Leakage and water transfers – Government and Ofwat keep up the pressure on water companies

The Government and Ofwat have signalled their intention to keep up the pressure on the water companies to drive leakage down further and encourage more water transfers.

The comments come in their separate responses to the House of Commons Environment, Food and Rural Affairs Committee Eighth Report of Session 2017–19 Regulation of the Water Industry.

The Committee received the Government response on 18 December 2018 and the Ofwat response on 7 December.

The report says the Government and Ofwat should make a strategic assessment of the need for water transfer infrastructure and confirm a long-term target for water transfers. It also expresses concern that “existing incentives in PR19 are not strong enough to incentivise water companies to invest in water transfers.” In its response the Government said that Defra and the regulators have been clear with the industry that “we expect more transfers between water companies.”

It goes on to point out that since privatisation, the capacity of water supplied by transfers has remained static at around 4% and that evidence from the National Infrastructure Commission suggests that strategic transfers could provide around double the capacity they supply currently.

“We expect water companies to take all reasonable steps to pursue transfers where they are the most efficient way of addressing future needs. This should be through regional planning groups, looking at both intra and inter regional options,” the response says. 

Ofwat’s target to reduce leakage by 15% by 2025 “not ambitious enough” 

The Committee’s report said that Ofwat’s target for water companies to reduce leakage by 15% by 2025 is not ambitious enough and that Ofwat should set a long-term target for water companies to reduce leakage. In the Committee’s view the water industry should collectively be aiming to reduce leakage by 50% by 2040, rather than 2050. Responding to the Committee’s recommendation on leakage, Ofwat said it intended to continue to review the leakage challenge in future price reviews to ensure that targets “stayed in line with advances in technology and the best available evidence on driving leakage reduction.” The regulator said it believed that a significant increase in industry collaboration and innovation is likely to be necessary to achieve continued improvements in leakage performance. “As part of our review of our regulatory strategy, we will consider the appropriate role for Ofwat in relation to collaboration and innovation,” Ofwat said. 

Ofwat “disappointed” in progress on water transfers

On water transfers, the response says: “We have made it clear to water companies that we are disappointed in the progress in this area,” and that the principal remaining barriers to trading water related to coordination problems, environmental and water quality constraints and commercial practice, rather than the level of direct financial incentive.

Ofwat went on to point out that three companies are in active discussions about establishing a joint venture to develop proposals for a major north- south transfer. The regulator said it was also exploring a regulatory alliance to assess multi-company infrastructure options and drive regulatory alignment and cooperation where possible.

In response to the Committee’s comment that it was “disappointing” that the Government had not yet supported a specific per capita consumption (PCC) target, Ofwat said it was launching a call for evidence on setting an ambitious national -but non-binding – PCC target.

Download the Committee report here