A new report published by the Department for Business Innovation and Skills has highlighted major failings and missed opportunities in the UK water sector – at both Government, regulatory and water companies level.

The ‘Global Market Opportunities and UK Capabilities for future smart cities’ report produced by Arup for the Department for Business, Innovation and Skills (BIS)  report has valued the smart cities industry at more than $400 billion globally by 2020, with the UK expected to gain a 10% share ($40 billion). The water sector is identified as a principal component, with some 36 pages of the 140 page report dedicated to water which highlight the major challenges the UK industry faces both domestically and overseas.

The report says that globally, utility companies which apply smart water solutions could save between $7.1billion and $12.5 billion each year from using smart water solutions in four key areas:

• the use of smarter leakage and pressure management techniques of water networks:
• interpreting data which enables strategic capital expenditure management:
• smarter water quality monitoring:
• smarter network operations and maintenance in the water cycle.

The report says that at present, a fully integrated smart water network does not exist in the UK or globally due to the “ineffective nature of water management systems worldwide.” This is despite the fact that “many experts believe that technology and smart water management are the only real way to enable the huge reductions to the present capital and operational running costs currently incurred by the utilities.”

The report includes much thought-provoking comment and data on the UK water sector which should undoubtedly be under active consideration by the utilities, the wider supply chain, regulators and Government.

Specific reference is made to leakage in the UK and the fact that while some utility companies are experiencing losses of up to 27% of treated water due to the poor condition of the water networks, under the latest performance regulations, half of the utilities companies operating in England and Wales will not be required to reduce their leakages rates before 2015, despite figures showing they have been losing more than 3.3 billion litres every day.

The report states:

“While annual customer bills in the UK have risen at an average of £64 to £376 since 2001, Ofwat has reported that tougher action on leaks would mean even higher bills. Ofwat reported that 8 of 21 water companies had been set zero reduction of leaks targets to 2014/15.”

On energy, the report refers to a 2012 survey by Black & Veatch on rising operating costs which found that the UK’s ageing water infrastructure network, managing capital costs, financing, increasing energy costs and expanding regulation ranked highest amongst the concerns of the water industry. It also highlights the fact that energy costs in England and Wales as a share of operating costs have risen significantly over a six year period.

Innovation - UK regulation make water utilities “conservative and risk averse”

In terms of routes to market for innovative smart technologies, the report says that the route from most innovation comes from R&D – and highlights some depressing views about the current state of innovation in the UK water sector.

The report states:

“One SME interviewed felt that regulations in the UK meant that water utilities were conservative and risk averse. The SME noted that there were structural regulations which mitigated against water utilities using innovative means of managing their network. The company was able to gathered more traction, faster, aboard than in the UK and were able to establish a presence aboard before engaging with utility companies in the UK.”

“ Another SME noted it is easier to grow UK innovation overseas, where there can get more support from foreign utility companies. SMEs noted that they could not demonstrate new technologies to a level of reliability or performance which clients demanded in the UK, which led to clients (utility companies) being reluctant to specify them.”

“One leading water utility company felt that water utility companies were incorrectly demonstrating the requirement for innovation in the water sector and therefore did not apply to Ofwat for permission to innovate. The result of this was a lack of funding in innovation and the development of UK based technology on the home market.

Both SMEs and utility companies felt that the lack of testing and approval of UK based technology meant that internationally qualified technologies were being used in the UK market. SMEs noted that it was hard to continue funding operations during the lengthy testing period. This placed a huge strain on their financial reserves of SMEs.”

UK water companies "slow to adopt new technology" and fail to invest in R & D

The report says that water utility companies have been slow to adopt new technology in the UK due to the following issues

• a lack of understanding of what benefits the technology will bring (tangible and intangible benefits)
•  lack of available funding
• lack of incentives being provided
• and no direct requirement from the Government requiring technology to be used to improve the network.

However, the report suggests that the condition of the water infrastructure network needs to be improved before any smart water technologies control and operate the network, commenting:

“The network needs to be reduced into more manageable sections, damaged infrastruture removed, sensors and controlled valves installed. This is occuring on a picemeal rate at present and in most intances the upgrade works only take place after sections of the network have failed.”

It also flags up the long-term timescale involved which only serves to emphasise the nature of the challenge the UK water sector now faces.

“A smart water system will not be able to provide the stakeholders with all the necessary information on day one. Utility companies will not have the analytical experience on day one to disect the data they receive. It may take up to three years to accumulate data. Only then will utility companies be able to predict and plan for opportunities to evolve and improve the network. After the intitial installation and subsequent collection of data, a bedding in period would be required, (estimated to be between 3 and 5 years), utility companies would only then able to link and integrate into other systems, which is then considered to be a futher 5 to 10 years away.”

The report also highlights the ongoing lack of investment in R and D by the UK water companies, pointingh out that while total revenue in 2011-12 of the water utilities in England and Wales was almost £10 billion, only £12.7 million was spent by water utilities on innovation. This equates to 0.13% of their revenue, which the report describes as “significantly lower than those of top R&D companies.”

Substantial barriers in UK for smart network to be operational

In terms of feasibility, the report says for a smart network to become operational in the UK, a number of substantial barriers such as the fragmentation of the sector, slow adoption of new technologies, no holistic vision being set out for the sector, and lack of SME development need to be overcome.

Key leadership failings – lack of Government involvement has damaged the industry

The Government comes in for some particularly sharp criticism. The report conclude that there is no strategic, holistic vision set out by the UK Government for smart water solutions, resulting in SMEs, utility companies, regulators and customers having different perspectives of what smart water is, and what it should offer cities. This lack of vision also acts to constrain legacy investments.

It also refers to political pressure being applied to Ofwat and the utilities companies to keep the cost of household bills low – a particularly interesting comment in the light of the current 2014 Price Review and the upcoming General Election in 2015.

The report states:

“The UK Government have not been proactive in the industry; they have not been setting goals or visions for the utility companies to deliver. The Government’s lack of involvement has damaged the industry. The water industry is fragmented and has no cohesive voice. There are five water bodies which claim to act for the water industry.”

The Report is now calling for Government to take action in the following key areas:

1. Follow through on previous recommendations

Many of the barriers and challenges the sector faces have previously been identified and recommendations have already put forward in previous papers by government. Government should ensure that the recommendations of ‘Smoothing investment cycles in the water sector’ by HM Treasury and the 2011 Government White Paper, “Water for Life” and the 2012 Draft Water Bill are fully implemented.

2. Leadership and collaboration on standards and vision

National government (e.g. DEFRA) should set clear goals and visions for the future of the water market and the use of smart water technologies in the UK. BSI should be tasked with developing national standards for smart water solutions to provide a consistent definition and understanding within the industry. The vision and standards should be informed by the opinion of key stakeholders in the water industry.

Vested parties with different goals need to come together, to deliver one aligned vision - DEFRA and Ofwat could play a key role in driving multi-party conversation and collaboration.

3. Encourage and drive innovation through collaboration, regulation and open data

Ofwat should develop ways to encourage innovation in the water market. Yorkshire Water has been able to demonstrate to Ofwat that investment in innovation does provide considerable returns on investment. Ofwat should explore ways to actively support SMEs and water utility companies with the development, testing, approval and installation of new technologies which will greatly improve the level of innovation and development in the water industry. Ofwat should continue to build on the findings of its own paper titled Innovation priorities for the water sector, published in 2011, by reviewing the mechanisms by which they regulate the industry, learning from experience elsewhere – e.g. Ofgem’s new RIIO price control scheme.

Ofwat and DEFRA should review examples of innovative funding methods provided by the State of Illinois, USA and Mekorot of Israel, to explore ways to ensure funding is available for innovative projects in which outcomes are often less certain than for conventional projects in the water industry.

DEFRA and Ofwat, along with the Open Data team in the Cabinet Office, and wider industry stakeholders, should explore the deployment of infrastructure to collect real time information on the UK water network and market. The information should be made publically available. This could also help drive competition and innovation between industry players.