NIC0033

Written evidence submitted by Ofwat

 

We have been asked by the Joint Committee on the National Security Strategy to provide written evidence on the requirements, timeframes and resilience standards placed on companies in relation to climate change. Specifically, this note sets out:

  1. A brief summary of the requirements placed on operators to identify, plan for and mitigate the effects of climate change, including extreme weather events, and the reporting requirements placed on them;
  2. The timeframes for this work e.g. how far in advance Ofwat requires operators to plan for the effects of climate change (ten years? 40 years?), and how regularly the operators are required to report on this work;
  3. Ofwat's approach to resilience standards against extreme weather and the effects of climate change, against which we assess companies in the short, medium and longer term; and
  4. Our assessment of the current state of climate resilience in the water sector, and the obstacles to achieving resilience.

Introduction

Ofwat is the economic regulator of the water sector in England and Wales. Our functions and duties are laid out in statute, primarily in the Water Industry Act 1991. The companies we regulate are responsible for delivering water and sewerage services to customers.

 

Ofwat's regulatory approach places the emphasis on companies to understand how climate change impacts on the services they provide, as well as their wider obligations, in the following ways:

 

Our commitment to climate change is also made clear in our strategy, ‘Time to act, together’, which highlights our aims to strengthen the sector’s approach to climate change mitigation and adaptation.

Questions 1 & 2: the requirements placed on operators to identify, plan for and mitigate the effects of climate change; and the timeframes for these.

There are clear requirements for water companies to report to the Department for the Environment, Food and Rural Affairs (Defra) under the Adaptation Reporting Power (ARP) of the UK Climate Change Act (2008).

 

The primary way that Ofwat's regulatory approach places the emphasis on companies to identify, plan for and mitigate the effects of climate change on the services they provide is through the price review framework. 

Price review framework

Companies have duties to develop and maintain systems for water supply and sewerage services, which need to be resilient in the long term, recognising the challenges arising from climate change.   One of the ways we regulate companies is to set the price, investment and service package that customers receive. We carry out a review of these price limits every five years and we are currently developing the price review for 2024 (PR24). This will set wholesale price controls for water and sewerage companies for 2025 to 2030. It is companies’ responsibility to set out and evidence their investment needs to continue to maintain and deliver services, while also achieving performance improvements (in line with Ofwat targets and other statutory requirements) and present their plans at the price review. In addition, all companies need to submit a single, annual performance report to demonstrate compliance with their separate price controls.

 

As part of our most recent 2019 Price Review (PR19), which covers the 2020-25 period, we required companies to demonstrate their approach to managing risks to resilience in their business plans. Much of the funding to provide resilient systems and services is included in normal business (‘base’) operating costs. We provided additional (‘enhancement’) funding where companies demonstrated that they could achieve real reductions in risk and improvements in resilience. We strengthened the incentives for companies to increase resilience by maintaining or improving performance through their commitments on asset health. We also set stretching commitments on key indicators of day-to-day resilience, such as leakage, supply interruptions and sewer flooding. All of these are relevant to the climate challenge and are key to enable companies to adapt.

 

For our forthcoming price review, PR24, we have set out that companies should set out their five-year business plans in the context of a long-term (25 year) delivery strategy[1]. These strategies will outline the long-term outcomes the company aims to deliver, and the key investments and activities that form the best pathways to achieving them, given future uncertainties; and be tested against a wide range of scenarios to demonstrate they are resilient to different plausible futures. Companies' long-term delivery strategies should bring together all the strategic planning frameworks, including regional water resource planning, water resources management plans (WRMPs) and drainage and wastewater management plans (DWMPs) – see below – and the activities set out within the statutory environment programmes, and all the remaining business plan activities outside of these frameworks.

 

We expect companies to set out their strategies in terms of 'adaptive pathways' up to 2050, allowing projects and programmes to respond to new information and experience over time. Where appropriate, adaptive pathways can allow options to be kept open into the future so companies can respond to change at the right time. Having this framework in place will be crucial for identifying the most appropriate investment sequences over the long term, and funding any preparatory or investigatory activities needed to support this.

Strategic planning frameworks: WRMPs and DWMPs

In addition, water companies produce WRMPs and DWMPs for water and wastewater infrastructure respectively. These plans encompass a 25-year time horizon and are required to be updated every five years.

 

These plans require companies to think about their approach and needs beyond the 5 yearly price review cycles, and are therefore an important opportunity to address the long-term potential effects of climate change. They require water companies to report every five years against a number of common planning objectives – with DWMPs including measures for storm overflow performance and pollution risk. Through this process and approach, we have a better understanding of the issues and actions companies need to take to address them. We can also ensure that companies are appropriately funded and incentivised to deliver on these plans. 

 

WRMPs provide an overview of water companies’ resilience to drought and the investment required to improve or maintain that resilience. They are produced every five years, covering a statutory minimum period of 25 years, and being kept under review annually.

 

Companies follow the joint water resources planning guidelines[2] set out by the Environment Agency, Natural Resources Wales and Ofwat when preparing their WRMPs. Companies in England are required to plan for a 1 in 500 year level of resilience (ie they should plan so that their system is resilient to a 0.2% annual chance of failure caused by drought, where failure is defined as implementing an emergency drought order). We work closely with relevant stakeholders to ensure water companies are appropriately challenged with a view to ensuring companies are adequately prepared to respond to the climate change risks connected to the provision of water supplies. As a statutory consultee we actively participate in the planning process by meeting all companies to gain early insight into their plans and working closely with other regulators to ensure we are proportionate, targeted, and consistent in our challenge of companies' plans.

 

Currently, we are also working closely with a range of stakeholders to ensure the

development of DWMPs by water companies. In 2018, along with Defra, Welsh Government, Environment Agency, Natural Resources Wales, CCW, ADEPT and Blueprint for Water, we supported Water UK's commissioning of a technical framework for DWMPs.[3] Accompanying this is the recent publication of a set of guiding principles[4] setting out government and regulators' priorities and expectations for DWMPs. These long-term plans are focused on encouraging companies to work with other stakeholders to better understand and target improvements in the resilience of their drainage and sewerage systems over a 25 year planning horizon, and thus in turn will play a key role in enabling companies to respond to the challenges and risks of climate change, particularly with respect to flooding.

 

These plans enhance existing programmes, such as the WINEP, and provide a key opportunity for companies to look beyond the five-year regulatory cycle. When undertaking this long-term planning, our price controls will act as essential stepping-stones and investment phases in companies’ long-term planning, with WRMPs and DWMPs providing an important evidence base for investment.

 

We will be taking account of DWMPs and WRMPs, in conjunction with other strategic planning frameworks, in PR24 and future price reviews.

Questions 3: Resilience standards against which we assess company operators in the short, medium and longer term

Ofwat does not require specific resilience standards against which we assess companies in the short medium and long term. Through the price review, we monitor the performance of companies in relation to minimum service standards (GSS), service performance, and customers at risk from extreme/severe weather events.

 

However, climate change will have significant impacts on the ability of water companies and their assets ability to deliver water services and protect against flooding. We recognise that asset management is a key part of long-term resilience and is essential to ensure the environment is properly protected and that customers get an excellent and reliable service from their water company.

 

To gain insights into companies approaches to asset resilience, we worked with companies to co-create an asset management maturity assessment (AMMA)[5]. This collaborative approach has generated valuable insights and provided cross-sector visibility of key asset management issues, challenges and good practice across a broad range of areas (strategy and planning, asset information, decision-making, risk and review, and organisation and people).

 

One of the areas for improvement identified through the AMMA concerns the consideration of uncertainty in companies' asset plans and strategies. Company responses suggested there was limited incorporation into asset planning of uncertainty around critical external stresses, such as climate change and demographic shifts. Where uncertainty was incorporated into asset planning, the focus was primarily on changing costs and performance for price review submissions rather than representing a broader strategic view of uncertainty. The consideration of uncertainty within asset health risks was limited to deterioration models, with only two companies stating that they are exploring how to incorporate the impacts of climate change into their deterioration models. As part of our recommendations, we expected companies to systematically identify and consider uncertainty in all areas of asset management, from strategic asset planning to data quality management.

We expect companies to work together to reflect on this and other areas of the AMMA findings and recommendations and share good practice to improve asset management maturity across the sector.

Question 4: Our assessment of the current state of climate resilience in the water sector, and the obstacles to achieving resilience.

Ofwat's third climate change adaptation report[6] sets out our current approach to overcoming some of the perceived obstacles to achieving climate change adaptation and resilience, and the commitments and actions we have taken and are taking to allow the water sector to deliver sustainable and resilient water and sewerage services over the long-term.

 

As set out above, our Asset Management Maturity Assessment provides cross-sector visibility of key asset management issues, and challenges to resilience across a broad range of areas. Alongside this we have been involved in a UK Water Industry Research project which aims to develop a common climate adaptation framework including a shared framework for climate change adaptation to support greater consistency in company climate change adaptation responses.

 

3 March 2022


[1] Ofwat, 'PR24-and-beyond-Long-term-delivery-strategies-and-common-reference-scenarios.pdf (ofwat.gov.uk)', November 2021

[2] Environment Agency, 'water resources planning guidelines', July 2021

[3] Water UK, 'Drainage and Wastewater Management Plans | Water UK', updated September 2021 (first issued September 2018)

[4]Defra, 'Guiding principles for drainage and wastewater management plans', February 2022

[5] Ofwat, 'Asset management maturity assessment - insights and recommendations', September 2021

[6] Ofwat, '3rd-Climate-Change-Adaptation-Report.pdf', December 2021