Ofwat has announced it will allow requests for limited exclusions from performance commitments to facilitate applications to the £600 million Innovation Fund.

The regulator has set out the approach it expects to take when determining whether and to what extent a water company should be granted a limited exclusion and the data and information it might require from companies to make an assessment,  including the interaction between the performance commitment and the proposed innovation project.

At PR24 Ofwat  said it may make limited exclusions to a performance commitment in relation to an Innovation Fund project where:

• there is compelling evidence this may facilitate the innovation being considered; and 
• that without a change, there is a likely barrier to the successful outcome of the project.

Ofwat will consider performance commitment definitions on a case-by-case basis as part of agreeing projects for the Innovation Fund. The approach will allow it to make any exclusions as limited and as specific to the circumstance as possible.

If exclusions are granted, they will be subject to review if there are any changes to the Innovation Fund project, either during development or at any stage of its delivery.

Any exclusion decision, including any qualifying factors that apply to the granting of one, will be shared with the water company prior to it signing the Innovation Fund winner’s agreement.

Ofwat will discuss proposed exemptions with applicants and provide feedback ahead of the application being formally submitted. Companies will be required to submit requests for early engagement no later than 10 weeks prior to a competition’s final closing date.

Ofwat’s considerations will include whether there is sufficient reason to reset aspects of the performance commitment to maintain the level of stretch and opportunity for outperformance payments in line with P24 final determinations.

Ofwat will also take into account the approach taken elsewhere in PR24 determinations, for example, the principle that companies will not be any better or worse off in terms of performance payments where they are participating in approved and properly controlled trials of nature-based solutions to reduce harmful spills from storm overflows.

In parallel with an application for to the Innovation Fund, water companies will be required to provide with at least the following for an exemption request:

• information that will enable Ofwat to understand the relationship between the Innovation Fund application and the performance commitment in question, including the reasons why and extent to which, without the exclusion, the performance commitment is likely to be a barrier to the successful outcome of the innovation project.
• the scope and impact of the proposed exclusion, including the intended duration of the exclusion, the number of customers it may impact, and the specific area it may impact.
• detail on how the proposed exclusion will facilitate the innovation project.
• Information on how the proposed exclusion is expected to improve company performance for customers and the environment.

In particular, Ofwat expects the company to explore how future rollout of the innovation project could deliver benefits to customers and the environment over a ten-year time horizon.