PR24 business plans and challenges for Ofwat

Across their PR24 business plans, companies have proposed to invest a record c.£96 billion, a 60% increase compared to PR19, with a concomitant record bill increase ranging from 13% to 66% in real terms.

PR24 is definitely not business as usual and Ofwat will have to manage a tough landscape ahead of the Draft Determination.

Many have commented about the affordability, deliverability and financeability challenges that the record levels of investments pose to companies and customers.

We share four more reflections on the wider challenges and environment Ofwat will have to manage in reaching its determination:

1. Analysis conducted by Ofwat in February 2023 showed that only 40% of customers think that water companies provide good value for money and around 25% of customers think that water companies act in the interest of customers, society or the environment. Ofwat will have the difficult task of allowing a sufficient spend to allow companies to deliver on their obligations, including Water Industry National Environment Programme (WINEP), while giving comfort to customers that the spend is justified, and efficient.

2. This level of increased expenditure is only the beginning. Companies are proposing a total of £18bn investments on WINEP schemes in Asset Management Period 8 (AMP8). This amount will significantly ramp up in future price controls which will lead to concomitant, further, bill increases and delivery challenges. To cite one example, Thames Water, the biggest water company, is proposing to spend just below £1bn on WINEP in AMP8 while the total cost of the WINEP scheme up to 2050 is currently estimated at £22bn.

3. The scale of the WINEP programme risks crowding out other necessary investments, for example in capital maintenance. While the WINEP programme is a key priority for the water sector and its customers and a statutory obligation for companies, the protection of the environment is a relatively lower priority for customers than, for example, drinking water quality and sewer flooding prevention. Companies and Ofwat will have to find ways to balance investments in AMP8 and beyond while delivering on their statutory obligations and managing delivery and financeability constraints. The relative scale of WINEP expenditure is illustrated in the figure below.

4. The regulatory framework should be tough, but also attractive. Ofwat like other regulators is delivering increasingly challenging price controls, with hard efficiency challenges and stretching performance targets. Regulators are here to protect customers and ensure investments are efficient, but they should also ensure companies are financeable. This means that the balance of risk and return needs to be fair, to both customers and investors. This includes an appropriate cost of capital, realistic but stretching performance targets and appropriate incentive rates.