In May 2016 Ofwat consulted companies on its proposal to introduce demand risk in water resources as part of its plans for opening up the water resources market for PR19.
This would effectively mean that companies may lose their ability to recover the full cost of new water resource schemes if actual demand for water falls below that predicted when the water resource was proposed.
We asked an economic consultancy, Economic Insight, to investigate this proposal in depth, with a view to understanding the potential implications for companies and consumers.
The report considers what impact the proposal would have on the level of required returns that investors would seek in order to take on greater financing risk for new water resources.
It examines the rationale behind the proposal and questions why existing regulatory tools cannot achieve the same outcome. Finally, it considers whether the proposal will have unintended consequences on company and consumer behaviour.