The Water Industry 2050 – Revolution not Evolution?

This article was first published in The Water Report

Despite much media coverage to the contrary, the water industry has taken great strides over the past 30 years, since the early days of privatisation. It has delivered £160 billion in major capital programmes, there is a much greater focus on customer service and efficiency and there is clear recognition that the businesses are managing a scarce and precious resource on behalf of the customers they serve.

Despite this progress, the industry probably now faces the most challenging time in its history. Climate change, demand growth, environmental focus and increasing customer expectations, along with the need to replenish an ageing asset base, will require a further step change. Revolution, not evolution, may be required to successfully navigate the next 30 years. What might this revolution entail and how might our industry look in 2050?

The scale of the challenge

Climate change

Climate change is probably the single biggest challenge impacting water supply, waste disposal and processing. The changes in our climate have already seriously impacted our water supply and most projections for the next 30 years indicate this trend will likely accelerate; this is at a time when abstraction rights are reducing, particularly from environmentally important chalk streams, and water resources will need to be replaced from other sources. The climate impact on our sewer network is becoming more apparent with exceptional rainfall in particular overwhelming the network and generating pollution incidents and spills. Climate will also impact our assets, with extremes of dry and wet weather, frequently close together, increasing the risks of bursts and damage to our water networks. Long-term modelling by some companies suggests a potential increase of 20 to 40% in water main failure rates.

Demand growth

Increasing resource scarcity due to a rising population and increasing usage of water for commercial processes makes this an ever-growing challenge. This is exacerbated by our attempts to meet net zero as water is a key requirement for the production of hydrogen - considered as one of the best fuel sources to replace gas. But hydrogen could generate the need for an additional 15-20% increase in water supplies by 2050.

Customer expectations

Customer expectations in general tend to rise, driven by improved customer service across a range of consumer industries. This is true for the water industry, with the added challenge that the cost-of-living crisis, press reporting on the release of untreated sewage into rivers, drought warnings and leakage are impacting customer trust in the sector. Ofwat’s recent survey showed that trust in water companies had fallen up to 15 per cent.

Increasing environmental and quality focus, increasing penalties

One of the biggest challenges faced by companies is the capacity and design of the infrastructure. In particular the Government is proposing an 80% reduction in untreated sewerage spills to watercourses by 2050. But this would require a monumental redesign of the infrastructure.

There is increasing societal awareness and anger at not only the existing design of the sewer system which allows these spills in heavy weather but also a lack of faith in some companies where they have been found guilty of significant pollution incidents. As a result, companies now face the spectre of increased penalties with the government proposing a 1000-fold increase in the level of fines, from £250,000 to £250 million, for breaches of environmental rules.

The UK already has some of the highest drinking water quality standards in the world. However, emerging risks such as Per and polyfluoroalkyl substances (PFAS) known as forever chemicals, Chromium VI and the need to reduce in lead concentrations in the long-term will likely make the requirements even more stringent in the coming year. PFAS is a good example of the scale of change that could be required; the US is imposing standards of 4ng/l in drinking water compared to our own standards of 100ng/l.

Infrastructure spend and funding

The sector has delivered c. £160 billion on investment since privatisation, but this figure is likely to be dwarfed by the requirements of the next three decades. Companies cite the need to replace ageing infrastructure and to that must be added potential costs to reduce untreated sewerage discharges to rivers. The costs of which have been estimated at between £350 billion and £600 billion. The need to build the first new reservoirs since Carsington in 1991; the need to make significant investments in technologies such as desalination; the need to support hydrogen

and the need for extensive technology investment to manage the networks increase the requirements still further. In addition, the challenges of climate change are likely to require a significant increase in expenditure to maintain the existing network asset base in a serviceable condition.

A new look industry will emerge by 2050…

The industry has a great history of rising to challenges and no doubt will again, but what are the key potential approaches to these challenges and what might our industry look like in 2050? The future will be shaped by three key areas: awareness of the value and costs of water; a new flexible model with centralised planning and local focus complimenting the regional companies and a fair and affordable tariff system.

Awareness of the value and costs of water

A national conversation is needed about the value of our water and sewerage services and the costs of providing them. The view of water needs to move from that of a plentiful resource to an increasingly scarce and valuable commodity. Graz University of Technology has concluded that Europe has been in drought since 2018 and its water situation is now “very precarious”. In France, President Macron has stated the ‘time of abundance’ is over and has called for a ‘sobriety plan’. A campaign to raise awareness, supported by appropriate government policy, would help increase understanding. For example, energy ratings on appliances and, to a lesser extent on homes, backed by Government policy, have been influential in raising consumer awareness of opportunities for both cost savings and carbon reduction. Similar schemes in water should be accelerated, in particular equivalent water usage ratings for white goods.

This conversation needs to extend to costs. For example, the upper estimate of £600b billion to reduce untreated sewerage spills is the equivalent of four times the entire capital spend for the industry since privatisation, six HS2s or thirty channel tunnels. This is a huge capital expenditure and work requirement; the equivalent of the industry needing to build a channel tunnel every year for the next 30 years.

A future flexible model

The regional model has served us well since privatisation. It is questionable whether it will suffice for the coming decades. There is a case for both greater national strategic planning and a recognition that per capita consumption and grey water treatment could be managed more effectively at a local (micro) level. This approach is increasingly being targeted in energy and could also help the needs of the water industry.

At a national level, there needs to be major infrastructure investment to address water supply shortages such as reservoirs, water recycling and desalination plants, with some projections suggesting a four billion litres per day deficit (24 per cent of the daily average demand for England and Wales) by 2050.

Some parts of the country will continue to have a localised excess of water available for supply, in the short-term, perhaps requiring a greater degree of interconnection. Reservoir provision is currently being driven on a regional basis, albeit with some sharing across regional companies. However, there are issues with this approach particularly around funding and attributing benefit to particular companies’ customer-bases. First, the regional approach places all the burden of funding the reservoir on the customers who are unlucky enough to live in an area requiring a reservoir or an area of higher deficit. Secondly this approach may not yield the optimal solution for GB as a whole, as it may ignore alternative possibilities, for example increased transportation of water. Whilst companies do search outside of their region for alternative water resources (for example the development of the Havant Thicket reservoir) the current regional cost allocation models mean that companies are often averse to looking at solutions further afield because the costs of doing so are prohibitive when only shared amongst that company’s bill payers.

RAPID has made some good progress in this area but we believe there is merit in going further and considering a top-down national strategic plan, looking at our overall needs and the optimal way to deliver and share the costs of funding them at a national level. This approach could require a System Operator (SO) responsible for developing and delivering the overall resource plan. The SO could then also work look across sectors, for example working closely with the energy sector and industry on, in particular, identifying areas viable for the introduction of hydrogen. The costs of delivering this plan could be socialised across all customers either through general taxation or mechanisms similar to those deployed in energy sector.

Opportunities also exist at a local level. We are arguably the most circular industry in existence. All our water drainage ultimately becomes our raw product and our sewage processing has huge opportunities in, for example, energy generation and fertilisers. We must make the most of these opportunities, with policy and regulation supporting the expansion of circular economy principles. For example, water recycling for industrial cooling requirements should always be the first option and local councils could mandate greater water efficiency in new developments with water companies provided additional incentives (such as discounts on infrastructure charges).

At both national strategic and local levels, there is a need for whole system thinking to optimise new infrastructure spend and to ensure a joined-up strategy across water, energy and industry.

A fair and affordable tariff system

The scale of change outlined above will require massive funding and emphasises the need to ensure the sector remains attractive to investors and that funds can be drawn from a range of sources. Notwithstanding this, it is difficult to avoid the conclusion that prices will need to rise to meet some of this need. Our water prices are currently around 20 per cent of those in The Netherlands and 50 per cent of those in France and our water bills levels are probably not sustainable if we are to meet future resource and environmental requirements. However, any future rise must be viewed against a growth in water poverty and the water companies’ Public Interest Commitment (PIC) to: “Make bills affordable as a minimum for all households with water and sewerage bills more than 5% of their disposable income by 2030 and develop a strategy to end water poverty”.

If price increases are necessary, alternative tariff models should be explored, for example there is considerable academic debate, again both in energy and water, on a tariff model that provides for a basic level of provision per head of household, with usage over a threshold commanding an increasing scale of charges. These charges could then be scaled further as usage reached new increments to reflect life-style choices; everyone gets the water they need and pays a higher price for the additional water they want.

Conclusion

Our industry faces unprecedented challenges. Neither the current regulatory model nor the current societal view of the value of water will be sufficient to meet these challenges. We need different approaches to both drive strategic planning and more localised solutions. These changes will need to be enabled by a step change in regulation, which is more appropriate for the challenges ahead, ensuring the industry remains investable and making the industry and its regulators and customers think more holistically about the solution required.