There are few exercises more important for water companies and Ofwat than the setting of the price control. In July, we passed a key stage when Ofwat published its methodology consultation. One of the many elements to their proposals is the introduction of market mechanisms for sludge.
Since privatisation, sludge has been treated and disposed of by water and sewerage service providers (WASCs). Ofwat want these companies to maximise the value of sludge and ensure that the existing infrastructure for treatment is used efficiently. As an example, a WASC should not simply rush off to build new capacity; it should see if others have spare capacity.
What do Ofwat propose?
Each WASC must set out a long-term strategy, explaining how it will use market-based approaches to improve efficiency.
WASCs will be paid to deal with their sludge in a way that encourages them to reduce costs. They will earn additional income for treating other WASCs’ sludge. How this is shared with the WASCs’ local customers is a key issue. WASCs will have to show that they are exploring market options and that they are taking steps to encourage these outcomes. They will have to publish information about their sludge output. This is to enable others to see if there are commercial opportunities, eg by buying sludge – or working with WASCs.
There is no doubt that Ofwat will look compare the WASCs’ long term strategies, and as importantly, what they actually do when implementing the strategies.
Will it work?
Can sludge be dealt with more efficiently? The answer is plainly yes, because some WASCs have shown this can be done. As with any reform, the wider policy and commercial context is key, but there are some hurdles.
- Electricity from gas derived from sludge remains a real opportunity. Energy from ‘sludge gas’ is stable. This is valuable for the GB electricity network, but the plants are small in scale, and Ofgem reforms make small-scale plants less attractive.
- Green gas – injecting gas from sludge into the gas grid – is proven, but infrastructure is a long-term game. The ‘payback time’ and location of such investments needs to be carefully scrutinised. There are long-term unclear risks, eg will there be a switchover from gas to hydrogen?
- There are other potential opportunities, including linking sludge treatment to ‘other organic waste’. However, a hurdle is environmental law. Changes are needed, but Defra and Parliament has a large and growing Brexit task list. Changes may have to wait.
Ofwat have very sensibly steered clear of suggesting that any particular opportunity should be pursued. It will be interesting to see how these reforms have worked in ten years’ time. Technology is developing in exciting ways which suggests that the treatment of waste and sludge will look significantly different. Ofwat’s proposed reforms are a sensible and pragmatic way of ensuring that sludge benefits not only from the market, but also wider innovation.