Demand management the 2004 periodic review of water prices

1. Demand management & the 2004 periodic review of water prices George Day Team Leader - Supply/Demand Balance 11 December 2002

2. Overview The supply/demand balance Water resource planning Demand management Metering Incentives Other initiatives

3. What is the supply/demand balance? Rooted in statutory duties to meet demands and connect new premises. High priority … Should reflect best mix of measures to comply with these duties, while maintaining levels of service ...

5. Looking forwards to 2004 Best practice has moved on better water resource plans economics of balancing supply & demand Also some developing areas … interaction with environmental programme headroom and risk climate change

6. Water resource plans Ofwat and the EA expect companies to produce integrated long-term water resource plans 25 year timeframe take all influences on water supply and demand into account based on best mix of demand management, water resource development and leakage control

7. Water resource plans More joined up approach … treat new (supply/demand) and replacement (low flow) water the same leakage (tripartite study) Better analysis better exposure of assumptions (e.g. through security of supply index) peak or critical periods risk and headroom?

8. The demand outlook Domestic demand creeping upwards lower household size affluence Over past decade offset by lower industrial demand and leakage reductions Regional pressures (SE England) Move to optional metering - legal limits on scope for demand management

9. Demand management:what we expect from companies Deliver leakage targets expect most to be based on company analysis of leakage economics Assess the role of demand management alongside other supply / demand measures more pro-active approach where supplies under pressure ‘economic’ level of activity

10. Metering plans Currently little targeted metering Likely to be more economic than reliance on optional metering Want companies to consider options available as part of their plans change of occupancy water scarce area status? Relevant where peak demand is driver?

11. Metering plans Companies should make business case for their metering strategy Internal versus external meters internal meters lower capital costs, but higher opex and less supply pipe leakage savings Allow for expected optional metering with ability to correct for forecasting errors either way

12. Statutory duty Water undertakers have a statutory duty to promote the efficient use of water by customers Expect a basic level of activity and information by all companies four criteria in judging compliance efficient pricing framework long-term education to sustain awareness economic level of activity directed to customers who will benefit

13. Demand management - incentives Where demand management is part of efficient water resource plan we will: allow capital & operating costs in price limits make allowance for the expected loss of revenues (if measured demand affected) We also assess companies’ customer literature for water efficiency messages forms part of overall performance assessment linked to a financial incentive

14. Demand management - incentives (2) Government proposals on competition for large customers could stimulate competition based on water efficiency advice Ofwat supports the EA’s water efficiency awards for research on the economics of promoting efficient use of water by households

15. Other initiatives UKWIR research on best practice in assessing costs and benefits of water efficiency activity Quadripartite co-operation DEFRA, EA, Water UK, Ofwat Government policy ‘Directing the Flow’ document

16. Summary Look at demand management in context of supply/demand balance Treat even-handedly in setting prices But recognise legal constraints encourage companies to consider all available options All companies should comply with their statutory duty