Can the legal requirements to reduce leakage align with achieving genuine best value for customers?

It’s #TechnicalTuesday and #teamWRc Senior Consultant Justine Leadbetter is asking the important questions: Can the legal requirements to reduce leakage align with achieving genuine best value for customers?

Within the latest price review, we’ve seen a continuation of the move towards a best value methodology in selecting options for WRMP24 and away from least cost options. This has enabled alternative water source options to be chosen which in the past would have been considered too expensive or uneconomical. However, with the update of the Environment Improvement Plan (EIP) in February 2023, which now means it is a legal requirement that companies contribute to a 50% reduction in leakage across the UK industry, could this have implications when trying to select a plan that represents overall best value?

There is no doubt that the introduction of the requirements set out in the EIP are going to drive forwards leakage reductions and encourage innovation. Additionally, the reputational benefits this would bring the industry are much needed, especially given the socially acceptable level of leakage is without question lower than the sustainable economic level of leakage (represented by the lowest total cost of water “produced” and power/chemical costs and the cost of leakage management). However, if leakage reductions are driven down to the detriment of overall water resource management, with droughts becoming more common, will the reputational benefits of driving leakage below the sustainable economic level be outweighed? The media coverage of the drought and hosepipe bans across the UK last year indicates this is a significant possibility.

Could a point come when in terms of £/MLD (million litres per day), it will be more cost effective to invest in a traditionally too expensive new water source such as desalination rather than continuously drive leakage down? I think this has the potential to happen as we get closer to 2050. If this is the case and is knowingly ignored in order to comply with the EIP, the implications on water resources could be significant, as could the resultant impact on industry reputation.

The politics have shifted, but a meaningful debate with customers around what is truly best value is unfortunately not a mature one, despite the legally binding targets being set. Not all companies are starting from the same position - a 50% reduction for some may be vastly more challenging and expensive than for others. Leakage is always flagged as a high priority for customers, but unfortunately the lack of clarity around the long-term costs has led to a void where there needs to be open discussions around the costs associated with reducing leakage by 50%. Most of the focus on customer bills tends to be relating in the short term to the current/next AMP cycle, raising the questions whether customers appreciate the full scale and magnitude of what they are being signed up to?

It is clear that a change was needed to ensure that companies are driving things forward when it comes to managing leakage but also an environment is created to promote innovation in this area. However, do the potential unintended consequences in both water resources and reputation outweigh the potential benefits these new legal requirements bring? Or will the new legal requirements set out in the EIP prevent best value from being achieved? Only time will tell which way the swings will sway.

The role of a water company is in many ways a simple one – to find a balance between the needs of people, and the needs of the environment. We might expect to see some of the tensions really starting to emerge at PR24 when the costs associated with achieving legally binding targets start to emerge.