Thames Water has said that its current performance is falling short of expectations due to deteriorating asset health, climatic events and cost pressures.

The comment comes in the water company’s updated January 2024 Service Commitment Plan it is required to provide to water sector regulator Ofwat, which describes the asset health of its network as “fragile.”

Declining asset health a principal cause of many of current performance challenges

Thames says the health of its assets has been declining over recent decades which, combined with climatic events, is a principal cause of many of its current performance challenges.

The update says “rapid industrialisation and population growth of London in the nineteenth century” has resulted in the utility’s infrastructure being significantly older than seen elsewhere. Thames is the only company in the industry where almost 40% of the network dates from before the 1920s, a high proportion of which are cast iron mains, which are more susceptible to failure than modern plastic pipes. Mains failures are strongly correlated with age, material type and soil composition, meaning the utility’s network is exposed to a relatively higher risk of failures such as bursts.

Commenting on climatic events and cost pressures, the update says in 2022/23 Thames’ assets were adversely impacted by the summer drought, while 2022/23 also saw challenging economic conditions. The update states:

“High inflation meant that there was a substantial increase in the cost of delivering our services, including increases in energy and chemical prices. These increases were significantly more than what we can recover from customers.”

Despite some areas of performance improvement (including complaints and internal sewer flooding), the water company acknowledges that its original turnaround plan “has not delivered the necessary improvements as quickly as we all want.”

According to the update, Thames is not meeting its leakage target for 2023/24 and is now forecasting a year-end outturn of 585 Ml/d (previously 550 Ml/d). It also says the utility will be unable to reduce its number of mains repairs by the quantum required by Ofwat, as “repairing our mains is a fundamental tool for improving our leakage position and reflects the age of our assets.”

The company has produced a prioritised three year turnaround plan that will address the core performance of the business, covering:

• Health and safety of customers, the public, colleagues and contractors;
• Asset maintenance to stem further deterioration of its asset base as far as possible; and
• Performance improvement in a small number of key areas that matter most to customers and the environment, notably leakage and pollutions, while holding steady other key metrics, such as water quality and supply interruptions

Commenting on its performance relative to other companies, Thames Water has the largest ODI penalty in the industry. However, the update says that this is not reflected through worst overall performance and that comparing companies based on ODI penalties” is not necessarily an accurate assessment of overall performance.”

"Delivering AMP8 will need more than a record breaking level of investment"

Looking ahead to the 2024 price review, the update describes PR24 as pivotal for the sector’s long term future, commenting:

“We remain commitment (sic) to heavily investing into our assets, however delivering AMP8 will need more than a record breaking level of investment. We acknowledge the need to do things differently and are taking steps to enhance our operating model, our systems and our processes. ...

“As we head towards final determination of PR24 plans, the stark reality facing the industry is clear. We need to invest to manage and renew ageing infrastructure and increase our resilience to extreme challenges that will only accelerate…."

“We have supportive shareholders”

The update says the company “very much appreciate” its shareholders’ substantial investment in the business, which demonstrates their commitment to delivering Thames’ turnaround.

The shareholders committed £500 million of funding, drawn in March 2023, and have agreed to provide a further £750 million of equity funding, subject to certain conditions, to drive Thames Water’s turnaround over the remainder of the current AMP7 regulatory period.

“They acknowledge that our turnaround will continue into AMP8 and will require the provision of further equity investment, indicatively in the region of £2.5 billion. The nature and amount of such medium term support will depend on finalisation of the new refocused turnaround plan and the regulatory framework that will apply to the AMP8 period,” the update says.

Challenges due in part to "lack of financial and operational grip"

However, the update also cautions:

“Over a long period of time Thames Water has gradually lost the confidence of its customers, shareholders and stakeholders.

There is clear acknowledgement that:

• There are many challenges that need to be addressed, both as a result of ageing and fragile infrastructure and a lack of financial and operational grip
• Not all these challenges can be addressed at the same time and will take time and money to solve.”

Click here to download the Service Commitment Plan January 2024