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Ofwat's draft determinations and the future of the water industry
A closer look at the final determinations and investment announcements
Dr Joe Sanders Kirelle Shepherd
Introduction of final determinations and investment announcements
After consulting on the draft determinations released in July, Ofwat has now published, on time, the final determinations for the Business Plans submitted by water companies in October 2023. The final investment proposal stands at £104bn, which is higher than the £88bn suggested in the draft determinations but still falls slightly short of the £105bn requested by the water companies. However, this amount is significantly more than the £59bn allocated in AMP7. Nearly 90% of this investment is necessary to comply with legal requirements, including new legislation introduced during the previous AMP. As a result, customers will see their annual bills increase by £31, compared to the £19 per year increase proposed in the draft determinations, but still £8 lower than companies proposed.
Ofwat Chief Executive David Black stated that:
“Water companies now need to rise to this challenge, customers will rightly expect them to show they can deliver significant improvement over time to justify the increase in bills.”
Vision for the sector
For the first time, Ofwat asked companies to develop their business plans in the context of 25-year strategies, to ensure sustainable solutions were proposed to improve performance for customers now and in the long-term. During AMP8, customers should receive better value for money and see a step change in water company performance, with the level of leakage expected to reach 17%, the lowest level since privatisation, and storm overflows expected to reach an average of 16 spills by 2029 for the companies in England, 45% lower than levels in 2021. Additionally, the sector will have a greater focus on its wider environmental impacts, with £2 billion to spend on nature-based solutions and biodiversity increases, and, for the first time, all companies will be incentivised to reduce their operational greenhouse gas emissions.
The conflicting viewpoints in response to draft determinations in July demonstrated the significant challenges the sector is facing. While Ofwat have proposed a way of balancing these competing priorities in their final determinations, not all stakeholders feel they have got the balance right.
Mike Keil, Chief Executive of CCW water which represents customers interests said
“These bill rises may be less than what water companies wanted but they are still more than what many people can afford. Customers will be hit particularly hard from April with a large chunk of these increases frontloaded into next year – on top of inflation.”
While today's publications mark a pivotal moment for the sector, we will continue to observe just how dissatisfied stakeholders are. Companies might appeal to the CMA if they believe they haven't received adequate funding, while eNGOs could lodge complaints against the Ofwat to the OEP, which is already investigating Defra, the EA and Ofwat regarding their regulation of combined sewer overflows in England.
Storm Overflows
On the 17th of December, two days before the publication of Ofwats Final Determinations, the OEP published its findings from their investigation into the regulation of CSOs, following a complaint made by Wildfish back in 2021. Their recommendations will lead to even tighter regulation, with revised guidance, better collaboration amongst regulators and stricter permits, as well as an expectation on Ofwat to see through their enforcement cases. While some companies may receive changes from Draft to Final Determinations as positive in the context of storm overflows, the OEPs publication demonstrates the ever-changing landscape the sector is currently facing.
Adapting AMP8
Ofwat has made clear in their final determinations that alongside delivering their AMP8 performance targets, the sector must continue to consider the future through adaptive planning, considering their 25-year long-term delivery strategies. Additionally, as of now, all water and sewerage companies in England and Wales are under investigation by the Environment Agency (EA) and Ofwat, with Ofwat having proposed draft enforcement orders for three water companies. With more likely to follow, companies will be required to adapt their plans in response to the regulator.
Additionally, if the Water (Special Measures) Bill is passed into law, companies may be required to adapt their plans to align with new legal requirements in the context of pollution incidents and emergency overflows. Alongside all of these potential changes, an Independent Commission into the water sector was launched by the government in October to address systemic issues and improve the regulatory framework to restore public confidence in the water industry. This will be the largest review of the sector since privatisation, with findings expected to be published in July 2025.
So, while final determinations set out direction for a current trajectory, companies will be required to adapt and respond to changes along the way.
RPS and Tetra Tech's role in delivering AMP8
Ofwat’s final determinations signal a significant shift in the sector, with a greater focus on the long term and more consideration for its environmental impacts. Regulators are pushing companies to be smarter with their data, improving how and where data is collected and analysed, to optimise their existing assets. In preparation, at Tetra Tech RPS we have already started supporting companies in adopting smarter practices, exploring new and adaptive ways of working and trialling more innovative solutions. As a result, we are ready to support companies in delivering on their stretching AMP8 targets and adapting to changes along the way.
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