Do we need a UK water grid or is it something else? Jon Ashley, Principal Economist Water Industry Forum event 15 October 2013 1 Water today, water tomorrow
Promoting interconnection The UK Government’s white paper and Water Bill promote interconnection between companies operating wholly or mainly in England The Welsh Government expects water companies operating wholly or mainly in Wales to agree bulk supplies only where it would not be detrimental to the incumbent company 2 Water today, water tomorrow
The benefits of interconnection – environmental New water for abstraction available for less than 30% of the time in some areas Climate change projections find that droughts such as the one that occurred in 1976 will become more common in the future The population of England and Wales is forecast to increase by 9.6 million people by the 2030s Trading is one way of helping to reduce abstraction pressures in water scarce areas Source: ‘Case for change’, Environment Agency, 2011 3 Water today, water tomorrow
The benefits of interconnection – financial Ofwat study in 2010 found almost £1 billion of benefits from increased water trading Water Resources in the South East (WRSE) group study in 2010 identified £500 million of benefits from increased resource sharing in the south east of England Customers are missing out on these potential benefits. Environment Agency 4 Water today, water tomorrow
The benefits of interconnection – resilience Water companies have invested in linking up their networks A main reason has been to improve security of supply for their customers 5 Water today, water tomorrow
Why isn’t water trading happening? Cultural issues Economic issues Regulatory issues 5-year return for Regulatory Risk aversion bulk supply processes do not Culture favours exporters emphasise trades engineering over contracts Importers dislike the Lack of published treatment of imports information View of customer as operating perceptions expenditure (opex) Uncertainty over future abstractions Based on ‘Assessment of regulatory barriers and constraints to effective interconnectivity of water 6 supplies’, Defra, 2010 Water today, water tomorrow
Measures to promote water trading Water resource planning guideline Ofwat price control incentives Ofwat ‘negotiating bulk supplies’ framework Ofwat’s network management initiative The UK Government’s Water Bill 7 Water today, water tomorrow
Water resource planning guideline Defra, the Welsh Government, the Environment Agency and Ofwat published a revised Water Resources Planning Guideline in June 2012 Companies wholly or mainly in England have to provide clear evidence of how they have considered interconnection and water trading options in their plans Companies wholly or mainly in Wales have to consider water trading where it would not be detrimental to the incumbent company 8 Water today, water tomorrow
Ofwat price control incentives We will use a totex / menu approach which will reduce the previous perceived bias against bulk supply imports We will apply water trading incentives which will encourage both bulk supply exports and imports 9 Water today, water tomorrow
Export incentive Purpose To encourage companies to export water where it is economic to do so Size Companies will retain 50% of lifetime economic profits from new exports with customers benefitting from the other 50% Delivery The incentive will be paid retrospectively at the 2019 price review (and possibly at the 2024 price review as well) 10 Water today, water tomorrow
Import incentive Purpose To encourage companies to import water where it is economic to do so. Size Companies can recover the cost of an import through the totex menu plus an import incentive equal to 5% of the costs of the water imported under new agreements Delivery The incentive will be paid retrospectively in the 2020-25 price control We are only committing to making payments for the 2015-20 period Cap Import incentive payments will be capped at 0.1% of the importer’s water activity turnover in any year of the control period 11 Water today, water tomorrow
Safeguards Trading and procurement codes To ensure that incentives are available only for efficient trades Abstraction incentive mechanism (AIM) To discourage water companies from abstracting from environmentally-sensitive sources at environmentally-sensitive times, particularly when abstracting water for exporting to another company 12 Water today, water tomorrow
Ofwat’s negotiating bulk supplies framework The document provides a framework for water companies to use as they consider negotiating bulk supply agreements We hope it will make negotiating bulk supplies easier resulting in more trades and benefits for customers and the environment Published in August 2013 13 Water today, water tomorrow
Network management initiative We will introduce network management reporting gradually with an option to set a trial incentive later in 2015-20 This should encourage companies to provide information leading to better network management Improved network management will be important as networks become more interconnected 14 Water today, water tomorrow
The Government’s Water Bill First reading in the House of Commons on 27 June 2013 The Government’s upstream reforms will increase opportunities for new entrants to provide efficient and innovative wholesale water supplies Government’s upstream reforms could save customers around £1.75 billion These reforms will have implications for companies’ management of their grids 15 Water today, water tomorrow
Interconnections between companies proposed In their 2013 draft Water Resources Management Plans water companies have proposed several inter-company interconnections Period Number Volume (max) AMP6 (2015-20) 4 30 Ml/day AMP7 (2020-25) 2 10 Ml/day Beyond (2025-40) 5 37 Ml/day Total (2015-40) 11 77 Ml/day 16 Water today, water tomorrow
A UK water grid or is it something else? A ‘UK water grid’ seems unlikely But we should see more linking up of water company networks where it deliver benefits to customers and the environment compared with the other options available 17 Water today, water tomorrow
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