Select Committee on Environmental Audit Minutes of Evidence

Memorandum from Water UK

  (a)  The water industry is an intensive user of energy. Energy costs account for over 13 per cent of turnover. The industry ranks third in the list of energy intensive industries set out in the Marshall Report.

  (b)  The industry is becoming more intensive in its energy use in order to meet stringent EU and UK regulations for drinking water quality and waste water quality. In some companies, particularly those where additional coastal waste water treatment is required, energy use is predicted to rise by up to 40 per cent over the next five years.

  (c)  The industry is committed to reducing energy consumption and utilising renewable energy where this is possible. As a major energy user, with a total carbon equivalent emission level of over 670,000 tonnes pa, it can play a crucial role in helping Government meet its CO2 reduction targets, make progress towards the Government's targets for renewable energy schemes, and help reduce methane emissions.

  (d)  The water sector is a strong cohesive sector, represented by a single trade association (Water UK). The relatively small number of members give the sector potential to initiate and participate in collective schemes for reducing greenhouse gas emissions such as trading.

  (e)  The industry is regulated by many EU directives so that at the time of the IPPC regulation it was considered an additional and unnecessary step to make the industry subject to IPPC.

  (f)  Water companies are regulated for energy efficiency implicitly by the economic regulation regime administered by Ofwat.

  (g)  The climate change levy will cost the industry an estimated £25 million, with only £3 million refunded through a reduction in NICs.

  (h)  The industry suggests that recycling levy proceeds into energy efficiency and renewable energy schemes would be equitable, result in higher savings and not penalise customers.


  The water industry is the third most energy intensive sector in the UK. Over 13 per cent of turnover is spent on energy. It is used for treating and pumping drinking water and waste water through 700,000 kilometres of water mains and sewers. Energy use is governed by the requirement to meet domestic and international standards, and is largely a function of the nature and state of the water supply and waste water network.

  The industry employs 46,000 people directly, and has multiplier effects in sectors as diverse as engineering, construction and IT.

  As a major energy user, with a total carbon equivalent emission level of over 670,000 tonnes pa, the industry can play a crucial role in helping Government meet its CO2 reduction targets. It can also help progress the Government's targets for renewable energy schemes and help reduce methane emissions.

  The industry does not, however, believe that the climate change levy in its proposed form will reduce greenhouse gas emissions in the most cost-effective manner.


  Water UK is a strong sectoral trade association with a relatively small number of large members. It represents a homogeneous industry—all of our members are concerned with exactly the same task. Water UK represents the regulated water business only and all of our members face the same regulatory pressures.

  We also have a direct interest in mitigating the causes of climate change. It is predicted that climate change will have profound impacts on water resources and on wastewater treatment. The industry recognises that it needs to face these challenges proactively.


  The climate change levy will cost the water industry £25 million pa. This figure is based on current energy use and mix of energy sources, and the indicative rates proposed by HM Customs and Excise.

  The industry is a large employer—46,000 employees—but recycling of the levy via a 0.5 per cent reduction in NICs would result in the return of only £3 million. The tax is therefore anything but "neutral" for the water industry, which would be in effect subsidising other less energy intensive sectors such as services or the public sector.

  Ministers and Ofwat have made it clear that they wish to see water prices fall where possible. At the same time, increased environmental quality is expected, resulting in an already extremely tight price regime for the industry—in fact it is uncertain whether the investment necessary can be carried out under the regime suggested by the regulator.

  The levy would mean that, as well as paying for the huge capital improvements required by regulations, companies will pay an additional tax on the running of that plant. This will undoubtedly compromise companies' investment programmes and could lead to threats to jobs in both the water sector and others which are dependent on it.


  Energy use in the water industry is driven by regulatory requirements, both for drinking water quality and the need for increased treatment for waste water. In many cases energy use is increasing as regulatory requirements become more stringent. Some companies, for example those needing to improve coastal discharges, are predicting an increase in energy use of up to 40 per cent. Regulatory requirements are driven by EC legislation, for example the Directives on Drinking Water, Urban Waste Water Treatment, Bathing Waters, and Shellfish. The existence of these stringent regulations was an important factor in the decision not to bring the Industry as whole within the scope of IPPC in order to avoid duplication of regulation.

  In view of the size, nature and energy intensity of the water industry we believe that by entering into a negotiated agreement with Government we would be able to make a significant contribution to reducing the emissions of carbon dioxide. Hypothecation of levy proceeds into energy efficiency and renewable energy projects would ensure that the industry can make its maximum contribution.

  Current discussions have centred on the use of IPPC as a criteria for entering into negotiated agreements with Government. The water industry is subject to one of the most detailed regulatory frameworks of any industry and is the subject of regular independent monitoring.

  IPPC is aimed at achieving a high standard of protection for the environment as a whole. It is not targeted at any one environmental impact—such as greenhouse gas emissions—but requires a balanced and integrated consideration of all environmental impacts. As noted by Lord Marshall "IPPC coverage is not a good way of identifying energy intensive users".

  We understand that IPPC contains a specific requirement relating to energy efficiency. However the regulatory regime of the water industry provides an equal requirement in this area.

  Work carried out by OXERA on behalf of the industry concluded that the water industry is already subject to a degree of energy efficiency regulation and target-setting.

  Water is a network industry. The industry uses energy to keep the whole network operating, not just particular sites. Demand is driven by the nature and state of the whole network. A site-specific IPPC approach to energy efficiency is not the best way to make savings in the water industry.


  Water UK suggests that Government should consider an alternative approach to operating the climate change levy for the industry. This approach would be equitable, result in higher energy savings, and not penalise customers.

  For example, even a eight per cent reduction in the levy would free £20 million across the industry which could be then be earmarked for energy efficiency or renewable energy projects. Higher levels of reduction would deliver even greater environmental benefits. Preliminary work being carried out within the industry shows that a sizeable number of projects could be brought forward as they would become economic at reduced levels of levy.

  This would provide a proper and efficient incentive for companies to implement energy efficiency projects and switch to renewable resources.

  In return for this reduction, the industry would agree targets to reduce energy on current projections. In meeting these targets we would also increase renewable sources of energy and reduce methane emissions.

  Renewable energy produced by the water industry should be excluded from the levy. Furthermore incentives to stimulate energy efficiency such as CHP should be encouraged by the recycling of levy revenues into tax credits for energy saving investments.

October 1999

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries

© Parliamentary copyright 2000
Prepared 9 February 2000