The UK Environment Agency report on sewage pollution in May took the issue of UK water companies’ approach to sewage from bubbling under in recent years to boiling over.
This is not a new problem. UK water firms have faced criticism and financial penalties for their poor performance on pollution since 20151.
Firms in England and Wales have invested GBP 108 billion in infrastructure improvements since privatisation in 19892. This investment has reduced flooding in sewers, cut pipe leakage by a third and improved the condition of beaches.
But the combination of multiple factors – including some that are beyond the direct control of water companies – has increased the problem. These include ageing pipes, the use of the same pipes for both sewage and surface water, and higher rainfall.
Turning the tide: how can the sector move forward?
With UK water companies under scrutiny, several senior executives have decided not to take their annual bonuses. Various initiatives are in place to mitigate the issues:
Review by the Water Industry National Environment Programme ahead of water regulator Ofwat’s 2024 price review: this aims to ensure investments will deliver greater benefits for the environment and allows Ofwat to challenge business plans before pricing determinations.
New rules on dividends: in March 2023, Ofwat announced the ability to block the payment of dividends by water companies if they risk financial resilience or if they are not linked to environmental and customer performance.
Larger fines for illegal pollution are being implemented faster: fines have totalled GBP 141 million since 20153 with significantly higher amounts expected in the future4.
Formal performance and investment targets: the UK Government’s 2022 Storm Overflows Discharge Reduction Plan sets 2050 targets alongside a GBP 56 billion capital investment.
Specific storm overflow assessments: in February 2023, the UK Environment Secretary demanded assessments for every storm overflow from every UK water and sewerage company.
Significant investment will be required to address the scale and breadth of this challenge. For companies to finance this, Ofwat will need to ensure an appropriate return on regulated equity and allow for flexible action plans. But we anticipate that greater regulatory and investor pressure will ensure less pollution which – should extreme rainfall events increase – may otherwise rise.
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