Ofwat has agreed to adjust the licence of Thames Tideway Tunnel, to ensure that the project can be completed after it was severely impacted by the Covid-19 pandemic and historically low interest rates.
The regulator’s decision follows on from two consultations last year on the proposals.
On 8 April 2021 and 13 December 2021 Ofwat consulted on proposed amendments to the conditions that attach to the project licence of Bazalgette Tunnel Ltd (Tideway). Initially, the amendments were solely to deal with the impact of Covid on Tideway. Subsequently however, Ofwat agreed to also amend the way a financing mechanism in the project licence works (the Financing Cost Adjustment Mechanism (FCAM)).
Without the adjustments according to the regulator there would have been uncertainty about Tideway's ability to finance the project and complete it within the required timescales.
“The amendments provide greater certainty for both customers and investors,” the decision document says.
The amendments will change how the project is financed - costs to customers will no longer be affected by changing interest rates and additional costs caused by Covid-19 will be shared between customers and investors.
The impact on bills of the project overall is still expected to be within the £20-£25 range first predicted when Tideway was announced in 2015 and the changes mean that bills will fall slightly this year.
The paper says the Consumer Council for Water (CCWater) was supportive of the proposals and believed Ofwat had struck “an appropriate balance between customer and investor interests in the revised proposals.” CCW had agreed that leaving the FCAM as it was could “potentially impact Tideway's cash flows and affect the achievability of project completion within the envisaged timelines.” They also agreed with the proposal to freeze the application of the FCAM at 31 March 2021 – the paper states:
“They thought this would provide certainty and limit further exposure to interest rate volatility and said their research shows that customers prefer stability of bills.”
According to Ofwat, Covid-19 has impacted the Tideway project far more extensively than any other water company with delays in construction and increases in costs. The paper says:
“Ofwat are confident that the steps Tideway took at this the time to safeguard the project were in the best interests of customers and other options could have ended up costing customers a lot more.”
Click here to download Ofwat’s decision document.
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