Ofwat offers carrot and stick approach to water firms with £300m innovation fund
Ofwat will raise the size of its innovation fund to £300m, as it looks to encourage companies to be more efficient and come up with new ideas to improve the sector and offer benefits for customers.
This includes greater use of markets to provide better value for customers, and assessing how major investment projects are procured, and the operation of developer services and bio-resources.
The £300m package is a 50 per cent hike on the current fund, and has been included in the watchdog’s upcoming price review (PR24), which will cover spending allocations for companies over the 2025-2030 period.
In exchange, water companies will be required to commit to more stringent environmental targets alongside improving customer service and providing more transparency around dividend and executive pay policies.
Ofwat is looking to establish the framework water companies will follow, leading to final decisions on each company’s future plans, and customers’ bills, in December 2024.
New environmental commitments for companies including the use of storm overflows, and improving biodiversity, bathing water quality and reducing greenhouse gas emissions
It will also require companies to address long-term challenges such as ensuring the country has sufficient water resources.
This includes establishing steps to reduce leakage and water consumption and increase water supply, with a new fund of up to £100m to stimulate new approaches to water efficiency.
To improve customer service, it is also calling for every company to conduct robust customer research and hold two public meetings next year.
This is alongside setting clear expectations on companies’ dividend and executive pay policies, with the prospect of further measures on performance-related pay to protect customers’ interests if expectations are not.
Ofwat: Water companies need to act now
Ofwat chief executive David Black argued that water companies needed to act now to deliver improvements ahead of the next price review taking effect.
He said: “Companies have fallen short of the expectations of customers and communities – they need to seize the opportunity to transform their performance at PR24. Turning around performance on the environment and improving resilience will require innovation, new approaches to managing water and investment.
“The sector needs to act now – in advance of PR24. Significant improvements are needed to drive down water demand, improve customer service and reduce pollution incidents. We are looking to companies respond to urgent need for change and set out ambitious plans to improve outcomes for customers and the environment”.
During the next phase of the price review process, companies will be expected to develop their business plans and long-term delivery strategies which will set out the expected level of investment needed to deliver the changes required.
Companies will be expected to carefully consider the affordability of their plans, looking to make efficiencies when delivering investment projects and balancing the interests of customers, both current and future.
The announcement follows Ofwat’s report last week, which revealed that 14 water companies had underspent their allocations to improve customer service and infrastructure during the first two years of the current 2019-2024 price review period.
It also has established enforcement cases with the Environment Agency against six suppliers, including Anglian Water, Northumbrian Water, South West Water, Thames Water, Wessex Water and Yorkshire Water.
The companies are being investigated over unauthorised dumping on untreated sewage in bodies of water such as rivers.