Memorandum submitted by Ofwat
It is particularly important that the water
and sewerage sectors manage the risks of climate change because
of the serious societal impacts of failure. Our aim is to protect
consumers, promote value and safeguard the future. To achieve
this, the sectors must respond effectively to the risks of climate
change.
Our key points are as follows:
— As economic regulator, we have an important
role to play. We are leading the sectors by taking a proactive
approach to encouraging the companies to adapt appropriately to
climate change. Regulation in the water sector has delivered a
lot since privatisation; however, we recognise that climate change
presents new challenges. This will require new and innovative
ways of working.
— The water and sewerage sectors are engaged
with the issue of climate change. Both we and the companies we
regulate are taking adaptation seriously. This can be seen in
our approach to the current price review in which we have seen
significant investments in both adaptation and mitigation. One
of the most important challenges ahead it to ensure that water
is valued in a way which reflects its worth given the additional
pressures on resources.
— We welcome many of the measures included
in the Adapting to Climate Change programme. We are keen to remain
engaged and involved in the implementation of these measures.
We will continue to work closely with Defra on key adaptation
issues.
— The NAO review provides a sound, but
very broad, view of the risks of climate change, particularly
to the water and sewerage sectors. A more representative picture
of the progress on adaptation requires consideration of how key
non-departmental bodies are considering and acting on risks.
ADAPTATION IN
THE WATER
AND SEWERAGE
SECTORS
1. We have a duty to promote sustainable
development; and we seek to achieve this by embedding our five
core principles of sustainability[40]
in our regulatory approach. We understand that climate change
represents a huge challenge to maintaining sustainable water and
sewerage sectors.
2. The risks of climate change to the companies
and their abilities to fulfil their duties successfully are significant.
We seek to regulate in a way which ensures that the companies
understand and act appropriately to address those risks. We therefore
aim to enable the companies to adapt to climate change and make
sure that the most appropriate adaptation action is taken. Fundamentally,
the best approach is for each company to include consideration
of climate change risks as part of its day-to-day management.
We have made this point clear to the companies in our climate
change policy statement[41]
and our regulatory policies aim to achieve this.
3. Properly embedding adaptation means considering
the long-term impacts of climate change, and then accurately assessing
and quantifying the resulting risks. These risks should then be
embedded into the planning process, so that appropriate steps
are taken to manage those risks.
4. We require the companies to plan for
the long term, for example by asking them to prepare 25-year strategic
direction statements and plan investment in this context. In planning,
we expect the companies to consider all risks, including climate
change risks together. Considering risks together leads to better
solutions which have multiple benefits. It also allows greater
potential for the companies to take advantage of any opportunities
presented by climate change, for example potential efficiency
gains in treatment processes.
5. We have set out the key risks of climate
change to the water and sewerage sectors in our climate change
policy statement. In it, we highlight the main impacts of climate
change. We also outline how we are responding to the challenges
and how we expect each company to respond.
6. A key area is maintaining a sustainable
balance of supply and demand in the face of a changing climate.
This includes planning water resources, managing leakage; and
encouraging water efficiency. As part of our regulatory framework,
we require the companies to align their business planning with
their water resource management plans. These set out how a company
will manage its resources for the next 25 years. So that customers
only pay a fair price for the costs of adaptation, the companies
must justify significant investment using sound science and the
best available information.
7. We seek to work with the companies to
help them better understand and respond appropriately to the risks
of climate change. For example, last year, we commissioned an
analytical framework for assessing and improving asset resilience
to flooding to address the sectors' need for a consistent approach
towards improving asset resilience and service to consumers.
8. A 2007 study showed that over 1,000 water
and sewerage assets were currently at risk of flooding and this
risk is highly likely to increase with future climate change.
As a result of our regulatory approach, the companies have proposed
significant action on adaptation over the next five years in the
form of asset resilience. Our draft price determinations included
£385 million of this proposed investment on resilience. This
investment will protect more than 10 million customers from the
risk of supply failure, caused by flooding in particular.
9. Adaptation should not mean simply more
investment when this is not the most appropriate response. We
therefore require the companies to provide economic cases. Our
regulatory approach to assessing proposals for investment in climate
change adaptation takes full account of whether the measures proposed
are necessary, the best way to address a particular risk, and
represent value for money.
10. Adaptation now should not compound problems
for those in the future. We therefore aim to encourage the most
sustainable approaches to adaptation. For example, we require
the companies to consider the social and environmental costs and
benefits of investment proposals in their business planning. This
includes carbon costs and impacts on the local environment.
THE WORK
OF THE
ACC PROGRAMME
11. We welcome the measures set out in the
review, which form part of the adapting to climate change programme.
We are currently engaged with Defra on a number of these issues,
particularly on the use of the reporting power in the Climate
Change Act 2008. We and the companies we regulate are highly likely
to be asked to report in the first cycle of reporting. We set
out our views on this issue in our response to their consultation
of June 2009.[42]
In summary, we welcome the proposal that we and the companies
report for the first cycle, as a helpful measure to encourage
them to consider climate change risks and plan future adaptation
measures. We are well placed to adopt an advisory role in contributing
to the review of the reports that the companies submit. We would
also expect to be closely involved in any decisions resulting
from assessment of companies' reports. However, we do not believe
that it would be appropriate or practical for us to take overall
responsibility from Defra for assessing and summarising the reports.
12. We believe that the best way to approach
adaptation is to embed consideration of climate change risks into
all aspects of business as usual planning and the existing regulatory
framework. We therefore plan to work with Defra to understand
how this can be achieved after the first cycle of reporting.
13. After the first cycle of adaptation
reporting, we plan to carry out a review of the companies' adaptation
progress over the next few years. This would be a detailed look
at the companies' adaptation measures and plans, involving site
visits to companies and in-depth scrutiny of their work. The conclusions
of this review will inform our approach to future price reviews.
14. We would be interested to understand
more about the ACC programme's work to establish a suite of indicators
for adaptation, building on the NI188 indicators. These indicators
may help to inform and guide our planned study of adaptation.
15. We do not know the details of the work
of the cross-government "Infrastructure and Adaptation"
project, which started earlier this year. We would expect that
a study of the water and sewerage sectors would form an important
part of this review. We are interested to learn more about the
review and its conclusions.
16. We have engaged with AEA Technology
as part of the climate change risk assessment (CCRA) scoping project.
The full CCRA could be a valuable resource across all sectors.
However, there is a potential for the study to contain only a
superficial appraisal of the risks; in this case there is probably
little value to specific sectors that face significant challenges.
We intend to play our part in contributing to the CCRA as appropriate.
SPECIFIC RESPONSES
TO THE
QUESTIONS RAISED
(NOT PREVIOUSLY
COVERED ABOVE)
17. The extent to which the Adapting
to Climate Change Programme will increase resilience ...:
As outlined above, we believe that the actions that form part
of the ACC programme are largely helpful steps towards encouraging
adaptation. However, measuring the success of these actions is
difficult, particularly since we are dealing with actions to minimise
inherently uncertain, long-term risks.
18. Our analysis of the companies' business plans
as part of our price review process has indicated that the best
way to justify work on adaptation is by demonstrating that a scheme
will lead to a step-change in the risk that consumers bear. This
approach has been adopted for flooding resilience measures in
order to justify investment and we intend to monitor the outputs
of schemes included in the companies' plans on this basis. We
would suggest a good way to measure the success of adaptation
measures in other areas would be to assess comparable types of
reduction in risks over the long term.
19. The extent to which Government departments
have identified the risks from a changing climate ...: In
a general sense, the departments' risks highlighted in the NAO
review appear reasonable. However, the risks are set out in only
the broadest of terms and this misses some of the more subtle
predicted impacts of climate change. This is particularly true
with regard to water. It is therefore difficult to fully assess
the extent to which government departments have adequately identified
climate change risks to meeting objectives. Similarly, this is
true of the adaptive actions set out in appendix 3.
20. The suitability of the processes
and structures in and across Government departments for identifying,
mitigating and managing these risks ...: There is a large
amount of work taking place across government departments with
varying degrees of complexity and detail. The adaptation sub-committee
(ASC) has a critical role to play in promoting good practice,
identifying any gaps and helping shape the ACC programme at a
strategic level.
21. It is very difficult for individual
departments, with their own specific focus, to ensure that effective
connections are made between the disparate areas of government.
However, an overall "command and control" approach to
climate change adaptation would not be appropriate as individual
sectors are best placed to find the most effective solutions.
22. The funding, support, training and
other resources available, including at a local and regional level
...: We recognise that the sectors have a large part to play
in adapting to climate change. However, we do not believe it should
be left entirely to the companies, using customers' money, to
fund adaptation measures that do not directly benefit those customers.
23. Other sectors have a role to play in
adapting to climate change. For example, through adopting more
sustainable farming practices, the agriculture sector can allow
rivers to cope more resiliently with the predicted effects of
climate change. We recognise that it is often much more difficult
to encourage these sectors to take adaptive action because of
the small sizes of individual bodies and their more diverse nature.
Such sectors need to be provided with adequate support and leadership
in order to ensure they play their part in adapting to climate
change. They often benefit from close partnership working.
24. We are also aware that the Environment
Agency plays an important role in quantifying the risks from flooding.
The companies make use of this data in their business planning
on a regular basis. We would expect the Environment Agency to
continue in its role as a key body understanding and quantifying
flood risks, and understanding the impacts of climate change on
those risks. The resources necessary to fulfil this role should
be made available. Our experience from assessing business cases
shows that pluvial (surface water) flood risks in particular are
not well understood; we would expect the Environment Agency to
play a central role in developing understanding in this area.
25. The resources provided by UKCIP have
contributed towards a greater understanding of the issues within
the water and sewerage sectors. We will continue to work closely
with UKCIP on developing both evidence and policy in order to
fully exploit the additional information and complexity available
in the UKCP09 scenarios.
26. The effectiveness of communication
within and between departments ...: We recognise the importance
of working in partnership with government departments where we
share responsibility for adapting to climate change; particularly
Defra. We are therefore surprised that the sectors are not mentioned
either by the NAO, or apparently by Defra, in the review as a
key body for working in partnership on water-related climate change
risks. We expect delivery of Defra's objectives in the face of
climate change will require working closely with us and water
and sewerage companies.
27. We have a clear understanding of our
role in the sectors to promote and assess adaptation to climate
change and as we set out above. We believe we have made significant
progress in this area. We are keen to develop our role in the
context of the government's whole ACC programme; for example engaging
with government departments and regulators to promote and assess
effective climate change adaptation actions and policy.
8 October 2009
http://www.ofwat.gov.uk/sustainability/climatechange/res_ofw_090915adaptpow.pdf
40 Our approach to sustainability is set out in the
document "water today-water tomorrow" available at:
http://www.ofwat.gov.uk/sustainability/sustainabledev/pap_pos_watertoday.pdf Back
41
Our Climate Change Policy statement is available on our website:
http://www.ofwat.gov.uk/sustainability/climatechange/pap_pos_climatechange.pdf Back
42
Our response to the consultation on use of the reporting powers
is available on our website: Back
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