Following the conclusion of of its consultation in October 2021,  the government has today published a draft of the Strategic Policy Statement  for Ofwat - the SPS has now been laid in Parliament.

The government’s strategic priorities for Ofwat are:

• protect and enhance the environment: Working with other regulators and government, Ofwat should challenge water companies to improve their day-to-day environmental performance to enhance the quality of the water environment. Ofwat should also drive water companies to be more ambitious in taking action to protect and enhance the environment, in particular by taking appropriate action to improve water quality
• deliver a resilient water sector: Ofwat should challenge the water industry to plan, invest in, and operate its water and wastewater services to secure the needs of current and future customers, in a way which delivers value to customers, the environment and wider society over the long-term
• serve and protect customers: Ofwat should push water companies to provide a better and fairer water service for all, by improving customer services and complaints handling. Ofwat should challenge water companies to meet the needs of vulnerable customers, including those who are ‘transiently’ vulnerable
• use markets to deliver for customers: Where appropriate, Ofwat should consider how promoting competition in markets can drive long-term sustainable investment, providing benefits to customers and supporting government’s priorities. Ofwat should focus its efforts on the business retail market, the NAV market, ecosystem services, developer connections, major infrastructure provision and bioresources

The legislative framework

The SPS says that water industry improvements have delivered significant environmental benefits and has contributed to the water environment being in a better condition than it was 30 years ago. In recent years, however, improvement to the overall quality of the water environment has stalled.

To improve the quality of the water environment, in the government’s view water companies must reduce pollution from sewage and wastewater.

The SPS also emphasises that, in particular, the government wants to see water and sewerage companies making progressive reductions in the adverse impacts of discharges from storm overflows, stating:

“We therefore expect water companies to significantly reduce the frequency and volume of sewage discharges from storm overflows, so they operate infrequently, and only in cases of unusually heavy rainfall.”

“Companies need to prioritise actions to reduce pollution and considerably improve their environmental performance, while delivering long-term value for money,” the policy statement says.

Pointing out that the water industry’s environmental performance has stagnated and, in certain cases, deteriorated in recent years, the SPS says “poor environmental performance is not acceptable and poorly performing companies need to rapidly improve.”

The government has set working with other regulators and government, Ofwat should challenge water companies to improve their day-to-day environmental performance to enhance the quality of the water environment as a priority.

The government expects Ofwat to:

• challenge water companies to demonstrate how they will improve environmental performance to meet Environment Agency requirements in the Environmental Performance Assessment
• challenge water companies to demonstrate how they will achieve zero serious pollution incidents by 2030
• challenge water companies to demonstrate how they will significantly reduce the frequency and volume of sewage discharges from storm overflows, so they operate infrequently, and only in cases of unusually heavy rainfall

Investment - government recognises system that works in interests of consumers does not simply mean lower prices in the short-term at the expense of future generations

Commenting on the levels of investment needed, the SPS says:

“The government has committed to taking a long-term approach to investment, recognising that a system that works in the enduring interests of consumers does not simply mean lower prices in the short-term at the expense of future generations.

“Ofwat should promote efficient investment, ensuring it is made in a way that secures long-term resilience and protects and enhances the environment, whilst delivering value for money for customers, society and the environment over the long-term.”

“Water companies should, when supported by customers and where it represents good value for money, also exceed these legislative requirements and deliver wider environmental benefits in the course of carrying out their functions.”

The government also wants to see the impact of environmental efficient investment by the water industry “maximised through co-funding with other sectors and green finance opportunities, where appropriate, including through market mechanisms.”

Companies and regulators should deliver nature & catchment-based solutions “as a matter of preference”

The SPS says water companies should significantly increase their use of nature and catchment-based solutions to achieve multiple benefits for the environment and the public. The government said it expects companies and regulators to work towards delivering these solutions as a matter of preference; so long as risks are understood, controlled, and proportionate to the potential benefits.

“Ofwat should work with the sector, the Environment Agency, Natural England and others to rapidly identify and overcome any barriers to the uptake of these approaches by water companies,” the SPS states.

A resilient water sector

The SPS says as a priority, Ofwat should challenge the water industry to plan, invest in, and operate its water and wastewater services to secure the needs of current and future customers

This will require water companies to shift towards long-term adaptive planning and to rigorously assess and improve their resilience, including existing assets’ health, to a full range of hazards.

Ofwat should promote an integrated water management approach so that water company actions deliver best value for customers and achieve multiple benefits where possible. “To achieve this, regulatory frameworks should be further developed to enable cross-sector working”, the Statement says.

Meeting long-term water resources needs

Commenting on meeting long-term water resources needs, the SPS says the government expects Ofwat to:

• support and challenge regional groups and water companies to effectively plan and deliver solutions to meet the long-term challenge to water supply set out in the National Framework, including the need to be resilient to a one in 500-year drought, with the aim to meet this by 2040
• recognise the need for investment in supply and demand solutions as set out in the water resources management plans (WRMPs)
• push the industry to innovate and adapt to deliver the expectations in the National Framework, including drawing lessons from collaborative approaches developed by Regulator’s Alliance for Progressing Infrastructure Development (RAPID)

The government also expects Ofwat to challenge water companies to halve leakage across the industry by 2050 and to monitor progress towards this target,

Other areas where the government is tasking Ofwat with specific priorities in its work with the water companies include delivering resilient drainage and wastewater services and greater resilience to flooding.

The SPS says Ofwat should challenge and incentivise the water companies to identify and deliver greater customer, societal and environmental benefits from their water and wastewater infrastructure and systems, such as using reservoirs to provide greater flood resilience. This should include leveraging funding from third parties where appropriate

It also wants the regulator to challenge the water companies to regularly review and fully understand the current and long-term flood risk to and from their infrastructure and systems and identify opportunities to increase resilience.

Security, corporate and financial resilience

The SPS also flags up Ofwat’s role in security and emergency measures, saying that Ofwat should continue to ensure that its regulatory approach, including the price review process, promotes the efficient delivery of companies’ obligations.

The Security and Emergency Measures Direction (SEMD) requires water companies to develop and maintain plans to ensure a water supply at all times, including during a civil emergency or event threatening national security.

The government is currently concluding a review of SEMD and the associated policy framework. The SPS says that a set of new security and emergency planning outcomes which companies will be expected to meet, together with new supporting guidance, will “provide clarity on the future framework for companies in good time for PR24 planning.”

According to the Statement, as part of the SEMD review, the government has also improved existing assurance and reporting structures, including linking SEMD performance reporting with potential PR24 business plan proposals.

The SPS states:

“Ofwat should use information supplied by Defra and the Drinking Water Inspectorate (DWI) from this process to inform PR24 decisions.”

Using markets to deliver for customers

The SPS identifies as a priority for Ofwat, where appropriate, to consider how promoting competition in markets can drive long-term sustainable investment, providing benefits to customers and supporting government’s priorities.

“Ofwat should focus its efforts on the business retail market, the NAV market, ecosystem services, developer connections, major infrastructure provision, and bioresources.”

With regard to markets for eco-system services, according to the SPS there is growing interest in the development of appropriate market mechanisms to support investment in natural assets and their management. The government says that such solutions can deliver multiple benefits such as improved flood resilience, with the potential to attract co-funding. “We want Ofwat to enable and encourage the increasing use of these nature-based solutions,” the SPS says.

Business retail market

Commenting on the business retail market, which is currently facing ongoing challenges in achieving an effective market, the SPS says that as part of Ofwat’s duty to further the consumer objective, there is a need to explore whether changes to market rules, processes, and structures can deliver better outcomes for customers, society and the environment.

The government expects Ofwat to:

• work in collaboration with wider stakeholders to explore whether changes to the business retail market rules, processes and structures can deliver improvements for customers, society, market resilience, investor confidence and the environment
• continue to work with industry to focus on resolving frictions and structural challenges in the business retail market and improve outcomes for customers
• monitor and promote incumbent water companies’ support in the development of a well-functioning business retail market

The bioresources market

The government also wants to see more progress in developing the nascent bioresources market - in 2020 Ofwat introduced measures to promote the bioresources market. However, the SPS says that Ofwat has identified barriers that may limit the growth of the market and the government has set expectations for Ofwat to:

• further promote the bioresources market
• set clear expectations that water and sewerage companies should also take a leadership role to enable the market to deliver its full potential

Prior to final publication, a draft of the statement must be laid before Parliament for a period of 40 days - subject to Parliament’s views the final statement will be published after 40 days.

Click here to access the government’s Strategic Policy Statement for Ofwat in full online