Ofwat has ordered water companies to gear up for better delivery after more than £1.7bn of cash set aside to enhance water infrastructure went unspent over the past three years.
In its Water Company Performance Report 2022-23, the regulator found that under 75% of the total budget given to the sector for asset improvement work from April 2020 to March 2023 had been invested.
Thirteen of the 17 biggest water companies underspent their allowances in the opening years of this decade, the report discovered. Thames Water was £373M short of its cap for clean water investment while Yorkshire Water left £497M of its wastewater pot untouched.
Ofwat hands out enhancement budgets every five years in what is known as asset management periods (AMPs). We are currently in AMP7, which runs until March 31 2025.
Ofwat and the water companies are in the lengthy price review process ahead of the commencement of AMP8 in April 2025. This requires utilities to produce business plans and make the case for expenditure.
Yet many water companies are failing to spend the enhancement cash they’ve been allowed to raise and ringfence. The regulator warned them to get their projects finished by 2025, when the next investment cycle will kick in.
“Delaying the delivery of these programmes will result in forgone benefits to customers and the environment such as enhanced river water quality, improvements to drought resilience and reduced risks in relation to usage bans and supply interruptions,” said the report.
“Given the step up in investment that is likely to be required for the 2025-30 period, we expect companies to improve their delivery capabilities over the next two years so that they are in the best possible position to deliver their Price Review ’24 (PR24) enhancement programme.”
Lagging behind
Ofwat has also ordered the sector to return £114M to customers due to a failure to hit targets in the last year.
The regulator rates companies annually on 12 metrics including customer satisfaction, supply interruptions, sewer collapses and drinking water quality. It found that 10 utilities were ‘average’ and the other seven ‘lagging behind’, with none judged as ‘leading’.
Thirteen of the companies will have to pay back money to customers, with Thames Water told to take £101M from customer bills in the 2024/25 year. Welsh organisation Dwr Cymru was next hardest hit, with a £24M rebate ordered. Anglian Water must repay customers £22M.
Paul Horton, chief executive of the Future Water Association, questioned the logic of reducing utilities’ income streams just as they were failing to meet targets and carry out projects.
“Although this morning’s water company performance reports are disappointing, the water sector and its partners are working hard to improve performance in key metrics such as pollution incidents and leakage,” he said.
“These problems are systemic and will take many years to fix. The association cannot see how the removal of £114M from the sector can assist in driving better performance in the medium term.”
A spokesperson for Water UK, which represents the sector, said: “Companies recognise there is still much more to do to meet the regulator’s ever-tightening targets. Ensuring the security of our water supply in the future while protecting the environment will take significant investment. That’s why water companies in England and Wales are proposing record levels of investment over the rest of this decade, with detailed plans set to be published next week.”
Ofwat chief executive David Black said: “The targets we set for companies were designed to be stretching – to drive improvements for customers and the environment. However, our latest report shows they are falling short, leading to £114M being returned to customers through bill reductions. While that may be welcome to billpayers, it is very disappointing news for all who want to see the sector do better.
“It is not going to be easy for companies to regain public trust, but they have to start with better service for customers and the environment. We will continue to use all our powers to ensure the sector delivers better value.”
Utility responses
The Ofwat report said reasons cited by utilities for not spending their investment cash so far this decade included the pandemic, inflation and planning delays.
Anglian Water said: “We are disappointed to be listed as a lagging company. However, following two extreme climate events last year, we expected our performance to drop as our infrastructure came under unprecedented pressure. The work we’ve undertaken since then focuses on how we are resilient to these challenges in the future, as they are felt more acutely by our region than any other. Our proposed business plan for 2025–30 will see our largest ever investment in securing water supplies against the risks of extreme weather. Our focus remains on regaining our place as a leading company and delivering outstanding customer service.”
Dwr Cymru said: “We know that we need to improve some areas of our performance as highlighted in Ofwat’s latest review. Work is already underway to tackle these areas, supported by detailed investment plans in this current regulatory cycle as well as in 2025-30 where we propose to deliver our biggest ever investment plan to improve the environment, meet rising customer expectations, and secure long-term resilience in the face of climate change and other challenges.
“2022/23 was a difficult year for the company where our services were impacted by both a drought during one of the hottest summers on record and the impact of the freeze-thaw over the winter – such extreme events are yet further evidence of the effects of climate change on our services. As a water company with no shareholders, our only focus is on the service we deliver our customers and we remain totally committed to ensuring that we can deliver the levels of services our customers expect and deserve, across all areas of our performance.”
Thames Water said: “Our customers expect a great service from us every time, and we’re sorry when we fail to deliver at the first opportunity. In 2022-2023 , we met 55 per cent of our annual performance commitments. While it is our job to deliver our services whatever the weather, our performance last year was severely affected by the summer drought and December freeze/thaw event.
“In March this year our shareholders injected £500M of new equity into Thames Water to help fund improved operational performance. Our shareholders are willing to provide a further £750M of equity funding before 2025, subject to certain conditions. They also acknowledge that additional equity funding, indicatively of £2.5bn, will be required during the 2025-30 regulatory period to further improve operational performance and financial resilience. This is the largest equity support package ever seen in the UK water sector and underscores our shareholders’ commitment in delivering Thames Water’s turnaround and life’s essential service for the benefit of our customers, communities, and the environment.
“Our turnaround is already delivering performance improvements. Our complaints fell by 28 per cent, the second consecutive significant year-on-year reduction and we have seen improvements in several key performance commitments including a reduction in sewage discharges, internal sewer flooding, and sewer blockages. We’re making progress and we’ll continue to engage and work with Ofwat as we implement our plan. We’re determined to do better for our customers and the environment.”
Yorkshire Water said: “Despite last year being a challenging one, we made some great improvements in reducing leakage and pollution incidents, which we know are key areas that our customers care about. While overall improvements take time, we are committed to doing more of what our customers expect and will continue to work closely with Ofwat on our plans. As a result of not meeting some of our commitments, there will be an adjustment to bills from April next year.
“We’ve always been clear that our plans for improving the health of Yorkshire’s rivers are on track and we’ve committed to delivering more improvements than we initially planned. Due to the significant amount of construction needed to improve over 765km of Yorkshire’s rivers, we’ve spent time designing, developing and securing planning permission for all the work that is needed, so we are confident that we are investing efficiently in the face of high inflation.
“As we said last year, in relation to the investments we are making for waste water we have some major projects which will deliver just at the end of the five-year period. We’ve recently started a £60M scheme at Knostrop wastewater treatment works (WWTW) on the River Aire as well as a £40MN scheme at Blackburn Meadows WWTW on the River Don, both to reduce the amount of phosphorus entering those rivers and achieve long-term government targets in this area. These are just two examples of the wide range of investment taking place across our region resulting in us investing £800M this year in Yorkshire’s infrastructure.
“On top of all of this, alongside the work we originally committed to do, we’re investing an additional £180M to reduce discharges from storm overflows, the majority of which is funded by shareholders, as well as bringing forward investment we were planning to do in 2025 to improve Ilkley and Scarborough’s bathing water.”
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