The OFT-led study, which was closely supported by a team from Ofwat throughout, looked across the market for and identified three areas in which competition could potentially operate:
• competition between water and sewerage companies (WaSCs) to treat sewage sludge
• competition between WaSCs and other businesses to treat organic waste
• competition between WaSCs and other businesses to treat sewage sludge.
According to the OFT, competition between WaSCs to treat sewage sludge is currently very limited, with WaSCs only trading sewage sludge with each other on an ad-hoc basis. The OFT has made a number of recommendations which it believes could help open the sector up to greater competition.
During the study, the OFT said that some of the companies expressed concerns that cost allocation and transfer pricing rules (that apply when using regulated assets to perform non-regulated activities) are complex, time-consuming and uncertain.
The OFT said:
“We consider… that these comments indicate the existence of a sectoral culture that focuses on core (regulated) businesses to the potential detriment of consideration of market incentives.”
“At a more general level, the WaSCs' apparent avoidance of risk (as opposed to management of it) and associated reliance on guidance also appear to hinder the adoption of innovative solutions to the treatment of sewage sludge, contributing to the absence of outsourcing of sewage sludge treatment to other WaSCs.”
The OFT says the perception that the rules are complicated and uncertain may, in turn, discourage some WaSCs from looking beyond their core business of providing water and sewerage services within their geographic region to contemplate treating sewage sludge on behalf of other WaSCs.
The report says:
"The “apparent conservative corporate culture” appears to be deterring WaSCs from treating (larger volumes of) other organic waste. Most notably, any additional investment that takes a WaSC outside its core regulated activity is likely to be subject to more stringent corporate scrutiny than activities considered as 'core' to the water and sewerage business, in a process shaped by the avoidance of risk and (over)reliance on guidance."
“While we understand that the market study itself has stimulated the WaSCs to consider the possibilities for outsourcing/providing to other companies the treatment of SS, the apparent risk avoidance that seems to characterise the sector appears well embedded in the corporate culture of these companies.”
The study also found that competition from other businesses to treat sewage sludge is extremely restricted. In the OFT’s view, corporate culture factors relating to apparent risk avoidance and (over)-reliance on guidance in the water sector can be considered as potentially even more significant in the case of competition between WaSCs and waste businesses in the treatment of sewage sludge, especially in light of the lack of historical links between, and different cultures of, WaSCs and waste businesses.
Planning system is a key barrier
The OFT study has also identified planning as a key barrier to the opening up of the market to greater competition. The study says that in relation to planning issues, waste companies appear to experience more problems when obtaining planning permission for (optimally located and/or scale efficient) treatment sites, unless these are co-located with (existing) water and sewerage facilities.
The OFT said that from discussions with stakeholders, it is clear that there are concerns about the way the current planning system operates. In particular, many businesses considered that the planning system may act as a barrier to the development of newwaste treatment facilities and highlighted potential tensions between national policies and the interests of local communities.
Additionally, some stakeholders suggested that WaSCs may have an advantage in obtaining planning permission because they can expand existing facilities as opposed to the building new ones on undeveloped sites, and because water facilities are seen as 'essential' to a local area compared to waste treatment facilities.
The OFT said that if the planning system does favour expansion of existing SS treatment facilities over building new ones then WaSCs may have an advantage over waste companies as they already possess a large number of sites where SS treatment facilities already exist. This could therefore prevent or make it very difficult for waste businesses to build facilities to compete with WaSCs to treat SS.
Sewage treatment to fall outside economic regulation?
On economic regulation, the study identified and explored a number of options, within Ofwat's remit, that could potentially increase competition in the sectors for the treatment of sewage sludge and other organic waste. In particular, the OFT has examined the possibility of “rolling back the regulatory boundary” so that sewage sludge treatment becomes an activity that falls outside the framework of economic regulation.
However, the OFT said that while there is scope for some competition at the margins, due to the existing infrastructure the WaSCs have in place for sewage sludge treatment and the likely localised nature of any market that emerges, there remains considerable potential for a WaSC to exert substantial market power in a sewage sludge treatment sector in its local area.
The OFT said the WaSCs had also expressed concern that if they outsourced their sewage sludge they could fail to meet some of the regulatory targets set by Ofwat as part of the price review, such as the amount of renewable energy generated. Companies perceive that if they do not have full control over the production process they could fail to reach the relevant targets, resulting in a loss of revenue.
Ofwat welcomes OFT recommendations
The water industry regulator has welcomed the OFT's recommendations. Keith Mason, Director of Finance and Networks at Ofwat said:
“'Looking carefully at how we regulate sludge is part of our much wider review of how we regulate to deliver sustainable water and waste water sectors that deliver for customers now and for future generations.
“We are pleased that this study has seen widespread engagement from across the sectors and we welcome OFT’s clear recommendations to Ofwat and others. The study will help inform our understanding of how we remove potential barriers and distortions to competition, and how we regulate sewage sludge in the water and sewerage sector.”
Ofwat will now consider the recommendations over the coming weeks and will discuss how it can best respond to the OFT’s recommendations with stakeholders during the autumn and winter. Ofwat will publish its final plans as part of its price review framework in spring 2012.
With the UK government demanding a 50% reduction in storm overflow spills by 2029, the era of reactive management is over. Speaking in the House of Commons on 21 July 2025, then environment secretary Steve Reed said, “This Government will cut water companies’ sewage pollution in half by the end of the decade.”
ERG, the leading supplier of odour control systems and industrial gas cleaning & thermal systems, has been awarded the coveted King’s Award for Enterprise.
Welsh Water’s new artificial intelligence-driven tool, ORAI, has been shortlisted for three categories at the prestigious British Data Awards 2026 – underscoring the company’s commitment to using cutting-edge technology to deliver better outcome for customers.
Barhale has completed work on two separate Rapid Action Taskforce Spills projects it is carrying out for Severn Trent.
Hear how Scottish Water has completed its £235 million Ayrshire Glasgow Resilience Project - customers across Greater Glasgow, Ayrshire and East Renfrewshire will now benefit from a more secure and resilient water supply.
Hear how United Utilities is accelerating its investment to reduce spills from storm overflows across the Northwest.
Find out more about the remarkable career opportunities on offer at WSP - scroll down to watch the inspirational video.