I am struck that there is so little focus on the opportunities that could arise from innovation in the water industry relative to what is being discussed in energy. At a recent investor conference, there appeared to be considerable interest in new initiatives that had an energy focus but far less on those suggesting new innovative approaches that could benefit either the water undertaker or its customers. Given that so much of our energy consumption goes to heating water for one purpose or another, such a skewed focus may be to the detriment of both the investor and the end water customer.
The introduction of retail competition has resulted in a much greater focus on meeting the needs of customers and tailoring a package of service appropriate to the individual user. The Section 29E provision, which allows the customer and its retailer to benefit from any initiative that reduces Scottish Water's costs, has not yet been triggered although several market participants are beginning to consider opportunities. In my view, there is a real opportunity for Scottish Water, as the wholesaler, to use the creativity of the retailers and their strengthened relationship with customers to identify opportunities to reduce costs.
Opportunities have been created by the introduction of the retail competition framework but it is now up to market participants to realise the potential. As industry regulator, we will stand ready to make whatever changes are required to ensure that the framework works in the best interests of customers and does not do detriment to Scottish Water’s core business.
Turning to the upstream activities of Scottish Water, our I-cubed initiative is targeted at removing or, at least, reducing regulatory barriers to innovation. This is why we will regulate on a cash, total expenditure basis rather than assess operating costs and capital expenditure separately. It also explains why we will focus on ex-post returns earned rather than setting an ex-ante cost of capital. We also stand ready to work with Scottish Water and its customers to ensure that NPV positive projects with an extended pay-back can be encouraged and appropriately rewarded.
Even a cursory review of some of the innovative approaches being adopted in other parts of Europe would suggest that there is considerable scope for value to be realised from what could be seen (wrongly it seems) as a staid, boring industry. Recovering minerals from sewage, capturing the heat differential between the effluent discharge and the ambient water course, and recycling sewage to create slow-release fertilisers are all examples of initiatives that may prove beneficial both to the water undertaker and to society more broadly.
The onus is on all of us to work together to realise the potential of the water industry.