 was working as planned. Certainly, that is the view of Northern Gas Networks chief executive Mark Horsley, who told Utility Week the review would show that the RIIO principles – including totex – are being delivered. On the electricity transmission front, Ofgem has highlighted some issues it may look into in more depth. These include the network output measures, the customer and stakeholder incentive mechanism, and the strategic wider works submissions. Should the response to the consultation be followed up with a mid-term review, any policy proposals will be made by sum- mer 2016 before a decision is made by the autumn of the same year. Ofgem will consult on a mid-point review for RIIO-ED1 in 2018. The water sector retained five-year con- trols and so there is no review mechanism. RIIO decisions face reality check The energy sector's RIIO regime introduced totex and extended the review period to eight years, but it also introduced a mid-point review so that bad misjudgments could be revisited. T he new concept of totex changes the rules fundamentally for water compa- nies. Now, when investments are being considered, it is the total cost – including energy usage, maintenance, etc – which has to be considered, not just the capital value. The totex concept also focuses attention on existing infrastructure and how efficient the installed equipment is, in particular in the area of energy usage. The new Ofwat rules will force utilities to examine historical installations and determine whether it may be beneficial to replace them with new tech- nology offering lower operating costs. Over the period of AMP6 (2015-20), wastewater expenditure is forecast at nearly £21 billion across all companies, with up to 50 per cent of this accounted for by wastewa- ter treatment, because water companies are also obliged to improve performance to meet the new discharge standards prescribed by European regulation. Controlling wastewater processing costs is therefore likely to become highly significant, both in the context of existing and new installations. The capital investment limit for the 2015-20 is £44.3 billion, 5 per cent lower than the projections supplied by the water companies. An imme- diate consequence is that the sector will need to enhance productivity and become more cost-efficient. This means buying smarter and managing sewage treatment and assets more efficiently. New technology providers such as Mapal Green Energy are well positioned to help. With a track record of delivering more efficient wastewater aeration processing technologies, especially in terms of power usage, such system are likely to be essential in the battle to meet totex targets. With no moving parts, the energy bills of Mapal's Floating Fine Bubble Aeration systems, for instance, are substantially reduced – by 22 per cent in the case of an installation run by Anglian Water, and fast switchovers are pos- sible because wastewater plants do not need to be drained for new installations. We believe AMP6 will give a huge boost to the rollout of floating fine bubble aera- tion technology across the utility sector. We currently have active projects with Thames Water, United Utilities and Anglian, all of which recognise the important energy savings possible. Add to that, lower mainte- nance and faster switchover times and the proposition is a powerful one for anyone who must now review existing capital and total expenditure models. Zeev Fisher, chief executive, Mapal Green Energy