Ofwat is calling on water companies in England and Wales to go further on Net Zero and reduce embedded carbon emissions from future infrastructure projects, in addition to operational carbon emissions.

In a position paper on net zero ambitions published today, the regulator has welcomed the Water UK 2030 Routemap on carbon as an important step towards the industry being net zero by 2050.

However, the Ofwat paper is emphasising that water companies must go beyond what is proposed in the Routemap to achieve its 2050 goal by also tackling embedded carbon emissions; the carbon that is emitted while infrastructure is being built.

In order for water sector to achieve net zero it must also deliver reductions in embedded emissions

The paper says:

“The Routemap does not address emissions from the use of chemicals, embedded emissions, or disposal of sludge to land. This means the focus of the Routemap is partial with it not being clear how net zero will be achieved by 2050 or how interim net zero targets, that do not align with the timeframe of the Routemap, will be achieved.“

According to Ofwat in order for the water sector to achieve net zero, it must also deliver reductions in embedded emissions, including:

• emissions associated with the building and/or installation of a built asset
• emissions caused by the extraction of materials
• the manufacture/processing, transportation and assembly of every product and element in the asset

The paper sets out Ofwat’s expectations in three key areas to guide water company planning on net zero.

• net zero target setting;
• scope of action on net zero; and
• prioritising the reduction of Greenhouse Gas (GHG) emissions before using offsets

Primary focus at PR24 Price Review must be driving GHG emissions down, rather than offsetting them

In the regulator’s view, a parallel approach to reducing both operational and embedded emissions will help to safeguard against decisions being taken in isolation avoiding the risk that operational emissions are prioritised ahead of action on embedded emissions – which would risk “the unnecessary early replacement of assets to reduce operational emissions.”

Ofwat has already developed and adopted standardised mandatory reporting of operational emissions for 2021-22 onwards, and plans to introduce standardised mandatory reporting of embedded emissions.

The paper says the the primary focus at the upcoming PR24 Price Review needs to be on driving GHG emissions down, rather than offsetting them.

Ofwat comments:

“We recognise that embedded emissions are more challenging with less well-established approaches to reporting. We will work with the sector with the aim being to introduce a form of mandatory standardised reporting on embedded GHG emissions for 2022-23, subject to consultation.”

The paper also sets out Ofwat’s expectation for the water companies to prioritise the elimination and reduction of GHG emissions before the use of offsets. The regulator expects companies to be able “to clearly demonstrate” that they are following the GHG Management Hierarchy, with offsets being used as a last resort.

The paper states:

“We consider this sequencing of action on GHG emissions best practice and the approach that companies should adopt” as follows:

• firstly focusing on eliminating emissions by preventing GHG emissions across the lifecycle
• reduce GHG emissions through optimisation and efficiency
• focus on the use of substitutes such as renewables and low carbon technologies
• finally, residual emissions should be compensated with the use of offsets, such as the planting of trees

The paper also calls on water companies to align their plans to national government net zero targets in England and Wales.

Ofwat to work with sector to further develop reporting requirements to ensure it delivers on net zero

John Russell, Senior Director of Policy at Ofwat, said:

“Water companies need to be in the best position possible to achieve their net zero targets and address the challenges that come with that. We welcome the sector’s ambition, but we need water companies to tackle and comprehensively report on their carbon emissions if they are to make the changes needed to sustain and improve the environment. We will be working with the sector to further develop reporting requirements to ensure the sector delivers on net zero."

“Ofwat have set out clear statements on these key issues so that companies can plan appropriately for their net zero strategies, particularly as they develop their plans for PR24. This position paper is also intended to stimulate discussion with Ofwat on how the regulator can support the sector in reaching net zero targets.”

Click here to download Ofwat’s Net zero principles position paper