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Ofwat considers introducing abstraction incentives

Water companies could be given reputational and financial incentives to encourage them to reduce their levels of abstraction from certain sources, as Ofwat considers recommendations made by the Abstraction Incentive Mechanism (AIM) taskforce.

The taskforce has submitted proposals to the regulator to try and limit the impact abstraction has at environmentally sensitive sites by reducing the volume of water removed when river flows are low.

The taskforce states that the mechanism is “one potential tool” to reduce levels of abstraction and is cheaper than the alternative, which would be to change licence conditions.

“In essence AIM offers an opex contribution to helping address abstraction issues rather than a capex one, whilst at the same time offering opportunities for reputational advantage,” the recommendation says.

Changing the licence condition is seen as the more expensive route because the companies would then need to develop new water sources and construct new assets.

One of the main recommendations made is that AIM should apply to individual water sources and that the key conditions under which AIM would apply would need to defined for each source.

The reputational and ultimately financial benefits for a company would relate to the average daily abstraction at that source. If a company abstracts less than this baseline it would receive a reputational boost in AMP6, or a detraction if it uses more.

For the next AMP period, this could translate into a financial reward or penalty, with the difference from the baseline being multiplied by a unit rate.

The recommendations state the costs of the AIM are likely to be “a lot lower” than changing the licence, but the trade-off is that there it “no guarantee of a reduction in abstraction at all times”.

The incentives will encourage water companies to do what they can when they can within their licensed entitlements.

The proposal is a guide for Ofwat on how it could introduce a reputational incentive during AMP6 and then develop a financial incentive for AMP7.

The taskforce states that reputational incentives of AIM could be introduced by April next year.

This article first appeared on Utility Week.

Author: Mathew Beech,
Topic: Policy & Regulation
Tags: ofwat , abstraction

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