Ofwat set to create net-zero challenge funding pot for water companies

Pictured: Derwent Reservoir

The water regulator announced this week plans that it claims will “deliver better outcomes for customers and the environment” through its Price Review 2024. The Review sets out how water companies should price their services and the incentives they will receive between 2025 and 2030. It is currently at the proposal stage, with stakeholders asked to provide feedback by 7 September.

Alongside better consumer and community engagement and service, the proposed Review places a strong focus on environmental sustainability. Ofwat lists among its priorities improving efficiency and innovation; delivering enhanced environmental value and building in long-term resilience for the sector.

On climate, the Review proposes that the sector should set shared greenhouse gas emissions reduction targets. Several of England’s major water companies have already set out a shared 2030 net-zero carbon target for their operations, but Ofwat’s move would bring other firms along and may also prompt businesses to provide more information on their climate plans.

Shared targets are also proposed for biodiversity, improving water quality and reducing the impact of storm overflows.

On net-zero, Ofwat is proposing the creation of a new funding pot which water companies would need to compete for. All companies will get climate spending allowances, while the net-zero challenge pot will be additional.

The regulator sets out that funding from this pot would go to the most efficient companies, helping them to “go further, faster” to cut carbon emissions. This fund would also support nature-based solutions, as discussions evolve about how to account for their climate benefits and how to scale them as an investable asset class. Leaders, Ofwat states, “set the standard for the whole sector to adopt”.

The Review, in its current form, would mandate water companies to set 25-year strategies – including adaptation pathways – as well as five-year business plans. These plans must include all key environmental issues covered in the Review. Short-term business plans must also include a “substantial link” between executive pay and the delivery of commitments relating to customers, communities and the environment. Ofgem itself will offer rewards for outperformance in these fields but no penalties for underperformance – this is the approach it currently takes.

“We understand the urgency of the environment and climate change challenges and the pressure on people’s finances,” said Ofwat’s chief executive David Black.  “In the Price Review 2024, companies need to step up to meet these challenges by finding new and innovative ways of delivering reliable and resilient services.”

The consultation on the review will run for two months. The finalised version will be adopted at the end of 2024.