A new report that explores the potential economic impacts Covid-19 might have on the water sector in England and Wales has flagged up a significant increase in household consumption between April-July 2020 and a material increase in per capita consumption (PCC).

The report sets out the findings of a research study jointly commissioned by Ofwat and Water UK in May this year to better understand the potential impacts across the industry and to look at the scale of the impacts under a range of future scenarios.

The report, which has been prepared by Frontier Economics supported by Atkins, is based on data collected from the water companies in August 2020 which covered the April-July 2020 time period.

The scope of the work focuses on the COVID-19 impacts experienced by the 17 incumbent companies that provide household retail and wholesale water and sewerage services in England and Wales as tested against three possible future pandemic scenarios.

Given the short timeframe for the project, Ofwat and Water UK acknowledge that the report’s conclusions should be interpreted with some caution. However, it establishes helpful shared evidence on the impacts of the early phase of the pandemic.

The report identifies a clear set of material industry-wide impacts based on sufficient information to estimate magnitudes, including:

• Impacts driven by shifting consumption from non-household customers to household customers as a result of increased working from home,furlough, school closures, etc:
• Increase in household consumption and revenue, decrease in non- household consumption and revenue
• Increase in per capita consumption (PCC)
• Increase in water production costs.
• Impacts driven by social distancing rules include a decrease in travel and discretionary expenditure and increases in health & safety expenditure.

Significant increase in household consumption and per capita consumption

The report is flagging up the fact that almost all companies experienced a significant increase in household consumption over the April-July 2020 period. This was a result of the combination of the COVID-19 restrictions and the hot weather. In line with the location of household and non-household consumption, this meant that the location of demand has changed, the report says.

The researchers suggest that the increase in household consumption could have implications regarding supply and demand balance, system resilience and the need for local investments. However, they were unable to establish these impacts in detail and say that further work is needed to understand the longer-term impacts.

Commenting on the increase in per capita consumption (PCC), the report says that almost all companies saw a material increase in PCC over the April-July 2020 period. Some of the increase in household consumption and PCC has been driven by the hot weather in spring. There are also interactions between the warm weather and the COVID19 restrictions.

Overall, the researchers observe that at least some of the increase in PCC is driven by the restrictions caused by COVID-19, commenting:

“This impact is relevant as all companies have outcome delivery incentives (ODIs) around the performance commitment (PC) levels of PCC.”

Potential industry-wide impacts

According to the report, there are a number of potential industry-wide impacts that are still subject to uncertainty for various reasons.

All companies that provided data had to either delay or re-prioritise their capital programmes for AMP7. This was mainly driven by social distancing rules as programmes and processes had to be adapted to comply with guidance. At the time of data collection (August 2020), there was no strong expectation that the impacts could not be mitigated across AMP7.

However, the report points out that reprioritising and rephasing can have significant impacts on companies with regard to project-specific PCs and meeting PC targets.

Opportunities have arisen as a result of the pandemic

The report also identifies a range of opportunities that have arisen as a result of the COVID-19 pandemic which mainly relate to adopting and trialling new ways of working and new technologies.

Companies made various technological adaptations to their ways of working, with some of these adaptations proving successful. Examples include:

• replacing existing technology such as digital meter reading processes;
• virtual home visits for supporting vulnerable customers and those with affordability issues;
• accelerating the trend towards handling customer interactions via lower cost digital channels;
• making greater use of existing technology such as more remote working.

All of these examples may improve efficiency across the sector beyond the pandemic, the report says.

Alena Kozakova, Chief Economist at Ofwat, said:

“We are pleased to have worked with Water UK, and grateful to Frontier Economics and Atkins for developing this report at pace to help give an initial view of where the areas most impacted by the pandemic are likely to be.

“Water companies responded well to the initial difficulties presented by COVID-19, adapting and even finding new ways to deliver services. We appreciate their work in providing the information that has helped shape this report.”

Rob Wesley, Head of Policy, Water UK said:

“Covid-19 has impacted all aspects of water company operations, from frontline key workers doing whatever is needed to keep water flowing and meet exceptional demands for water, to providing additional support to customers in need.

“Although it is too early to say what the full impacts of the pandemic will be and what changes might be needed as a result, this report provides an important shared evidence base for both the industry and Ofwat. We look forward to continuing to work with Ofwat on understanding the impacts of Covid-19 and preparing for a post-pandemic world.”

The magnitude of the industry-wide impacts depends on the future path of the pandemic, the report concludes. However, it has not looked at the issue of who should bear the costs of any impacts. It shows that the impacts of the pandemic are complex and there are many interactions between consumption, costs and revenue that companies must respond and adapt to.

The researchers say that further analysis of the COVID-19 impacts is needed to ensure that future decisions are based on a strong and robust evidence base.

Click here to download Economic Impacts of COVID-19 on the Water Sector