Water UK, the organisation which represents all the UK water companies, has questioned Ofwat’s proposed approach to funding bioresources activities at PR24, saying that this represents “the considered and consolidated views” of its members.

Water UK was commenting in response to the water sector’s economic regulator consultation, saying:

“Our view is that Ofwat should reconsider whether the reforms advocated in this consultation represent a sensible change at this time given the wider regulatory uncertainty and the longer-term challenges facing the sector, which should be our collective principal focus.”

Water UK is suggesting that Ofwat should instead develop its approach in a different direction which is aimed at appropriately and efficiently managing future uncertainty, including support for competitively procured options where appropriate.

There would also be benefits in including bioresources within the scope of the long-term adaptive planning framework, given the significant uncertainties faced by this area of the sector’s activities, the response says.

Referring to recent PR24 discussion papers published by the regulator, Water UK notes that Ofwat’s position with respect to bioresources is “different in nature to other papers” and that “rather than exploring whether it is beneficial to make the reforms outlined, this consultation takes the reform as given and is focused more on how to implement the change in approach.”

Ofwat’s proposals effectively fail to recognise "highly material environmental regulatory challenges"

The response states:

“We do not consider this appropriate at this time, given that Ofwat’s proposals effectively fail to recognise the highly material environmental regulatory challenges which persist both in terms of the Farming Rules for Water (FRfW) and the compatibility of bioresources with other organic waste activities. On the latter, we note that bioresources cannot be regarded as interchangeable with other organic wastes and there are regulatory barriers which impede the smooth integration of bioresources into the wider waste market.”

According to Water UK, the change in the Environment Agency’s interpretation of the rules has “profound effects” on the way in which the industry will have to manage bioresources and the full impacts are not yet apparent.

Water UK is warning that is “already clear that the changed interpretation does not in any way improve the prospects of the organic waste market being able to treat bioresources.”

The industry body points out that it seems “most likely that new assets will be required” to divert at least part of the sector’s biosolids production away from agricultural recycling. In addition, “significant capital investment” may also be needed to meet revised regulatory standards for bioresources products.

However, while Water UK acknowledges that “these impediments are not in Ofwat’s gift to remove” and that Ofwat has statutory duties to fulfil, the response says it remains clear that “no other part of the water industry value chain faces the prospect of such short-term and longer-term uncertainty as bioresources.”

Water UK also recognises that environmental regulations might change at some point in the future to “enable the development of the full bioresources market that we all seek.”

Water UK has put forward a number of alternative options, including:

There would also be benefits in including bioresources within the scope of the long-term adaptive planning framework, given the significant uncertainties faced by this area of the sector’s activities.

Ofwat’s framework could better support third-party interventions that increase competitive activity in the sector, by providing regulatory certainty for sludge treatment capacity that has been competitively tendered.

“Ofwat’s preferred option for remunerating new quality-driven investment will deter investors and third-party entrants”

Commenting on investment, Water UK said it prefers the alternative approaches in view of the critical need for investment to deal with high levels of uncertainty in the sector.

“We and investors and third-party entrants will naturally expect a return for investing in bioresources that is commensurate with the risks they face.”

According to Water UK, Ofwat’s preferred option for remunerating new quality-driven investment will deter investors and third-party entrants concerned about the risk of asset stranding.

It concludes by warning the regulator that Ofwat should not under-estimate the importance that investors attach to the RCV and its stability, transparency and certainty over time.

Pointing out that it underpins the sector’s ability to access capital markets at a relatively low cost and the investability of the sector overall, Water UK said:

“ Any move by Ofwat to change its approach to RCV will attract a high degree of scrutiny and the potential for significant unintended consequences is considerable.”