Post date
22 May 2025 (original LinkedIn date)
Original
LinkedIn version· 1,806 words
I make no claims to expertise on the topics of the UK water sector, the RAB framework and the current regulatory environment, but I’ve been scratching my head as to why progress, in the face of rapidly mounting adaptation and resilience challenges, has been so slow. First off, it strikes me that the UK water sector faces a pivotal moment, but will that be enough to drive action?
With Ofwat’s PR24 (2025–2030) proposing an unprecedented £88 billion in investments (of which I believe c.£10bn is dedicated towards ‘environmental projects’), not to mention escalating public frustration over 464,000 sewage spills in 2023, and mounting pressure to achieve net zero by 2030, water companies obviously have to navigate a complex landscape of financial, environmental, and societal demands.
The Regulated Asset Base (RAB) system, overseen by Ofwat, seems to have been designed to ensure financial stability for capital-intensive grey infrastructure (pipes, treatment plants, and reservoirs) by allowing companies to recover costs and earn returns (and pile on debt?). Yet, green infrastructure, such as wetlands, sustainable urban drainage systems (SuDS), and catchment management, seems to this uneducated observer to offer transformative potential for sustainability, cost efficiency, and public trust.
The challenge therefore must lie in aligning regulatory incentives to balance these approaches. Here, I propose three reforms to the RAB system to integrate green infrastructure effectively, drawing on industry trends and real-world examples, and issue a call to action for collaborative change. I recognise that there won’t be an overnite transformation, but maybe we can accelerate the journey?
1. Valuing green assets for RAB inclusion
Grey infrastructure, like Thames Water’s £4.2 billion Tideway Tunnel, dominates the RAB due to its high capital costs and long asset lives (30–100 years), ensuring predictable returns through Ofwat’s Weighted Average Cost of Capital (WACC) framework. In contrast, green infrastructure, such as wetlands creation or reforestation, delivers benefits like carbon sequestration, flood mitigation, and biodiversity enhancement, which are harder to quantify. This valuation gap appears to discourage investment in green solutions, despite their alignment with the Environment Act 2021 and public demand for sustainability, evident in social media posts rightly decrying sewage pollution.
Proposed reform: Ofwat could, and I believe should, help to develop standardised methodologies to monetise green infrastructure’s benefits for RAB inclusion. For instance:
Carbon savings: value carbon sequestration using UK Emissions Trading Scheme prices (~£80/tonne CO2 in 2025).
Flood mitigation: estimate avoided costs from flood damage (£/hectare for SuDS reducing runoff).
Biodiversity: use Biodiversity Net Gain (BNG) units, mandated by the Environment Act, to assign monetary value.
Water quality: quantify savings from reduced treatment costs, as seen in United Utilities’ Sustainable Catchment Management Programme (SCaMP), which lowers chemical use through moorland restoration.
Implementation: Ofwat could collaborate with the Environment Agency, Natural England, and water companies to establish these metrics, building on pilots like Wessex Water’s Somerset Catchment Market, where farmers and landowners deliver water quality improvements. Green assets meeting these standards would be added to the RAB with tailored depreciation schedules (e.g., 20–50 years for wetlands). The £2.7 billion Green Recovery program, which funded projects like storm overflow reduction, could provide grants to ease initial capital barriers.
Impact: For water companies, this reform unlocks returns on green investments, diversifying portfolios and reducing reliance on debt-heavy grey projects (e.g., Thames Water’s £18 billion debt in 2024). Regulators align with long-term policy goals, though they’ll need to build valuation expertise, but that is clearly within their wheelhouse. Consumers may see moderated bill increases if green infrastructure’s lower operational costs (OpEx) offset capital costs (CapEx), but transparency is key to justify RAB-driven bill hikes. Environmentally, this accelerates solutions that enhance river health and climate resilience, addressing public concerns about pollution.
Challenges and opportunities: Let’s be honest, quantifying non-financial benefits is complex and risks disputes during price reviews (e.g., PR24), otherwise we’d have already done it. However, leveraging existing frameworks like BNG and carbon pricing, and scaling successes like SCaMP, could position the sector as a sustainability leader, attracting sustainability-focused investors the world over.
2. Flexible incentives for long-term outcomes
My research digging tells me that Ofwat’s Outcome Delivery Incentives (ODIs) reward or penalise companies based on performance metrics like leakage or sewage spills within 5-year price control periods. This short-term focus appears to favour grey infrastructure, such as pipe upgrades, which deliver quick, measurable results, whereas green infrastructure, like SuDS or wetlands, often requires years to mature (wetlands may take 5–10 years to stabilise) risking ODI penalties if benefits aren’t immediate. This misalignment hinders investment in solutions critical for net zero and the 25 Year Environment Plan.
Proposed reform: Extend ODI timeframes to 10–15 years for environmental metrics, such as water quality improvements or biodiversity gains. Rolling assessments or interim milestones (e.g., wetland establishment by year 3, water quality improvement by year 8) could reward progress as projects mature. Ofwat could pilot this in PR24, building on the Green Recovery program’s success with companies like Severn Trent and South West Water.
Implementation: Ofwat would, of course, need to adjust its performance monitoring systems to track long-term outcomes, potentially using digital tools for real-time data collection (e.g., water quality sensors in catchments). Companies could propose long-term ODI metrics in PR24 business plans, aligning with catchment-level strategies like those trialed, seemingly successfully, by Yorkshire Water with SuDS.
Impact: Water companies would gain flexibility to invest in green infrastructure without short-term penalty risks, encouraging projects like reforestation or wetland restoration. Regulators can then align ODIs with long-term environmental goals, even though administrative costs may modestly rise. Consumers may face initial bill increases to fund green projects, but OpEx savings (e.g., reduced treatment costs) should stabilise costs over the longer term. Environmentally, this reform would drive progress on river health, carbon reduction, and flood resilience, addressing public anger over sewage spills.
Challenges and opportunities: Clearly long-term ODIs require robust data over extended periods, which will complicate oversight, but that needn’t be an insurmountable challenge. Highly leveraged companies like Thames Water may face cash flow challenges if rewards are deferred, and a separate solution might need to be found for them. However, this reform fosters innovation, as seen in Wessex Water’s catchment markets, and enhances public trust by prioritising sustainability.
3. Hybrid approaches for balanced solutions
It’s not realistic to expect a complete switch overnite. Grey infrastructure ensures immediate reliability (e.g., reducing leakage), while green infrastructure offers long-term sustainability and cost efficiencies. A hybrid approach that combines pipe upgrades with SuDS or treatment plants with wetlands could meet both regulatory targets and environmental goals, addressing the sector’s dual challenges of performance and public perception.
Proposed reform: Ofwat should therefore prioritise hybrid projects in PR24 business plans, offering RAB inclusion and grants for integrated grey-green solutions. Catchment-level planning, as trialed by Severn Trent’s tree planting alongside pipe upgrades, would optimise reasonable outcomes (and there’s good software out there to help with this). Ofwat’s £862 million draft funding for PR24 could support such initiatives, building on successes like Philadelphia’s Green City, Clean Waters programme.
Implementation: Companies could resubmit hybrid plans detailing how grey and green solutions complement each other (e.g., SuDS reducing runoff to support smaller pipes), and Ofwat could develop ODIs rewarding combined outcomes, such as reduced sewage spills (grey) and biodiversity gains (green). Public-private partnerships, as used in Philadelphia, could share costs and risks.
Impact: Water companies ought to benefit from more balanced portfolios, reducing debt risks (e.g., Thames Water’s 80%+ debt-to-RAB ratio) while meeting short- and long-term goals. Regulators could then streamline oversight by leveraging existing frameworks, though clear guidelines would still be needed. Consumers stand to gain from reliable services and sustainable outcomes, though bill impacts would require clear communication. Environmentally, hybrid approaches will enhance resilience against climate impacts like flooding.
Challenges and opportunities: Coordinating grey and green will require cross-disciplinary expertise, and scaling hybrids across large networks is undoubtedly complex. However, successes like Philadelphia’s program show scalability, and hybrids can attract diverse funding, including new investors, while rebuilding trust amid public criticism.
Drought
And what of today’s main focus, drought (despite a drop of rain last night)? To incentivize UK water companies to invest in green infrastructure for drought resilience within the Regulated Asset Base (RAB) system, it seems likely that we’ll need a standardised methodology that can quantify the benefits for RAB inclusion..
Proposed methodology: Here’s how we might quantify drought resilience benefits in monetary terms:
Water retention: measure water stored (m³/year) by wetlands or reforestation, valued against reservoir costs (~£1–2 million/mega-litre/day).
Treatment cost savings: calculate reduced chemical/energy use (e.g., 10–20% savings from United Utilities’ SCaMP), using market prices (~£0.20/kWh).
Demand reduction: assess water demand avoided via SuDS, valued against desalination costs (~£1.5–2.5 million/mega-litre/day).
Ecosystem resilience: monetise biodiversity gains using Biodiversity Net Gain units or similar (~£20,000–£50,000/unit).
Climate co-benefits: value carbon sequestration (~£80/tonne CO2) and heat reduction benefits.
Implementation: Ofwat could collaborate with the Environment Agency to develop metrics, using hydrological and economic data. Pilot projects (e.g., Wessex Water’s catchment markets) can test valuations, with Green Recovery funding (£2.7 billion) supporting CapEx. Long-term monitoring (10–15 years) would then be able to verify the benefits.
Impacts: Surely only positive? This would encourage green investment, reduces debt reliance (e.g., Thames Water’s £18 billion debt), and enhances climate resilience. Being pragmatic, let’s recognise that challenges will include data variability and regulatory complexity, but opportunities abound to leverage existing frameworks (e.g., BNG) and rebuild public trust.
Overall this methodology supports RAB reforms, balancing grey and green infrastructure for a sustainable water sector.
Call to action: let’s collaborate for a sustainable future
It’s be no means impossible that someone else will have thought about this more deeply and more effectively before - I welcome any feedback. But surely the UK water sector should act now to balance grey and green infrastructure. With PR24 shaping the next five years and public pressure intensifying, I urge water companies, Ofwat, policymakers, and environmental stakeholders to:
Co-develop valuation standards: partner to create robust metrics for green infrastructure’s benefits, ensuring RAB inclusion and investor confidence. Leverage BNG and carbon pricing to set a global standard.
Pilot flexible ODIs: let’s grasp the proverbial nettle and test 10–15-year ODI timeframes in PR24, sharing learnings to scale green solutions across catchments.
Scale hybrid projects: we can start by launching catchment-based pilots combining grey and green, using public-private partnerships to share costs and drive innovation.
Engage communities: in the current climate of disinformation, there’s never been a better time to transparently communicate the value of green investments to rebuild trust, addressing concerns about bills and sewage spills.
By embracing these reforms, the UK’s water sector can lead in sustainable infrastructure, delivering reliable services, resilient ecosystems, and a healthier planet. Join the conversation - tell me what I’ve missed out or gotten wrong!