Memorandum submitted by Waterwise (Ofwat
03)
OFWAT'S
PRICE REVIEW
2009
Waterwise is an independent, not for profit,
non-governmental organisation focused on decreasing water consumption
in the UK by 2010 and building the evidence base for large scale
water efficiency. We are the leading authority on water efficiency
in the UK. We sat on the UK Environment Minister's Water Saving
Group alongside the water industry and regulators, for which we
produced, in October 2008, the Evidence Base for Large-scale Water
Efficiency in Homes.
Our aim is to reverse the upward trend in how much
water we all use at home and at work by 2010.
EXECUTIVE SUMMARY
1. In the context of climate change impacts,
targets and commitments, and the significant potential contribution
of water efficiency measures to both mitigation and adaptation,
Waterwise hopes and expects a significant step change in the scale
and number of the water efficiency schemes proposed in the water
companies' PR09 business plans, and funded in the final PR09 settlement.
In the PR04 process there was very little quantified evidence
on the costs and benefits of large-scale water efficiency programmes.
2. For PR09, Waterwise, for the Government's
Water Saving Group, and working closely with the water industry
and its regulators, has built an Evidence Base for Large-scale
Water Efficiency in Homes. This Evidence Base, published
in October 2008, can be used and built on as water companies—and
others—develop the scale and number of their water efficiency
programmes.
3. Water efficiency measures can also be
usefully linked to existing energy efficiency mechanisms and programmes—increasing
carbon reductions.
INTRODUCTION
4. Since the last Price Review, climate
change has made a striking shift from being seen as an environmental
concern to being at the mainstream of economic, political and
business thinking and action. Predictions of its impacts have
become more detailed, and are more severe than was thought to
be the case even five years ago: and we have seen increasingly
extreme weather events, including the worst drought in England
for 100 years, and devastating floods, both of which have led
to water supply challenges to homes. The economic and environmental
implications of inadequate mitigation policies have been clearly
set out in the Stern Report, which shows in great detail that
the benefits of strong, early action considerably outweigh the
costs: Stern states that "Unabated climate change could cost
the world at least 5% of GDP each year; if more dramatic predictions
come to pass, the cost could be more than 20% of GDP. The cost
of reducing emissions could be limited to around 1% of global
GDP."
5. Since the last Price Review, the government
has set itself a challenging target of 80% cuts in greenhouse
gas emissions on 1990 levels by 2050, and five-year carbon budgets,
and enacted legislation to make these commitments legally binding.
It has brought the water companies within the scope of the Carbon
Reduction Commitment scheme, which sets targets for industry to
reduce its emissions, and the water industry itself has made a
commitment to a 20% target for renewable energy by 2020 and to
research how it might better manage non-CO2 greenhouse gas emissions
from wastewater treatment.
6. In this context, it is inconceivable
that water efficiency would not play a central role in PR09. The
government's own figures show that almost half of the UK's carbon
emissions today come from the use of buildings. Water efficiency
plays a key role in mitigating climate change: 25% of domestic
fuel consumption, for example, is used to heat water. In addition,
water company treating, pumping and other processes account for
5% of total UK greenhouse gas emissions. So water efficiency measures
such as aerated showerheads clearly cut emissions. The water industry
now has water efficiency targets, set by Ofwat and due to be in
place for PR09. Wasting less water in homes and businesses helps
mitigate climate change through reducing direct energy consumption
in buildings due to hot water use—as well as helping the
water industry meet their own carbon emissions targets through
reducing the pumping and treating costs of both water to homes
and wastewater from it.
7. But water efficiency is also a vital
tool in adapting to climate change—making less water go
further. Climate projections indicate that much of the UK will
experience more intense and frequent periods of drought—reducing
net water consumption will help to reduce the risk of demand exceeding
available supply of water during these periods.
8. We set out below our view that the PR09
settlement should boast a significant number of large-scale water
efficiency retrofitting schemes (and a significant increase in
metering), and the economic case for this which Waterwise has
built, for the Water Saving Group, and is hoping to continue to
keep live.
Retrofitting, and the Evidence Base for Large-Scale
Water Efficiency in Homes
9. Waterwise was the only NGO to sit on
the Ministerial Water Saving Group (WSG), alongside the water
industry and its regulators. The WSG focused on water efficiency
in households in England, and held its final meeting in November
2008. For the WSG, Waterwise produced, in October 2008, the Evidence
Base for Large-scale Water Efficiency in Homes.
10. In the last Price Review, there was very
little in the way of evidence, or an economic case, on which the
water companies and Ofwat could base applications for large-scale
water efficiency schemes. Many water companies have been undertaking
excellent water efficiency retrofitting and other schemes in the
last 20 years, but few of these have been of a large enough scale
to extrapolate the costs and benefits of different measures, and
their associated water savings.
11. However, since the establishment of
the Water Saving Group, there has been a significant increase
in the size and number of water company water efficiency projects.
Waterwise, the water industry and its regulators therefore decided
that an in-depth analysis of those projects with larger sample
sizes was needed in order to establish an evidence base that could
support the development of water demand management measures as
resource options in their own right.
12. Waterwise's Evidence Base collated
and analysed around 20 large-scale water company water efficiency
projects, of around 1,000 homes or so each (most previous projects
covered around 300 homes or less), and used the data to identify
savings associated with a range of water efficiency measures.
Findings were then used to develop best estimates of savings,
costs,uptake rates and installation rates in order to create a
series of scenarios of cost-effective, large-scale water efficiency
programmes.
13. The results from the Evidence Base
are especially important for comparing water efficiency measures
with new resource development options in the water resources planning
process, for which this report was timed to provide best available
evidence in the lead up to the Price Review 2009. The Evidence
Base will also help water companies meet their new water efficiency
targets, in PR09.
14. One key finding of Waterwise's Evidence
Base was that large-scale water efficiency programmes are
most effectively delivered through water companies working in
partnership with other organisations—joint action is crucial
to success (the government's new CESP recognises this)
15. The Evidence Base showed clearly
that water efficiency is a viable option in water resources management.
It is already being used by the water companies and Ofwat in the
final stages of PR09. With this Evidence Base in place—and
being built on and further developed, not least as new projects
report (Waterwise is currently seeking funding to keep the Evidence
Base live, which the Water Saving Group agreed was necessary),
Waterwise hopes to see upscaling to water efficiency projects
of tens of thousands of homes, covering whole communities, in
PR09.
16. Some of the existing water company projects
also show huge savings for little investment in schools and hospitals.
Waterwise has not to date been able to analyse these, but we would
also hope to see similar projects emerging in PR09. Importantly,
we believe that water companies should be expected to take demand
management measures as seriously as reservoirs and other supply-side
measures. Waterwise was a key contributor to the Department of
Health's best practice advice for the healthcare sector on water
management and waster efficiency,[13]
which contains several case studies of significant water, energy
and money savings in hospitals.
17. At Waterwise's 2008 Water Efficiency
Conference (9 April 2008), Regina Finn, Chief Executive of Ofwat,
said that "Ofwat thinks water efficiency is a win for consumers".
Ofwat has put in place water efficiency targets, instituted a
revenue correction mechanism to tackle the revenue driver for
companies to sell more water and is supporting Waterwise's Evidence
Base. There is a framework in place for ambitious water efficiency
retrofitting and other programmes. We hope the companies will
rise to the challenge.
Capex and opex
18. A specific issue has arisen in the building
of the Evidence Base, which Waterwise, the regulators,
the industry and Defra have sought hard to address. Water efficiency
retrofit programmes are currently treated as operational expenditure
(as required by UK Generally Accepted Accounting Practice), while
supply-side projects are treated as capital expenditure. This
results in an incentive for water companies to deliver large-scale
supply-side schemes, since these generally increase regulatory
asset value and may offer opportunities to over-perform on and
make additional gains on capital expenditure. Operational expenditure
does not have the same potential benefits, and also counts against
water companies' financial performance targets. Ofwat have suggested
the possibility of "special opex" treatment for water
efficiency programmes, which partially resolves the problem, but
only for large one-off programmes: where a scheme takes an entire
AMP period to carry out, for example, it would still be treated
as opex.
19. In the context we have laid out above, Waterwise
could not agree more with Professor Cave's statement in the interim
report of his Review of Competition and Innovation in Water Markets
(Nov 2008) that "I believe, to the extent that water companies
are currently seen to be unadventurous with regard to tackling
environmental problems and focused on `pouring concrete', this
derives from a combination of factors, not least the environmental
and economic regulatory framework within which they operate. This
may have led to a self-reinforcing culture of conservatism within
the companies. This analysis appears to be largely shared by all
parties".
Metering
20. In their draft Water Resource Management
Plans, the water companies outlined plans for a large increase
in metering. The Government, through the Water Saving Group, has
already put in place measures to allow the industry to compulsorily
meter in water-stressed areas. However, Waterwise continues to
support the target of the Blueprint for Water coalition of NGOs
of full metering across England by 2020.
21. As successive Environment Ministers have
argued, since 2005, it is no longer sustainable—in the context
of climate change—to charge householders not for how much
water they use, but according to a decades-old assessment of their
home's rateable value.
22. We would therefore like to see a large
increase in metering programmes in PR09. Such a step-change in
metering should be supported by tariff schemes to protect vulnerable
families. However, it should be noted that, as we move piecemeal
from metering a quarter of homes to eventually metering them all,
the traditional concern that full metering will disproportionately
impact large-low-incomes families is being turned on its head,
as these very families are currently subsidising meter optants.
23. We hope the Walker Review will recommend
a move to full metering within the next 10 years, to address this
anomaly—a political commitment from government to this end
would influence the scale of metering programmes undertaken by
the water companies and supported by Ofwat. We hope that such
a commitment would gain support in Parliament—the Conservative
party have recently set out their commitment to full smart water
metering within the next 10 years.
24. Metering is complementary to water efficiency—and
innovative programmes can be designed by water companies to combine
the two, on a large scale: for example, offering retrofitting
packages with metering.
Climate change: links between energy efficiency
and water efficiency
25. As Professor Cave pointed out in his
interim review in November 2008, there is a need for agreed outcomes
and timelines and consistency with climate change objectives—between
government and regulators.
26. The government is to be commended for the
extensive zero carbon and reduced carbon measures it has taken
across the economy, in both industry and homes, including huge,
funded, energy efficiency retrofit programmes announced in recent
months to tackle the issue of emissions from existing homes, and
for the water efficiency measures it has put in place in new homes
and to allow an increase in metering in water-stressed areas,
in recent years
27. However, the significant potential of
water efficiency measures in both mitigating and adapting to climate
change has in many cases been overlooked in policymaking. Since
the heating of water in the home is the second largest consumer
of energy after space heating, accounting for approximately 25%,
and bringing water to and taking it away from homes and businesses
by the water industry contributes to their responsibility for
5% of UK greenhouse gas emissions, water efficiency measures should
be at the forefront of carbon reduction policies and measures,
alongside energy efficiency. (The Australian and Californian regulatory
structures already recognise this link.) And it is to date a missed
opportunity that measures such as the reduction of VAT, which
are being taken forward to transform the market in energy efficient
goods, and planned large-scale energy efficiency retrofit programmes
announced by the government in recent months, are not yet intended
to be applied to, or to include, water efficient fittings such
as showerheads.
28. The Great British Refurb programme announced
by the government on 12 February is a high-profile example of
this—the new HES (Heat and Energy Saving strategy), review
of CERT (Carbon Emissions Reductions Target) and CESP (Community
Energy Saving Programme) contain a raft of innovative measures
to reduce emissions from existing homes and buildings, but no
reference at all to water efficiency measures.
29. There is huge potential for including
both the carbon and water savings of large-scale water efficiency
retrofit measures in an existing government scheme, the Carbon
Emissions Reduction Target (CERT), and in similar schemes. As
the "easy wins" of wall and loft insulation reduce (recognised
by the government's new CESP proposal), hot water efficiency measures
will be essential to reach the next level of carbon emissions
reductions. Water companies will from PR09 be required to meet
water efficiency targets set for them by Ofwat, and they are being
brought within the scope of the Government's Carbon Reduction
Commitment scheme, which sets targets for industry to reduce its
emissions and has committed to a 20% target for renewable energy
by 2020. Government has its own per capita consumption target
of 130 litres per day by 2030.
30. To help government and the water industry
meet these commitments, Waterwise would like to see the following
measures—which Ofwat could work with Ofgem to take forward:
31. The CERT scheme is a statutory obligation
on energy suppliers to deliver energy efficiency improvements
in housing. It makes sense for the carbon savings from hot water
efficiency measures to be included in the CERT scheme. A flow
regulator has already been accepted into the CERT scheme, but
showerheads (arguably the most effective hot water efficiency
device) are not yet. The carbon savings from showerheads should
be able to be counted under CERT, by either water or energy companies,
or both. We believe that Ofwat and Ofgem could work together to
develop a standard mechanism for this process to be recorded.
This, from the two regulators, would result in significant carbon
savings: with incentives for both energy and water companies.
32. In addition, Ofwat could develop a water
version of CERT, to quantify water savings rather than carbon
savings. The carbon savings of cold water efficiency schemes such
as toilet retrofits within the home cannot as easily be quantified
(relating as they do more to the water company's own carbon footprint
in treating, and pumping the water to, and the wastewater from,
the home), but the water savings can be. Such a scheme could draw
on Waterwise's Evidence Base. In this way, the water savings
of cold water efficiency measures can more easily be standardised,
compared and quantified, not least as water companies meet their
water efficiency targets (which we would expect in future price
reviews to be tightened as the dataset from large-scale projects
expands). We recommend that Ofwat work with Ofgem to design such
a scheme, building on CERT.
33. In the meantime, an allowance should
be made for "explanatory" programmes, much like the
demonstration activity allowed by Ofgem for the energy companies.
Ofwat could work with Ofgem to develop their existing criteria
for demonstration activity into a scheme which would work for
water. Ofgem's definition of demonstration activity is "measures
to which accurate carbon savings cannot yet be attributed but
which may reasonably be expected to promote a reduction in carbon
emissions. This means that measures could be funded where the
carbon dioxide savings are difficult to calculate, perhaps due
to a measure's site specific nature or because there is little
available evidence of the measure in practice." The three
broad categories of trials that might be carried out as demonstration
activity are:
— Trialling consumer reaction to a technology
— Trialling consumer behaviour to better
information
34. The purpose of the demonstration activity
route is to trial new and innovative carbon-saving measures. It
is not difficult to see how such a measure developed by Ofwat
would in a stroke remove many of the current disincentives on
water companies (not least due to risk arising from uncertainty
of effects) to innovate with large-scale water efficiency measures,
rather than subjugating these to supply-side measures.
35. All three of these measures would incentivise
innovation in water and energy efficiency within water companies,
and would help water companies and government meet their targets.
UK Climate Impact Programme Scenarios
36. Finally, the much-awaited UK Climate
Impact Programme 2008-09 scenarios are expected later this year—just
beyond the timeframe of the water companies completing their final
PR09 Business Plans. As these scenarios will be absolutely crucial
as water companies plan their supply-demand balance, updating
the last set of scenarios which are now seven years old, we would
like Ofwat to take forward a programme with water companies once
they have been announced, alongside the final PR09 determinations,
including potentially reviewing the companies' 25 year Strategic
Direction Statements.
Waterwise's Evidence Base for Large-scale Water
Efficiency in Homes can be found at
http://www.waterwise.org.uk/reducing_water_wastage_in_the_uk/research/publications.html
Waterwise
February 2009
13 Environment and Sustainability Health Technical
Memorandum 7 April 2009. Back
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