The new trilemma posed by PR24
Commenting on this, Greg highlights: "The sheer scale of investment represented by the plans, with spend on the enhancement programme more than tripling on the sewerage side between AMP7 and AMP8. That appears to be sustained, if not growing, through AMPs 9, 10 and beyond."
Liz explains: "If this magnitude of expenditure was to be approved by Ofwat it would pose questions about both the affordability and the deliverability of the plans. The level of investment and the increase in the cost of capital from PR19 means you’re seeing 25% to 30% increase in customer bills across the five years, and in some cases a really significant step change in just the first year of AMP8."
Adding: "We think there’s something like 32,000 new jobs that will be created across the sector and supply chain in delivering these plans, which means this has to be an attractive sector to work in. There are obvious challenges there given where public trust in water companies is."
Anthony goes on to explain: "As well as increasing bills, the plans will require substantial new investment. Tens of billions of new capital need to be injected into the sector and for that you need investor confidence. Some companies have suggested that Ofwat’s early view on the allowed rate of return is insufficient, but of course any further increase in the allowed cost of capital is going to increase customer bills all else equal, so it will be interesting to see how Ofwat balances that."
He adds: "The question for Ofwat is how you square the circle. You’ve got increases in bills that look very difficult to afford in the context of a cost of living crisis, you’ve got all the politics that go with an election year sitting in the background as well. But the need for the investment is clear. How do you deliver those improvements, tackle affordability and make the sector attractive for both investors and a future workforce? That’s a really challenging position to be in."
Liz concludes: "The plans present the industry with a new trilemma – affordability, financeability and deliverability."