Ofwat Final Determination

Having been spared the threat of nationalisation, Water Companies now face the AMP7 triple challenge of heightened customer expectation, accelerating climate change and diminished returns on capital. Ofwat’s price review final determinations (FD) have set out a five-year price and service package, but what does this mean both for customers and the industry?

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Ofwat’s final determination has put customers first by cutting a total of £2.5bn out of revised business plans and by cutting return on capital (ROC) to 2.96.  The FD has also opened the floodgates to direct procurement, creating the prospect of more competition in the sector – not only for capital investment opportunities, but for access to a capacity-constrained supply chain as well.   With a £13 billion capital investment programme to deliver and a longer-term capacity programme to initiate ahead of 2025, there really is no time to lose.  In AMP7, deferred expenditure will not mean kicking the can down the road or ROC foregone, but it will increase the risk that big commitments around net-zero carbon, leakage reduction and network resilience will not be met.

Our three priority call-outs for the AMP are:

    •   Mobilise capex at speed.  Despite the scale of business plan adjustments made by the water companies and Ofwat, it is essential to create early momentum on capital programmes.  This will require a renewed focused on internal governance and decision-making as well as early engagement with the supply chain;

    •   Exploit the data and analytics capabilities of the digital twin to streamline totex  decision-making.  Wider adoption of data-driven simulation will enable the acceleration and optimisation of best life-cycle value asset investment and operation.  The accelerated development of digital twin capabilities in the UK as part of Digital Built Britain will create a real opportunity for water companies to outperform over the AMP7 cycle;

    •   Jointly prioritise climate-change resilience and net zero carbon.  Given water’s accelerated path to carbon neutrality, there is a risk that, even with £500 million in resilience funding, other critical aspects of climate change readiness could receive a lower priority.  Tracking infrastructure resilience in line with climate-change risks will help to ensure that the long-term health of the asset base is maintained.  

Ofwat’s 2019 FD will drive the water companies to focus relentlessly on the immediate priorities of their customers, whilst taking a far more strategic view of the health, capacity and effectiveness of the network.  Water Companies will be challenged from all directions and it is essential to create early momentum to meet the expectations of the public, other stakeholders and owners.  Real determination is needed if the demands on the sector are to be met.

 

Simon Bimpson

Managing Director - Water, Energy and Utilities Ask me a question
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