Ofwat has concluded that overall “there is little difference between the capital costs of conventional and advanced digestion treatment technologies” being used to treat bioresources.

The water industry regulator was commenting in a new paper providing feedback to the ten largest water and sewerage companies in England and Wales on their assessments of the value of their bioresources assets.

Introducing the paper, Ofwat said its aim in setting a separate bioresources control is:

“to promote a greater role for markets in bioresources services, creating opportunities for companies to look beyond traditional company boundaries and their own in-house solutions to meet the long-term needs of customers.”

“This should deliver increased optimisation of activities across companies and greater participation from firms operating in wider waste markets. This will drive benefits of greater efficiency, improved resilience in services, and broader environmental benefits.”

The detailed paper sets out the next steps the companies must now take based on the feedback.

Companies must value potential capacity of all assets that might be used in 2020 to provide bioresources services

Three companies, Southern Water, Severn Trent Water and United Utilities have proposed that the hypothetical capacity that they value should be less than the actual capacity they expect to have at 2020. In addition Wessex Water did not include a site that it does not expect to normally use, but that it will keep for resilience purposes.

Ofwat said it accepts that some variation in headroom may reflect requirements of dispersed populations which may have remote assets and so less flexibility to economically transport bioresources to different sites.

However, the paper says that the four companies that have excluded capacity have “not provided compelling evidence” that their capacity should be treated differently to other companies. The regulator wants all companies to value the capacity of all assets they anticipate might be used to provide bioresource services.

“Overall ... little difference between capital costs of conventional and advanced digestion treatment technologies”

The paper looks in some detail at Ofwat’s analysis comparing the capital costs for the three main bioresource treatment technologies based on data supplied by the companies:

• liming;
• conventional digestion;
• and advanced digestion

Advanced digestion processes use a pretreatment which typically allows greater biogas generation from digestion, higher quality resulting biosolids, and often a reduced volume of treated biosolids to recycle. Using such pre-treatment can also provide pathogen reduction meaning that secondary digestion is then not required to meet microbiological standards.

Ofwat said that as expected, liming has the lowest capital costs. However, the expectation that the capital costs for advanced digestion would be higher than conventional digestion, had proved not always to be the case.

“It may be that the extra costs of the pre-treatment for advanced digestion is offset by the reduced costs of not needing secondary digestion that is typically required for conventional digestion.“

“Overall, it appears that there is little difference between the capital costs of conventional and advanced digestion treatment technologies.”

Ofwat expects companies to choose technology that will represent best economic value

The paper said that the information provided by the companies had not identified differences in asset age depending on technology – which implied that the potential future cash flows of different technologies could help to determine the choice of modern equivalent technology.

Ofwat’s analysis of the data suggests that the higher the proportion of bioresources treated with advanced technologies, the lower its net unit cost of operation. However, this excluded the income from incentives –advanced technology will tend to produce more biogas and so has a greater potential to receive income from renewable incentives, the paper says.

After considering the industry data, the regulator expects all companies to consider whether their choice of technology for modern equivalent assets is appropriate and to consider the full range of incentives that could be available for each site in choosing the modern equivalent asset.

The companies will be expected to choose the technology that will represent the best economic value for the services they operate in their business plans without the constraint of the existing bioresources assets on the site.

The data submitted by Anglian Water, United Utilities and Wessex Water made significant changes to the choice of technology of modern equivalent assets compared to their actual assets.

• United Utilities has assets driven by investment decisions many years ago that it states would not be repeated now.
• Wessex Water proposed that modern equivalent assets would use more advanced technologies.
• Anglian Water proposed the modern equivalent would use a consistent advanced technology while its actual sites have slightly different technologies that have developed over time.

Most other companies considered the technology of the assets that they would have by 2020 was appropriate for the modern equivalent assets.

Large differences between management and general costs across companies

The paper also highlights the fact that there are large differences between management and general costs across companies. These include the allocations of shared assets within the overall wastewater business to particular bioresources sites. Bioresource sites are often co-located with wastewater treatment sites and therefore share assets such as power connections to the grid.

For most companies management and general costs make up less than 5% of the economic valuation. However, for United Utilities and Wessex Water the assets make up over 10% of the economic valuation. “These two companies did not provide us with compelling reasons why their management and general costs are so large.” Ofwat said.

Ofwat now expects companies to consider the feedback and improve their valuation of their bioresource assets where appropriate and the associated cross checks that they submit as part of their business plans. They will also need identify if they have any new information which they should reflect in their valuations and their business plans.

The companies will need to submit the updated information in September 2018 and also to provide information to check the potential impact on a customer’s bill.

Click here to download Economic value of bioresource assets - feedback to companies