Ofwat has published its final decision confirming that it will allow an increase in totex funding for Portsmouth Water's Havant Thicket Storage Reservoir to £339 million from the £123.6 million first outlined at PR19.

Image: Havant Thicket Reservoir Delievery Timeline

When Ofwat first allowed funding for the Havant Thicket Reservoir at PR19, the project was in a very early stage of development. At that stage Ofwat said there was significant uncertainty around the cost of the project – particularly as this would be the first public water supply reservoir to be built in thirty years.

In its original application for an increase Portsmouth Water had asked for £370.4 million – the water company has now accepted the water regulator’s final decision.

Ofwat’s final decision is largely in line with its draft decision published in December - Portsmouth Water had already accepted the majority of the regulator’s efficiency challenge prior to publication of the draft decision document .

Ofwat received five responses to a consultation on its draft decision which did not raise any issues that led to Ofwat reconsidering its decision.

The outstanding area of difference in the draft decision related to £5.4 million of costs associated with enabling works and future compensation events under the main works contracts.

Following publication of the decision, Portsmouth Water provided further information to substantiate the costs. Ofwat’s review of the evidence led it to conclude that £4.4 million of these client uplift costs should be included in allowed totex in the CAM.

Although the decision on the CAM will only be implemented in 2024, Ofwat said that providing a decision now will give Portsmouth Water certainty as to the level of totex it has been allowed and can recover through the Bulk Supply Agreement with Southern Water, which is how it will recover all of the costs of the project. “This will support the financing of the project”, the regulator added.

Southern Water's response supported the draft decision, while also expressing disappointment that it will increase costs for its customers. However, Ofwat said the water company had acknowledged the rationale for the cost increases, and the importance of continuing to make progress on the project.

CCWater expressed support in its response for Ofwat and Portsmouth Water working together to reach an agreed view on a range of allowed costs for the project. However, the consumer watchdog had also noted that the draft decision still represented a significant increase in project costs and pointed to “the importance of a single, national social tariff to ensure the most vulnerable customers are protected while ensuring projects like the Havant Thicket Reservoir can be delivered.“

Winchester City Council and Hampshire County Council expressed their support for the principle of increasing funding and recognised the cost pressures described by Portsmouth Water. However, the Councils had also voiced concern that the efficiency challenges “might lead to short cuts in construction and create risks to the environment. “The Councils also queried in its response whether the delivery of the reservoir could “remove the requirement on Southern Water to deliver other schemes in its area, which are currently in the planning process.”

Commenting on the councils' reservations, Ofwat said:

“Our draft decision took into account the need for Portsmouth Water to deliver the full scope of the project, and therefore, there should be no short cuts in construction or increased risk to the environment. In making our final decision, we expect the company to be able to comply with all of its obligations relating to the reservoir project and Portsmouth Water has not raised any concern that the draft decision allowance would prevent it from meeting its obligations.

“With respect to other schemes in Southern Water's area, these schemes are currently required by the Environment Agency and the need for the schemes already takes into account the delivery of the Havant Thicket Reservoir.”

Ofwat pointed out that since PR19, the economic environment had “changed significantly in a way that could not have been predicted at the time.” saying it would take into account its experience on this project when considering similar large projects in the future.

Following the final decision on Portsmouth Water's CAM application for the Havant Thicket Price Control, Ofwat will amend the allowed totex under the Havant Thicket Price Control at the mid period review which will take place as part of PR24.

Southern Water's customers' bills will therefore not be affected by this decision until 1 April 2025 at the earliest.

"Iinnovative regulatory and commercial approach enables delivery of cost-effective local solutions to regional water resources challenges"

The regulator said it would continue to discuss with Portsmouth Water how the cost adjustment will be implemented at PR24, together with the financing approach. It will also continue to engage with Portsmouth Water on the delivery of the project.

Commenting separately in today's announcement that Portsmouth Water has awarded two contracts with a combined value of £208 million for construction work on the project, CEO Bob Taylor said:

“The final decision from Ofwat on the project’s updated budget will ensure the reservoir scheme can be funded and deliver good value for money for customers, while safeguarding water supplies and supporting nature.

“The innovative regulatory and commercial approach that’s being taken has enabled us to deliver cost-effective local solutions to regional water resources challenges."