The upcoming regulatory period from 2025 to 2030 will pose unprecedented challenges regarding the expansion and modernization of the UK’s water networks and infrastructure. A significant hurdle will be securing the skilled workforce and supply chain capacity necessary to execute planned large-scale infrastructure projects.
Labour may encourage Ofwat to adopt a stricter stance on dividends. Although Ofwat may not have the authority to directly impose dividend caps, they could influence how license conditions are interpreted, potentially granting the regulator greater leeway to affect dividend policies.
Who will be the winners in the new look water sector?
Consultants are likely to emerge as the ‘biggest winners’ in this scenario. The strategy involves breaking the network into smaller areas to gain a better understanding of operational conditions, which will enable more effective management of issues like leakage. This approach emphasizes the use of artificial intelligence, monitoring, and predictive maintenance across the networks, along with the installation of smart meters.
A substantial portion of the capital expenditure increase may be directed towards the digitization of the network and improvements in leakage control.
In the upcoming AMP8, we may witness a flattening of cash rewards for good performance or an asymmetric shift towards penalties for all companies. Currently, no companies are reaping net rewards from common Outcome Delivery Incentives (ODIs), and there is a noticeable transition from bespoke ODIs—which have historically driven additional revenue and returns—to common ODIs.
Water companies will need to adapt to more extreme weather patterns, increased flood risks, and stricter environmental standards. This adaptation will require significant investments in areas such as water storage, treatment capabilities, and measures to reduce storm overflows.
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What about Thames Water?
“The resolution of Thames Water’s debt issues is likely to be a long-term endeavor that extends beyond the PR24 period,” says Louis Knight, an analyst with Third Bridge, an independent research house. “A gradual approach to reducing debt levels over multiple price review periods, including PR24, PR29, and possibly PR34, may be essential.”
Thames Water [LON:94NA] can consider various options to address its debt beyond the Strategic Asset Review (SAR). These include potentially delaying major capital programs or selling certain assets, such as the Guildford region network, to generate cash and reduce debt.
The company might also explore the use of separate capital vehicles for significant projects, akin to the Thames Tideway Tunnel, to avoid further increasing its debt burden.
Thames Water’s owners have indicated a willingness to fund £750 million; however, Ofwat’s chair has suggested that a minimum of £1 billion is required before 2025, resulting in a £250 million shortfall. “While this funding is seen as a positive initial step, it is likely insufficient,” says Knight at Third Bridge.
It is anticipated that a deal will be reached between Ofwat and Thames Water rather than resorting to special measures, though the exact terms and timing remain uncertain. Ofwat must balance the need for necessary investment with ensuring that customers are not paying twice for previous underinvestment. If Thames Water is dissatisfied with Ofwat’s determination, they have the option to challenge it through the Competition and Markets Authority (CMA), though they have not utilized this option in the past.
