Select Committee on Public Accounts Twenty-Fourth Report

1  Water Efficiency

1. Eleven of the 22 principal water companies in England and Wales are predicting that demand for water will increase in their region over the next four to five years. Most of the eleven are in the South East of England. This increase is due to predicted growth in the number of households and higher average consumption. At the same time, EU directives aimed at protecting the environment will reduce the amount of water that can be abstracted from ground and surface water sources. The Environment Agency has predicted that this will cause future demand to exceed supply in many parts of England and Wales unless new measures are put in place.

2. The Water Services Regulation Authority is responsible for setting price limits that allow water companies to meet future demand. The Authority came into being on 1 April 2006, taking over the powers from the Director General of Water Services. The Director General was supported by the Office of Water Services, known publicly as Ofwat, a name which the Authority has retained.[2]

Water efficiency projects

3. Promoting the efficient use of water by consumers can help water companies maintain a safe margin between the demand for water and the amount they can supply. It can also keep water companies' costs down, for example by removing or delaying the need to develop a new source of water such as a reservoir.[3] This in turn helps to keep consumers' water bills down.

4. To be effective, Ofwat needs information on the water saved by water efficiency schemes and their effect on consumers. In 2002 the Committee recommended that Ofwat should identify which water efficiency measures are most effective in helping consumers waste less water and share this information with water companies.[4]

5. A wide range of water efficiency programmes can help consumers to use less water. These include toilet cistern devices that reduce the amount of water used when the toilet is flushed, rainwater collection devices, and systems that re-use bath water for flushing the toilet.[5] Consumer education and publicity are also important elements of a water efficiency programme.

6. Work has been done internationally on the effectiveness of water efficiency measures, most notably in Australia. For example, Sydney Water provides grants to consumers who take effective measures to save water. To date over 300,000 households have taken part in this programme, saving, on average, 20,900 litres of water per household per year.[6] There is however no direct comparison of these figures to England and Wales as little evidence has been gathered on water savings in the UK.

7. Ofwat has only recently started to take some steps to address the Committee's 2002 recommendation. In 2006 it established a good practice register of water efficiency initiatives and it is working with water companies to ensure that the information collected is available for the next periodic price review. Ofwat is also co-funding and participating in research projects to determine the cost effectiveness of demand management schemes.[7]

8. Five years after the Committee's recommendations on water efficiency, however, Ofwat still does not have enough robust evidence on which water efficiency projects are the most effective.[8] Furthermore, a majority of water companies believe that Ofwat has not been very effective in encouraging them to promote water efficiency; several of them find Ofwat's approach to allowing extra funding for water efficiency projects confusing.[9]

Consumer response to water efficiency

9. During the drought in 2006, both consumers and water companies responded to non-financial incentives to save water. Consumer demand in the Thames region was 8% less than the norm for the summer. Anglian Water and Southern Water made efforts to repair all visible leaks to demonstrate that they took water efficiency issues seriously.[10] But other companies did not do so.

10. Recent research by the Consumer Council for Water shows that consumers will save water in a drought, especially if they believe that their own water company is also doing all it can to reduce wastage.[11] Water companies therefore play an important role in giving a lead and setting an example to consumers.[12] Ofwat does not, however, require the companies to alter their operating practices during a drought.

Impact of metering on water efficiency

11. Consumers who do not have a meter pay a fixed sum regardless of how much water they use. There is therefore no financial incentive for them to use less water.[13] By contrast, metered consumers do have a financial incentive to reduce consumption (Figure 1). Research by UK Water Industry Research (UKWIR) shows that metering can reduce household consumption by between 9% and 21%.[14]

12. A water company increases its revenue for every unit of water used by a metered consumer. The incentive for a company therefore is to encourage metered consumers to use more rather than less water.[15] There is no evidence that water companies are doing this, but as metering becomes more widespread, the economic incentives on companies to do so will increase.[16] A revenue cap, as opposed to the current system of a price cap, would limit the amount of total revenue that a water company can earn and therefore reduce the incentive to promote water use. Ofwat has begun to investigate using a revenue cap to complement the current price cap regime.[17] Figure 1: Economic incentives on the consumer and company
Incentive on consumer Incentive on water company


Conserve water

The less metered

consumers use the less they pay

Sell more water

The more water a consumer uses
the more revenue the company receives.



Consume freely

Consumers pay a fixed

charge for water regardless of how much they use. Therefore there is no financial incentive to conserve water.

Conserve water

The company receives a fixed

sum from the consumer but bears the cost of treating the water consumed. The company therefore has an incentive to encourage the consumer to use less water, as costs will fall but revenue remains constant. Increasing consumption may also require additional infrastructure.

Source: National Audit Office

2   C&AG's Report, paras 1.2-1.7; Q 7. Back

3   C&AG's Report, Appendix Two, page 24 Back

4   C&AG's Report, Appendix Two, page 25 Back

5   Qq 10, 53, 93 Back

6   Q 134 Back

7   Qq 50-51 Back

8   Q 10 Back

9   C&AG's Report, para 2.24; Q 56 Back

10   Q 9 Back

11   C&AG's Report, para 3.18 Back

12   Q 9 Back

13   Qq 25-26 Back

14   C&AG's Report, para 2.17 Back

15   Q 52 Back

16   Q 25 Back

17   Q 52 Back

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