First published in Cleantech magazine, Volume 6 Issue 6. Copyright Cleantech Investor Ltd
By Nigel Hawkins
Whilst implementing the regulated investment programme remains the core mission of the UK’s water companies, there is now – and not before time – an increasing focus on innovation in a sector that has hitherto been regarded as inherently conservative. As Water UK Chief Executive, Pamela Taylor, recently comments:”It is imperative that that we reform the relationship that we have with water and innovation.”Of course, when compared with pharmaceutical companies such as GlaxoSmithKline, the level of research and development (R&D) spend in the water sector is minimal. Last year, Severn Trent plc reported an R&D charge of just £4.5 million, identical to the figure in its previous financial year – and this is for a company currently capitalised at almost £4 billion. And its nearest quoted comparator, United Utilities, spent just £1.6 million on R&D in 2011/12.
However, over the next decade, significant advances in innovation are widely expected as UK water companies increasingly adopt innovative technologies, whilst the regulatory demand for operational improvements becomes more pressing. Nonetheless, the five year £20 billion regulated investment programme will remain the most important issue for every UK water company. The existing regulatory period expires in March 2015 and will be replaced by a further five year financial determination, which may well prescribe increased capital expenditure, especially if new EU legislation sets even higher industry standards.
In drawing up its final industry determination in late 2014, Ofwat will be laboriously scrutinising each water company’s business programme and will make pivotal judgements about its weighted average cost of capital (WACC) assumption, to which quoted share prices are highly sensitive. However, Ofwat seems set to continue its quinquennial periodic review timetable, despite examining the case for both a shorter – and longer – duration. For water industry suppliers, a longer regulatory period would have noticeable advantages in that it provides both greater certainty and a longer term investment perspective. Industry suppliers, many of whom are represented by British Water, are greatly impacted by Ofwat’s regulatory decisions.
Aside from its key price-setting responsibilities, Ofwat has also started to focus more on promoting innovation in the UK water sector, where many operating processes date back not just generations but, in some cases, centuries. Indeed, much of Thames Water’s infrastructure is very elderly, including the famous London interceptor sewerage system which was designed in the 1860s by Sir Joseph Bazalgette to minimise the impact of the ‘Great Stink’. Currently, Thames is seeking to replace this with its £4.1 billion Tideway Tunnel scheme, completion of which is earmarked for the early 2020s. Given the complexity of this project, it is bound to incorporate some of the latest sewerage technology, although few of the specific details are presently available since a plethora of controversial planning issues currently dominate the debate.
In framing its water innovation policy in 2011, Ofwat addressed the key question as to why the use of more modern technology – which should benefit customers – was urgently needed. In its conclusions, Ofwat highlighted five factors:
- A changing climate, with its various water industry implications;
- Population growth, especially in south-east England;
- Economic uncertainty and affordability issues;
- Rising EU-driven environmental standards;
- Changing energy demands and the need to reduce greenhouse gas emissions.
Furthermore, Ofwat has drawn up a priority list for each of its innovation requirements. By some way, two issues – reducing leakage and the adaptation of infrastructure for climate change – dominate this list.
In terms of leakage, Ofwat’s stance is curious, especially since its last periodic review required minimal reductions in leakage for most of the water companies, despite the high levels of leakage still occurring. Perhaps the subsequent criticism of this laid-back approach has spurred Ofwat to re-assess its priorities. It is now very eager to see the development of technologies that provide pro-active and accurate leak detection and quantification.
The widely-praised hydraulic leak detection system patented by Ferret Technology – suitable for 12mm to 50mm diameter pipes – is an obvious example of this aspiration being met: its technical attributes have recently attracted plaudits from Wessex Water. Ofwat would also welcome initiatives to develop reliable technology that enables efficient water network control and pressure management in real time – the latter proviso undoubtedly throws down a challenge.
With regard to the adaptation of infrastructure for climate change, Ofwat accepts the many uncertainties relating to this subject. Nonetheless, it recognises the need for the development of network controls – that operate in real time – which are able to provide enhanced resilience to water customers through the effective operation of infrastructure assets.
The need for such improvements is becoming very apparent in the UK as weather patterns – and especially the lack or excess of rainfall – become increasingly erratic. Indeed, the prolonged lack of winter rain in south-east England – vital to replenish reservoirs – has been accompanied in recent years by deluges and severe flooding elsewhere. Lower down its list of innovation priorities, Ofwat has highlighted the need for economic reform to reward innovation more directly, via the regulatory regime; this is an issue that both Water UK and British Water have been addressing.
Currently, there is relatively little financial benefit for a water company to adopt innovatory solutions, which might well enhance short term operational risk irrespective of the extra costs involved. To an extent, the water industry’s financial regulation model is static rather than forward-looking in that it is not really designed to promote radical – and out-of-the box – thinking.
However, it is probably in the water and sewage treatment areas where most technical progress is being made. Given its declared aims to prevent environmental pollution, to promote sustainable drainage and to increase efficiencies in the costly water and waste treatment processes, Ofwat will clearly welcome this trend.
In truth, the old dictum, ’Necessity is the Mother of Invention’, which some attribute to Plato, is likely to continue to drive innovation in the water and sewerage industry.
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