PR19 must allow for adequate investment in London’s infrastructure
9 December 2019
Consensus is much lacking in this election, with the different approaches proposed to utilities ownership truly at opposite ends of the spectrum. Investors are watching carefully, concerned about the detail of how re-nationalisation, if pursued, could be put into practice.
Investors in London’s utilities are also keeping a watchful eye on the PR19 process. And this price review, which will agree a series of targets and investment allowances for Thames Water and other water companies over the next five years, will be of critical importance to the future of London’s water infrastructure.
In its first draft determination, Ofwat deemed that Thames Water – along with three other water companies – needed to dramatically improve their efficiency targets for the price review period. Since then, Thames Water has made some positive moves in committing to more stretching targets on pollutions, supply interruptions, leakage and prices for customers. However, on the eve of the final determination, Ofwat is pushing Thames Water to make further efficiencies, insisting that the level of investment over the next five years should be squeezed further.
Ofwat’s intention to drive efficiencies in water companies is welcome – and it is widely understood that the previous price review settlement ended up being on the overly generous side for investors. But it is important for the regulator’s emphasis on reducing bills to be matched with a priority to improve the resilience of London’s water infrastructure. That, of course, means allowing Thames Water to plough the necessary investment into London’s infrastructure over the next five years and beyond.
The costs of underinvestment and inaction in the water sector will, in all likelihood, end up costing bill payers more in the longer term. This was highlighted by the UK-wide analysis carried out in 2018 by the National Infrastructure Commission (NIC), which found that the investment cost of resilience (£21bn) would be roughly half the cost of relying on emergency measures (£40bn).
Improving resilience in London is likely to be more expensive than in some other parts of the country. London’s water infrastructure will need to cope with the scale of expected growth in both jobs and population in the capital – as well as the increasing risk of climate change. Projections from the NIC show that London faces the highest increase in the risk of drought and flooding across the UK.
And in the more immediate term, there is an urgent need to replace ageing pipes across the capital. The recent incident in Finsbury Park, where a burst water main ended up affecting around 250 properties, highlights the need for ‘replumbing’ of London’s water infrastructure.
It is quite striking just how old some of the infrastructure beneath London’s streets is. Data from Thames Water shows that the average water main in the Thames Water region is 70 years old, and around one eighth of trunk mains are over 150 years old or more.
Investment in replacing this infrastructure will be no doubt be costly –both in financial terms and due to disruption associated with developing new water supplies and overhauling existing infrastructure. But London business – as well as Londoners – want to ensure that the regulatory environment will allow for these necessary upgrades to occur, so that the capital’s water supplies are secure into the future.
London First very much hopes that Ofwat’s final determination for Thames Water will take account of this, so that London business has the confidence that the necessary investment in London’s water infrastructure can take place over the next five years and beyond.
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