Ofwat (UK) has released its draft methodology for PR24, to inform the setting of water prices from 2025-30, in the context of clear delivery strategies for the next 25 years. There is a strong focus on longer term issues, including tackling climate change, cleaning up rivers, securing future water supplies and enhancing biodiversity.
Where a business plan is considered of sufficient quality, there are three possible ambition levels:
- Outstanding (30 basis point reward, 50:50 cost sharing)
- Standard (0-10 basis point reward, 50:50 cost sharing)
- Lacking Ambition (up to 30 basis point penalty, 55:45 cost sharing)
If a business plan is considered not to be of sufficient quality, then it is rated Inadequate, receiving a 30 basis point penalty and a 60:40 cost sharing ratio.
Some or the more interesting enhancements to the framework include:
- cross-sector research to reveal customers’ relative priorities and views on the outcomes that companies need to deliver on;
- the introduction of open challenge sessions to give customers and stakeholders a chance to share concerns and ask companies questions;
- setting stretching but achievable performance standards for the whole sector;
- greater rewards for companies that exceptionally pushes the boundaries on performance, provided that it shares the knowledge gained with the rest of the sector;
- extending innovation funding to support sector changing ideas and ways of working;
- make more use of direct procurement for customers for large infrastructure projects to deliver more efficient financing costs, with incentives for companies to manage the process well; and
- cutting the determination stage from three phases to two. Ofwat expect companies to provide quality and ambitious information up front in their business plans. It will penalise those that fall short, as well as rewarding those that show the most ambition.
We look forward to seeing how these changes drive better value for the UK’s water customers.
