Ofwat has launched a new consultation on the initial findings of its newly-published bioresources market review.

The water sector regulator launched the review of the market in October 2020 to consider a range of issues such as:

• the scope for bioresources competition under the current market model;
• the current barriers to competition and the development of the market;
• different forms of competition and market models; and
• the steps needed to achieve these market models and overcome any barriers.

Ofwat has also published the bioresources market review report it commissioned from Jacobs to provide support for its work on the review. The Jacobs’ report assesses the market opportunities, potential constraints and how these could be addressed.

Jacobs has identified six key market opportunities:

1. Headroom trades. The use of the unused appointed capacity of another water company (or vice-versa). Water companies undertake this type of activity already but usually for “emergencies”. Jacobs consider this to have limited potential due to transport distance and lack of tradeable capacity.
2. Joint capacity. The coordination of two or more parties (e.g. water companies) to procure capacity in a geographically optimal location. Jacobs consider this to have high long-term potential, especially given IED drivers.
3. Cotreatment (including codigestion). The comingling of sludge with other treatment feedstocks. Jacobs consider this to have a high potential,especially given future alignment of regulation.
4. Collocation. The bringing together of two different treatment streams on a single site taking advantage of shared assets (e.g. energy generation assets). Jacobs see this as having medium potential.
5. Project finance. Bringing forward future benefit by using 3rd party finance to invest in assets. Jacobs assess this to have medium potential, particularly for enhanced energy generation or resource recovery.
6. Outsourcing. Using markets to deliver services which would otherwise be delivered in house. In some areas benefit may be marginal.

Ofwat’s proposed approach is based on a strategy of:

• strengthening the incentives on companies to engage with the market;
• further development of market enablers;
• promoting greater collaboration;
• encouraging company ownership to develop the market; and
• on-going monitoring and review of market development.

The regulator is proposing to:

Establish bidding market arrangements. At PR19, companies produced Bid Assessment Frameworks for activities related to water to ensure clear, objective and non-discriminatory consideration of third party bids when tendering for significant work. Ofwat considers there is merit in companies producing a similar framework which is tailored to the bioresources market.

Undertake better targeted cost assessment. An efficiency challenge tailored to the bioresources control will help to drive efficiency. To achieve this, Ofwat needs to ensure thatcompanies have allocated their costs appropriately. The regulator has already issued guidance tocompanies to improve cost allocation in relation to sludge liquors and will separatelyconsult on changes to the allocation of overheads. It will also shortly consult on methodsto improve the allocation of energy costs and revenues in bioresources.

Consider changing the basis of Ofwat’s cost challenge - so that it is based on average revenue requirement rather than expenditure. An average revenue control would come closer to a ‘gate price’ type of approach which is how waste is frequently charged for in the wider waste sector.

Encourage greater sector collaboration. Ofwat expects water companies to work together to address common issues where appropriate e.g. by providingadditional information to support the market, introducing standardised measures ofsludge quality and considering regional collaboration.

Improve information remedies. Ofwat recently published an amended direction which requires companies to publish improved information to support the bioresources marketand provide it with additional information to monitor the development of the market.

Ensure more joined-up, pro-market outcomes. Ofwat will look to ensure that company performance commitments related to bioresources at PR24 are more joined-up with its long term plans for the market and do not have unintended consequences for market development.

The review also identified that there were barriers that are unrelated to how Ofwat regulates. Ofwat said it will continue to work with environmental regulators and other stakeholders to ensure environmental regulation or other barriers are addressed as appropriate.

Deadline to submit responses to the consultation is 22 July 2021.

Click here to download Review of the bioresources market - draft findings consultation paper

Click here to download Bioresources Market Review – Jacobs Report