Ofwat is set to prioritise river water quality and environmental outcomes in the year ahead, according to its newly-published forward work programme for 2022-23.

Introducing the programme, interim Chief Executive David Black said:

“The Environment Act provides new levers for regulators and obligations on companies to improve and enhance the water environment. Our work will stretch across both the immediate challenge of improving water quality in rivers, and the longer-term work to incentivise the sector to reach Net Zero emissions in line with government targets.”

“We have made clear our concerns about water companies’ unacceptable performance in releasing sewage into the environment and are taking action with the Government and other regulators to tackle these issues and hold companies to account. This is a priority for the months ahead.”

“At the same time, we will continue to push forward better environmental outcomes through the Water Industry National Environment Programme (WINEP) and the NEP in Wales, and by developing new approaches to protect the environment through our innovation fund.”

The year ahead also represents the first major step in the upcoming Price Review in 2024, with Ofwat due to publish publication its draft framework for PR24 in the summer.

Ofwat’s upcoming programme is set in the context of three strategic goals:

• To transform water companies’ performance
• To drive water companies to meet long-term challenges through increased collaboration and partnerships
• For water companies to provide greater public value, delivering more for customers, society and the environment

The paper says the following themes are expected to remain important throughout the rest of AMP7 and looking to PR24 and beyond – environment, customer outcomes, major infrastructure, open data, collaboration with regulatory partners and transforming company performance.

Ofwat is increasing its focus on environmental issues, emphasising that it will continue to drive improvements in the sector’s current and future environmental performance using all of its regulatory tools, including enforcement where appropriate. The work will continue to cover a wide range of areas, including delivering improvements to water quality and reducing the use of storm overflows, and supporting the sector’s net zero ambitions and flood risk management.

Ofwat also intends to continue to focus on improving outcomes for residential and business customers, including a focus on affordability and vulnerability in relation to household customers.

The regulator will consider the case for a new customer-focused licence condition in the coming year.

With regard to major infrastructure, Ofwat says it plans to use competition for the market where appropriate for major new infrastructure via DPC or other routes, creating new opportunities for investors. The regulator intends to undertake a stocktake to consider opportunities for, and barriers to, more competition in the provision of strategic infrastructure.

The paper describes open data as a key enabler and tool to support transformation by the sector, saying it will stimulate more innovation and collaboration, encourage new business models and service offerings as well as improved transparency. Ofwat comments:

“We are looking to the sector to embrace this challenge and expect companies to keep pace with the wider digital economy and customer expectations and to see measurable progress in delivering open data over the course of the next year.”

Transforming company performance

Ofwat says it has made progress in developing its understanding of company performance and has seen some positive signs of improved performance in areas “where we have provided a clear focus and challenge, notably in relation to leakage.”

However, Ofwat warns that its work on asset management and resilience, and the need to address issues concerning companies’ wastewater discharges and operation of storm overflows, show that “there is much more to do if companies are to deliver effectively and efficiently for customers and the environment now and in the future. “

In the business retail market, the regulator says that while market participants have made some progress to address market frictions, action is required to improve the quality of market data and to improve incumbent company support for the market.

Preparing to meet long term challenges

The paper says that many of the challenges facing the sector can only be met through a long term approach, including adapting to climate change and meeting net zero emissions targets. Ofwat comments:

“ That is why we expect companies to set their five-year business plans in the context of long term delivery strategies, with their planned long term actions and investment considered in terms of ‘adaptive pathways’, with clear triggers and decision points on the assessment of the right options to efficiently deliver long term outcomes.”

In addition, the Environment Act 2021 also provides “much needed impetus to longer term planning with respect to drainage infrastructure, in the wider context of the system of flood and water resource management.”

Pointing out that investment in the sector is for the long term, Ofwat says:

“We are also beginning to see different funding solutions and investment opportunities for those with a focus on environmental sustainability and long term delivery. We expect the sector to capitalise on these opportunities.”

The regulator says it expects companies to demonstrate how their financing arrangements take account of the interests of customers – Ofwat also wants the water companies to “fully support customers who are in debt or struggling to pay their bills.”

The UK Government has approved a three-year flat cash budget with an increase for additional work on the Environment and Direct Procurement for Customers as part of the last spending review. In 2022-23 this equates to an annual budget of £32.3 million, an overall fall in real terms.

The total estimated licence fee of £32.3 million is comprised of £0.5 million from Thames Tideway, £1.3 million from Water Supply and Sewerage Licensing (WSSL) and the remainder representing the core Ofwat budget.

Click here to download Ofwat’s forward work programme 2022-23 in full.