Resilience and affordability of water services under different sectoral models

Vivid Economics, with advisory support from the Centre for Ecology and Hydrology, was engaged by Defra to examine how different models of competition and regulation could promote the government’s strategic goals for the water sector. Drawing on a range of international published evidence and expert interviewee views, the report finds that greater use of competition between providers can reduce bills, improve environmental outcomes, and reduce service risks. Distinct models of competition can be introduced in four areas:

  • Water resources, where independent central procurement could enhance both resilience and affordability through investment in water resource capacity and interconnection. This could unlock the large-scale new entry needed by 2030 to meet the challenges of climate change and population growth.
  • Major new schemes, where direct procurement can improve affordability through reduced financing costs, particularly if there is a sufficient deal pipeline to attract institutional investors. Licences have the advantage of retaining the confidence of investors, while allowing regulators flexibility to adapt to changing circumstances over long asset lives.
  • Catchment services, where there is consensus that models of competition could reduce the cost of ecological improvements and flood risk management in catchments, but there is an evidential gap on the most effective model for this. There are also conflicting views as to whether water companies should adopt a coordinating function in catchments or merely participate in markets for catchment services.
  • Bioresources, where a more liberalised form of competition could support innovation and cost reduction. Competition would be most effective in delivering an affordable service where regulation supported the integration of bioresources into the wider organic waste sector: this would facilitate the entry of existing players and reduce the risk of local market power in isolated areas.