Wessex Water has published a new report setting out a new strategy developed in collaboration with Frontier Economics which it says will revolutionise regulation of the water industry.

The Outcome Based Environmental Regulation (OBER) concept gives water companies the opportunity to make greater environmental improvements using markets, so the burden is not passed on to bill-payers.

The report - Outcome Based Environmental Regulation: Enabling the water sector to make its contribution to the 25 Year Environment Plan - sets out the opportunity and need for the Government to regulate differently to deliver its commitment to be the first generation to leave the environment in a better state.

Launching the strategy, the water company said the current climate and biodiversity emergencies require urgent action, and the Government’s 25 Year Environment Plan (25YEP) provides an ambitious framework to help tackle the challenges.

However, the report says the current approach to environmental regulation in the water sector leads to inefficient outcomes as companies are not incentivised to choose solutions that deliver the biggest environmental benefit at the lowest societal costs.

“While a taskforce has proposed changes to the Water Industry National Environmental Programme (WINEP), the current reform proposals will not deliver the step-change needed for the sector to deliver its contribution to the 25YEP,” it points out.

In parallel, there is significant pressure on water bills as the sector is expected to adapt and mitigate climate change, meet increasing consumer expectations and deliver a step-change in environmental improvements.

“Along with other water companies, we want to use our knowledge and resources to help the Government achieve many of the goals it sets out in its 25YEP. But our hands are tied by the current ineffective approach to environmental regulation“ Wessex Water said.

According to Wessex Water, the water sector has a significant role to play in improving the environment and there is “an overwhelming consensus that it needs to raise its game.”

To deliver the improvements without putting even more pressure on household bills, the industry to innovate. However, traditional solutions are becoming increasingly unsustainable because they involve significant energy and chemical use. They are also becoming increasingly inefficient with small marginal gains for high marginal cost. “To become a Net Zero industry and build the resilience of our catchments at an affordable price, we need to invest in nature-based solutions and collaborative approaches”, the water company said.

The problem with the current approach

In Wessex’ view, OBER will unlock the inefficiency with the current approach to environmental regulation.

Citing its nitrate reduction scheme at Poole Harbour, Dorset as a good example of this, the utility said it was “obliged to invest” in a carbon-intensive treatment process that costs around £31,000 for every tonne of nitrogen removed.

Wessex were able to show it could achieve the same outcome by delivering nature-based solutions in partnership with farmers, at a cost of £9,000 per tonne of nitrogen removed.

However, despite this being a 71% cheaper option, which also provided biodiversity benefits instead of more carbon emissions, Wessex Water said:

“We still had to invest in the costlier carbon-intensive asset solution to comply with the current environmental regulation requirements.”

The water company is calling for a new outcomes-based approach that has a better result for the environment to be introduced.

The benefits of OBER

According to Wessex Water, Outcome Based Environmental Regulation will allow the company to meet the goals of the 25YEP in a far more efficient way and deliver a range of benefits, including environmental improvements for lower private and social costs, more cross-sector collaboration and more private investment in the environment.

Wessex Water Chief Executive Colin Skellett said:

“We are living through climate and nature emergencies at a time of huge pressure on the cost of living. The water industry has a significant role to play in improving our local environment and there is an overwhelming consensus that it needs to raise its game.

“However, to deliver the improvements without putting even more pressure on household bills, we have to innovate. Traditional solutions are becoming increasingly unsustainable because they involve significant energy and chemical use.

“The approach would have benefits for water customers, regulators and taxpayers. It will generate new sources of finance for environmental improvement, attract private investment in nature and climate recovery and support a green economic recovery. It would also accelerate place-based environmental leadership by water companies.

“Finally, with the focus back on the domestic environmental agenda post-COP26, it would demonstrate how to finance and deliver the environmental targets introduced by the Environment Act.”

Produced in partnership with economic consultancy experts Frontier Economics, the report explains the economic case for a decisive shift to a genuinely outcomes-based approach with a regulatory framework that enables, supports and incentivises catchment and nature-based solutions as a core part of water companies’ service delivery.

Click here to download the report in full