Competition in the Water Sector: Financing the Fourth Generation of Water Infrastructure

Originally published on the Alliance for Water Efficiency Financing Sustainable Water Blog (19/10/15)

What if your building, home or office, was also a water company that could enable innovative decentralized water management approaches? In the UK and Australia, changes to the water competition regime are enabling new companies to provide water services at an individual building scale, for neighborhoods and towns or as strategic new supplies available for existing water companies. This post explains the approaches behind these at the building and neighborhood scale and outlines two case studies.

A fourth generation of water infrastructure has been identified by the Institute for Sustainable Futures Sydney as an emerging, efficient, decentralized, integrated and fit-for-purpose approach (Figure below). We have seen increasing costs from centralized options, including desalination and other drought resilient measures, that can no longer be afforded by utilities and local government in a US context or passed on to customers in an Australian and UK context. Enabling competition in water service provision is one model that can finance this fourth sector of water infrastructure.

Figure: Four generations of water infrastructure (White and Turner, 2014)

Competition explained

In a previous post, I outlined retail competition as the customer-facing services that can help improve water efficiency. Upstream competition (in the economic, not catchment or watershed sense) includes sourcing and developing water resources for public supply, water and sewerage treatment services, or managing a network to transport water and wastewater (see orange arrows in figure below).

Figure: Overview of the value chain and difference between upstream and retail competition

Examples of competition could include, but aren’t limited to:

●     A new supplier of water and wastewater for a property development using recycled water or a new source of water

●     A wastewater recycling operator who provides a source of water for a new factory, which could include “mining” and treating water from an existing sewer system

●     A local authority that harvests stormwater through sustainable drainage systems/ green infrastructure and provides this as a source of water to an existing water supplier

●     An innovative demand management company that reduces commercial or domestic demand for water and sells this to a utility as a “source” of water

An analogy from the energy sector could be the selling of renewable energy into the grid. For example a new wind farm could be built by a private developer and the existing energy utility would buy from this. Or a new factory could purchase energy from this wind farm directly to augment its power supply. The situation for water can be more complicated due to the different levels of water quality matched against different end water uses.

Case Study: Central Park Sydney

This innovative new development is served by Central Park Water, servicing 4,000 residents and 15,000 workers and visitors daily. The world’s largest membrane bioreactor system, with ultraviolet and reverse osmosis treatment in the basement of the building, provides water to 50-70% of non-potable uses including toilet flushing, washing machine use and garden/green wall irrigation.

Figure: Central Park Sydney showing green walls (Photo: Hans Veneman, Creative Commons, Flickr)

Water sources include (see interactive graphic):

●     Rainwater from roofs

●     Storm water from impermeable surfaces/planter box drainage

●     Groundwater from basement drainage systems

●     Sewage from an adjacent public sewer

●     Sewage from all buildings within the Central Park community

●     Drinking water from the public water main

Wider benefits stated by Central Park Water include lower infrastructure charges for developers, quicker land release speeds for development and lower bills for customers. Central Park Water also supply recycled water to surrounding buildings, including the Institute for Sustainable Technology.

A range of similar schemes are developing in New South Wales, including an additional eight communities and more than 25,000 dwellings. As of April 2015, the economic regulator IPART reported 28 current licences under the Water Industry Competition Act 2006.

Case Study: Inset appointments UK

Through the process of inset appointments, Albion Water was one of the first companies in the UK to provide an alternative water service to a new development. At Knowle Village, they supplied the wastewater and sustainable drainage infrastructure to 750 residential homes with a saving of £2m for the developer and reduced customer tariffs compared with the existing monopoly water supplier.

After six years, research into wetland wastewater treatment with Cranfield University has identified a wider range of benefits, including improved water quality and biodiversity outcomes along with improved monitoring of activities to reduce energy use and managing flood risk during storm events. As of August 2015, there are 5 small water and sewerage companies, including Albion Water, providing these inset schemes in the UK.

Learning from case studies and questions for competition

The case studies above have been enabled by competition regimes. These require innovation in the ways we see customers and move away from traditional centralized water utility regimes. The case studies also link with transitions towards resilience by providing semi-autonomous areas that are more resilient themselves and reduce the impact of new development on existing centralized systems. The UK Water Efficiency Network (WATEF) is currently considering these issues through its service innovation technical committee, which I chair. Further innovation could include companies providing water efficiency retrofits of existing areas with guaranteed water savings similar to water neutrality approaches.

Competition isn’t the only option. An alternative community model is taking shape in the South West of England. This is called Rain Share and involves connecting those with excess water, including roof runoff, with those who need water. The first example of this will be between householders and an adjacent allotment for growing vegetables. In the UK, innovative approaches on water reuse have been implemented by water companies in the North West Cambridge development and at the London Olympic Park. However, both schemes required innovative thinking from water companies but also clear partnerships with the developer, the University for Cambridge and the Olympic Development Authority in London.

Competition may provide a way forward for development of innovative water supply options. This has been applied within the privatized UK context, as well as the public utilities in Australia. Some questions that arise are:

●     Will upstream competition be successful in the UK and Australia in the face of long-term maintenance and operation requirements?

●     How can we consider upstream competition and nested semi-autonomous water supplies within wider planning to ensure optimal economic, social and environmental outcomes?

●     Will community based approaches or those led by more institutional developers (e.g. universities or legacy sites) provide the same level of innovation as new private water companies?

●     Can existing monopoly water service companies provide similar innovations through partnership working and funding approaches?

Notes and further information:

●     The Water Industry Act 1991 in England enables customers using over 50 million litres of water per year to be supplied by a new water service company or gain access to wholesale prices form the current provider in the area. The Water Act 2014 opens this up to enable the supply of water to an existing water utility by an entity or person other than a water utility.

●     The Water Industry Competition Act 2006 in New South Wales sets out similar regions for this state in Australia. The act provides for licensing third party providers of water services, access for these third parties to existing infrastructure and enables the regulator IPART to arbitrate disputes in this area.