The Asset Investment Cliff – don’t go too close to the edge

This article was first published in The Water Report

We are facing a major challenge to our national infrastructure, including our water and waste services. In the post war years, significant investment was made to serve a booming population and their developing needs. The materials used offered long asset lives and high levels of performance at a relatively low cost, especially when compared to current prices.

Unfortunately for later generations, the speed of this investment meant that we sowed the seeds of bulk obsolescence, which we will shortly have to deal with. Recent decades have not required the same level of expenditure in these areas and, combined with underlying deterioration of these assets, means we will need to invest large sums or find alternatives in a short space of time.

Without strategic thinking, intelligent use of the data available and working collaboratively to draw upon a variety of expertise, we face either a significant drop off in the performance of our water infrastructure, or worse still, costly interruptions to the services reliant upon these assets.

Asset Investment Cliffs – a way forward?

Spotting the cliffs:

A significant proportion of large civil infrastructure within the water sector will be exceeding asset design lives within the next 15-20 years. Many companies are operating assets that are over a century old such as service reservoirs, which have a typical asset life of 120 years. Most treatment works, contain assets such as sand filters, rapid gravity filters, or UV filtration, which were all technologies deployed at a similar time across the industry, causing another potential investment cliff on the horizon.

More recently, the automatic meter reading (AMR) meters that have been put in place throughout many large water networks also present an obsolescence challenge, with battery lives all likely to expire within a similar time frame. The increased penetration of meters is a risk, given the range of communications technologies that are available. Systems such as LoRaWAN which provide meters with a wider IOT connectivity will one day become obsolete and may prove costly to update without a phased approach to renewal. Software-based obsolescence is also going to be an issue for many water companies. Small steps are being taken to move away from on-premise hosting to sustainable, longer term options, however many key systems have not had the level of investment required.

The challenge to water companies posed by bulk obsolescence is how to replace these critical assets and meet current and future performance targets, without significantly increasing current or future customer bills. More now than ever this is difficult, given the emphasis on ensuring inter-generational fairness and not adding pressure to people’s cost of living.

The historic approach to maintaining acceptable asset performance and service output has been to prolong asset life through increasing volumes of repair and inspection activities. To a point this has proved effective at solving the here and now problems, but in doing so it has simply delayed the bulk obsolescence issue. However, risk profiles on critical assets are now close to an (unacceptable) tipping point and companies will need to carefully use the opportunity of PR24 and Ofwat’s increasing focus on long term planning to justify major investment in their networks.

Scaling the cliffs:

Despite these challenges, there are some simple steps that can be taken to alleviate these issues.

Think strategically…

The first task in dealing with bulk obsolescence is to understand what components are contributing to the scale of the problem. Companies must look forward at regulatory drivers and societal trends and the likely investments required to meet these drivers. They should then merge this insight with asset deterioration modelling outputs to produce a realistic and informed picture of the distribution of investment required.

After evaluating the scale of the problem, companies must develop a robust, data and insight driven strategy that can meet the regulatory evidential bar. This strategy can take several paths:

• Continue with the current approach – the need and demand can sometimes be met without radically different interventions
• Manage resilience better – work to own fewer, more resilient assets with more reliable data that is kept dynamic
• Reconfigure the network – for fewer, more sophisticated assets, simplify network configurations where sensible.

These paths are straightforward to define, given the large amounts of asset information and knowledge of the current network operations we now possess. Of course there are improvements we can make to our systems and data to better inform the definition of these paths, but there’s always more information available than we may realise.

Financing large scale investment can be quite a challenge within regulatory periods. Business models such as Direct Procurement for Customers within the water industry, or the alternate functionality of OFGEM’s SPV model, present utilities with the opportunities to shift the cost of asset replacement onto the contractor. Data as a service or software as a service can also help to make investment less “lumpy”. Adaptive pathways prescribed by Ofwat’s new Long Term Delivery Strategy requirement will also be a key mechanism for smoothing the cost burden of significant investment by calling upon companies to actively consider modular investment. The selection of a suitable model, and the framework on which a contracting partner is selected needs to be carefully considered, based on many factors including risk appetite.

A final and critical component of thinking strategically involves assessing now what bulk obsolescence may be currently being created, for instance the large-scale digital infrastructure currently being deployed to provide greater control over water and wastewater networks. Unlike materials such as concrete civil structures, surfaces and pipework, digital infrastructure is likely to have a far shorter asset life, crucially in terms of hardware and software. Considering how quickly consumers are pushed from one system to another, and then scaling this at a business level, it is possible to start to get a picture of the scale of the problem.  The process of planning for the replacement of these assets must start now, to mitigate obsolescence in the coming decades.

Use the latest technology to provide insights…

Another important aspect to working through large scale asset replacement is to use existing assets more effectively. This can be achieved by innovative technologies which increase the visibility of our asset base. Within the water sector, smart networks are being deployed to great effect, through integration of sensors and actuators to enable real time monitoring and control. This allows companies to detect issues and be proactive in their investment approach, for instance giving greater oversight of zonal demand and fluctuations in pressure, which contribute to increased likelihood of bursts. According to Sensus, smart water networks are believed to have the potential to save $12.5 billion per year globally for utilities.  In the energy sector, the government estimates that smart technologies could save £10 billion per year by 2050[1]. Examples include smart metering, allowing operators to have a better understanding of current and future demand, configuring distribution more effectively and prioritising resources. The energy digitalisation strategy, which links to OFGEM’s own approach to digitisation, is seeking improve asset data capture and sharing. By visualising this data using the latest tools and techniques such as Tableau & Power BI, informed conversations can be had at all levels of an organisation to aid decision making. Composite pictures can show a single version of the truth which can otherwise be hard to obtain, with uncertainties clearly mapped. These technologies provide opportunities for asset owners to find efficiencies and drive returns for investors and customers if deployed correctly.

Work collaboratively across asset classes to share knowledge…

Innovative thinking will be required to help to reduce the scale of the asset investment cliff. This can be achieved in part by working within the constraints set by regulators to find opportunities to reconfigure existing assets into new operating models. Adaptive planning is a key constituent of this. Through longer term flexible planning, it is possible to prevent block obsolescence in the future. Throughout this process there is likely to be the need to show mitigation against excessive costs, but to be clear where it cannot be avoided. Asset owners need to understand different regulators and their drivers, to build better business cases. Where possible, that should involve quantifying impacts of investment through the six capitals approach and pursuing long term econometric modelling to prove the financial implications that can stand up to regulatory scrutiny. There is also a need for internal collaboration within the different areas of a large asset owning organisation to ensure that investment solution options consider both build and non-build solutions.

Conclusions: The view from the summit

The scale of the task cannot be understated and balancing this with keeping customers’ bills at sustainable levels will be of real concern to owners of large infrastructure within the water sector. It is also worth considering that along with the challenges associated with physical infrastructure, sector wide expertise will be lost as operators and engineers who have accumulated a deep understanding of their respective regions and sites retire. This skills gap must also be carefully addressed to ensure crucial insights are not lost.

The water industry is in a better position at present than ever before to prevent the aggregation of investment cliffs in the future. Some bulk obsolescence is inevitable - when a new technology such as smart metering opens up industry wide opportunities that cannot be ignored then it is likely to be deployed at scale. However, through the right integrated approaches it is possible to prepare for future replacement and share the cost.

The challenges in the coming decades will test the robustness of asset owners: to paraphrase Sir Edmund Hillary “It is not the cliff we conquer but ourselves”. Time will tell who can leverage these opportunities to best effect for their businesses and customers.