Building on flood plains makes no sense

As every school child knows there is a very good reason why flood plains are called flood plains. So news that a new estate in Ruthin built on a flood plain – the Glasdir estate had flooded despite residents being told the chance of flooding was less than 1 in a thousand years is disturbing. The industry depends on trust, incidents like this put this reputation at risk and do harm to everyone in the industry.

An inquiry has been announced, real questions now need to be asked of the Welsh Development Authority who actively promoted building on the land, Denbeighshire County Council who gave planning permission, the Environment Agency who presumably agreed the risk was negligible and the builders Taylor Woodrow who apparently gave reassurances to homeowners. 

The obvious concern is that commercial pressures outweighed common sense. It is made all the worse in that this is a brand new housing estate with building work not yet finished. It suggests the lessons of Tewkesbury from 2007 have not been learnt.  How depressing!

Ofwat urged to act sustainably

Photo source: Thames Water

At the All Party Parliamentary Water Group House of Commons reception on Monday night it was fascinating to hear Ann McIntosh’s views on innovation in the water industry. Surprisingly she was highly critical of Ofwat and said she though Ofwat were jumping the gun in pushing for licence changes with the water companies.

It is clear that Ofwat’s request to change the license terms to promote retail competition is causing real concern. Water company share prices have dropped significantly over the last two weeks as investors take fright. Now 17 of the water companies have apparently rejected Ofwat’s license changes.

Water UK reported: “Companies have considered these proposals carefully. Companies want to maintain investor confidence and the low cost of financing that the sector enjoys, which keeps customers' bills as low as possible - an objective which is shared by the Government.

The majority of companies have been unable to accept Ofwat's proposals in their current form due to widespread concern within the industry about their potential impact on investor confidence”. 

Water demand to outstrip supply by 2030

Photo source: Thames Water

Fourty per cent of senior executives in the water industry across the world believe that by 2030 national water demand will outstrip supply. The results are part of a fascinating survey by the Economist Intelligence Unit sponsored by Oracle Utilities called “Water for All”.

The biggest barrier ahead is seen as wasteful consumer behaviour. Across much of the world water flows out of our taps at almost no cost to the consumer. As such it is not surprising that consumers, business and farmers have little incentive to curb usage.

Israel has been one of the most innovative countries in tackling water issues with almost 70% of wastewater recycled and world leading technology for irrigating crops, (farming is the biggest user of water in most countries). But most countries do not have such a severe water crisis or the strong political will to tackle the issue.

Encouraging consumers to use less water is very difficult apart from the obvious win of installing water meters. In many countries consumption of water per head is increasing as lifestyles change. Equally imposing a significant cost for water is also extremely difficult to achieve – just look at Northern Ireland.

There is no simple answer. The risk of drought and water pollution is increasing as the world becomes more urban and the impact of climate change continues to evolve. There is a lot that can be done from reducing leakage to making better use of recycled water. The technology exists, the problem is getting the financial incentives right to drive investment. With the current world economic recession stifling public sector investment this blog is pessimistic and believes the situation is likely to get worse before action is taken.

Cost of capital in water industry

Farmoor Reservoir photo courtesy of Thames Water

Will the draft water bill help to solve the key issues facing the UK water industry, like flooding, water abstraction and major projects like the Thames Tideway Tunnel?

The draft water bill is based on the premise that increasing competition in water is the answer. Yet as every householder knows competition in railways and especially the energy market has not worked as intended. Indeed some would argue it has made the situation worse. Now Ofwat is consulting on proposals to alter water company’s license to operate to start moving towards what is proposed in the draft water bill. This sounds arcane but these so called ‘section 13’ modifications has the potential to increase the cost of capital and hence raise water bills for everyone – the opposite of what is intended.

Why? The reason is uncertainty. Many of the water companies now have pension companies as their main investors. Pension companies do not like risk and need certainty in investment returns. The proposals by Ofwat increase the risk and take away the certainty. No one knows how Ofwat will use the enabling powers and discretion it is seeking in the future.

The concerns of investors have already forced the inclusion of this statement in the white paper: We do not want to take risks with a successful model given the challenges we face in building the resilience of the sector. The water and sewerage sector has proved attractive to investors looking for reliable low risk returns, with its stable regulatory system a key factor in building confidence”.

Dieter Helm has written an excellent critique of the draft water bill - its well worth reading. 

The cost of capital in the water industry is remarkably low and rivals that of governments – to put it at risk would be a major mistake.

Flood defences need intelligence

Picture source: BBC 

News that last week buildings along the sea front at Weston-super-Mare had flooded has caused huge embarrassment to the local council. Only earlier this year a £29m flood defence scheme was commissioned to end the history of flooding problems.

What went wrong? - someone forgot to close the flood defence gates! North Somerset Council claim there were no Environment Agency flood warnings so they did not think they needed to close the gates! As any Somerset school child will tell you, Weston super Mare has one of the highest tidal ranges in the world. It only needs a £1 set of tide tables to be able to predict exactly when the town might flood, years in advance. Rainfall is totally irrelevant when there is a 11 metre difference between high and low tide. But a combination of westerly wind and a spring tide means potential flooding.

When one has stopped laughing (although if it was your house flooded its not a laughing matter), there is a very serious point. Spending £29m on a capital solution is a complete waste of time if a 'robust' management solution to operating the flood defence system is not established. Too often the focus is on major capital when its actually some common sense and clear accountability for the problem that is needed. 

Perhaps some of the money spent on celebrating the opening of the flood defences would have been better spent on some tide tables and ensuring someone took ownership for making sure the gates were closed!

Thames Water prepares to compete

Photo courtesy Southern Water

Thames has won a license to start selling water across England and Wales. The move is in response to Defra allowing companies that use more than 5 MGl per year to buy their water from a third party. But will this really drive down costs for companies like Coke Cola or Tesco?

For a nationwide company to have just one supplier and a combined bill may help it understand where its using water and where savings are possible. But the cost of the water will not reduce significantly by competition. The water companies will still have to buy the water from an existing water company. It will be exactly the same water being supplied to a factory as is currently the case it is just the bill that will come from another supplier say Thames Water.

The problem is that the cost of water is dominated by the fixed costs of maintaining and investing in the infrastructure. Billing costs are relatively trivial. Look at what has happened in Scotland. When Business Stream the industrial retail arm was separated from Scottish Water, significant one off costs were incurred that Ofwat estimates will take over four years to pay back. Worse annual costs were also higher due to the complexity of the new systems and new IT costs. The net saving was only £4 million a year. This is less than 0.5% off water bills. Would you switch water suppliers for a saving of 0.5% off your bill?

In the view of this blog competition is an unnecessary distraction for the water companies. It would be better that they should focus on their core business and drive down their costs for 99% of the business not waste management time focussing on the roughly 1% represented by the cost of sales 

Flood or drought - who knows!

Photo source: BBC news

The wet summer raises the vital question. Is this a statistical anomaly and unlikely to be repeated for another 100 years or is it a sign of things to come?

The question is vital for the water industry. To date most of the thinking about the impact of climate change has assumed that the UK will have generally drier summers especially in the South East. Already massive investment is underway to improve resilience and increase water supplies. Bristol Water are planning a new reservoir yet the current one is currently literally overflowing.

IF the impact of climate change is to move the gulf stream north and this year’s wet summer becomes the norm that has massive implications. Already the signs are that this year will see the worst bathing water results for at least 10 years. Major tourist beaches likely to fail the standard include Bude, Exmouth, Weston –super-Mare and Blackpool.

With the tougher bathing water standards being introduced in 2015 and the new requirement to display visible signs warning the public not to enter the water the potential impact on some of Britain’s major tourist beaches is disastrous. People will vote with their feet and go elsewhere. Massive investment will be needed to cope with the storm water and reduce flooding incidents.

The answer is that no one knows what is likely to happen to the weather. This is probably the worst position for the water companies as it means their plans will have to allow for the two possible extremes. If both dryer summers and wetter summers are realistic possible outcomes this will require investment to both improve water supplies and manage floods. The result will be much higher water bills something none wants.