Ofwat's latest climate adaptation update report includes a commitment to introduce a new Bid Assessment Framework for the water companies to ensure that in-house solutions are not favoured at the expense of third party proposals.

The latest update sets out progress since PR14 and explains Ofwat's current and future plans to adapt to the impact of climate change. 

Since the last update the water sector regulator has established and consulted with an independent Task and Finish group, to provide challenge on promoting resilience across the sector. Ofwat has also taken steps to better align the PR19 Price Review process with the next round of water Resource Management Plans in England and Wales.

The regulator is working with stakeholders on the appropriate mix of common and bespoke outcomes (including asset health and leakage) and the role of customer engagement in those issues. It is also working with the UK Regulators Network climate adaptation sub-group to share knowledge and best practice.

Ofwat has set out plans to work with with the National Infrastructure Commission to ensure the evidence base for future water and wastewater need is robust and to work with the Environment Agency and Natural Resources Wales to try to align the timetable for PR19 with the next round of River Basin Management Plans.

Introducing the update, Ofwat said it sees economic regulation as playing a vital role in ensuring that water companies understand the risks climate change poses to the services that customers and wider society value and in incentivising innovative, sustainable and flexible responses that build resilience over the long term.

Commenting on resilience in the context of climate change, the report says that Ofwat's resilience duty has challenged it to look beyond the assets and infrastructure that have often been the focus of past investment and instead consider the resilience of systems and services that companies provide. 

Ofwat said it has recognised that "more could and should be done" to encourage and incentivise innovation, efficiency, resilience, sustainability and long-term planning in the sector, taking the view that there are significant opportunities to drive these behaviours through the reform and expansion of markets. For example, markets can: 

• be faster and more flexible than regulation in responding to changing demands and pressures; 
• reveal information about system capacity and cost, allowing for better planning to meet long-term trends and short-term shocks;
• create diversity in the supply of services, reducing the risk of single points of failure and offering choice when shocks strike; and
• deliver outcomes efficiently, reducing costs to customers and/or freeing up resources for investment elsewhere in the system. 

However, the paper warns that markets can also bring risks which may either be specific to the service/market, or more general – for example, when competition strips out redundant capacity that could otherwise buffer shocks from extreme weather; or service providers fail in a competitive market, leaving water companies or customers without vital services. As a result, regulation will continue to play an important role in driving the right behaviours for climate adaptation, and ensuring that markets function effectively, Ofwat said. 

Ofwat to introduce a Bid Assessment Framework 

The paper sets out a number of commitments that will enable adaptation in water resource service provision via market approaches, including a requirement by Ofwat for companies to produce a Bid Assessment Framework to ensure third party proposals to close supply-demand deficits are appraised against existing legal obligations and policy objectives.

The regulator will also encourage direct procurement for customers – an approach that could allow large capital infrastructure projects, including those required for adaptation, to be subject to longer term price controls.  

The aim of a Bid Assessment Framework will be to ensure that:

• in-house solutions are not favoured at the expense of third party proposals that offer more efficient, resilient or sustainable services.
• bids are assessed against existing legal obligations and policy objectives to maintain safeguards. 

Commenting on the update, Nicci Russell, director of Strategy and Planning at Ofwat, said:

"Over recent years, we have evolved our climate adaptation approach to put in place the right incentives and safeguards to encourage innovative, efficient and sustainable behaviour. We have also put the emphasis on water companies to understand how climate change might impact on the services customer and wider society value, and to respond to that."

"We know we cannot tackle this in isolation and so have worked with all stakeholders, and formed dedicated groups to help drive new thinking. It is important that we challenge ourselves and the sector to keep this issue front of mind and explore inventive and practical ways to deliver in the interests of customers and the environment."

Click here to download Enabling, incentivising and encouraging climate adaptation in the water sector: Ofwat’s updated climate adaptation report