Insights and News /

26 March 2018 3 min read

Tough from every angle – efficiency for the water industry

Adam Ball

Adam Ball
Manager | Energy, utilities and resources | London

As the water industry enters the closing two years of the regulatory period, companies are delivering against challenging savings targets, fighting to be fit for the start of the next period in 2020, and evaluating the scale of the efficiency challenge to 2025.

PR19, the upcoming price review, is expected to be tough from every angle:

  • A decade of no bill growth in real terms, with Ofwat setting expectations for an average saving per customer of between £15 and £25 a year from 2020 onwards in their December methodology.
  • Financing flexibility will be reduced, meaning that operational efficiency will have a bigger focus relative to financial outperformance than has been the case in the past.
  • Operational performance is being stretched (for example in leakage, where all companies are being asked to find 15% reductions), accompanied by further-reaching penalties and rewards.
  • Rising, or at least volatile, cost challenges including energy prices and the uncertain impact of Brexit on imports and labour.
  • Increased political and media opinion on value for money, the need for customer advocacy, and the distribution of dividends to investors which can be seen as lost opportunity to provide further customer savings.
Controlling spend within revenue allowances is far from a new theme, but delivering transformational efficiency and making it stick is a perennial challenge.

In our experience, companies that get it right recognise the importance of four levers:
  • Using the flexibility under totex and high-level service outcomes to deliver least whole life cost through optimised maintenance and asset replacement cycles. The challenges? Maintaining a whole life focus in the context of a five year cycle, and a regulatory totex focus against investor interest in capital growth and low running costs.
  • Business model change, whether sharpening accountabilities within the organisation, reviewing commercial partnerships or the balance of in-house and outsourced skills. Stability can be attractive (and successful), however new forward-looking models are needed over time to respond to external drivers. Two examples include: Building analytics capabilities and teams to target bad debt effectively, and commercially-focused system operation functions to reduce energy costs, driven by the need to offset rising energy prices.  
  • Empowering teams to identify and deliver improvements, providing them with tools and approaches to increase throughput, including a growing opportunity for process automation.
  • Delivery through the line, supporting teams to exert grip and control, tighten responsibilities and align incentives across functions.
It is important for companies to reflect on previous savings plans, understanding what has been tried before, which improvements have been sustained, and any barriers that may have existed. This exercise of looking back before moving forward also helps ensure that foundational elements are in place to enable transformational change.

There’s no doubt that the next few years will be tough from many angles for the water sector, and there are unlikely to be many undiscovered silver bullets. A commitment to embedding improvements, monitoring their impact, and being adaptive to change feels like the right approach.