Lawrence Gosden, CEO of Macquarie-owned Southern Water, told The Times last week the water utility is angling for a 55 percent increase in bills to pay for a five-year spending programme that is roughly four times larger than in any past regulatory period.
At the heart of Southern’s £7.8 billion ($9.7 billion; €8.9 billion) spending pitch is an environmental capex spend of £4.5 billion – what Gosden called “an environmental plan like nothing seen before” – to forcefully tackle the storm overflows and associated sewage discharges that have polluted the UK’s rivers and muddied the industry’s reputation.
“This is an investment to get ahead of the game and protect against the impact of climate change,” Gosden told the newspaper. “Ofwat will thoroughly test whether customers will support it, its cost and efficiency and whether it is needed in the way we say it is needed,” he added, putting the ball firmly in the UK regulator’s court, as it mulls a final determination on water firms’ spending plans in late 2024.
If it gets what it wants, then £4.5 billion of the £7.8 billion Southern plans to spend in the next five-year period will come from increased bills; £2.8 billion from debt raised in the market and about £500 million from forfeited dividends, The Times reported.
And here you have the template for a discussion that is going to play out across multiple sectors all over the world, particularly salient when it involves critical, public-facing infrastructure: who is going to pay for climate change adaptation, mitigation and resilience capex? And who gets to profit – and how much – from it?
Gosden’s take on those questions was representative of what we are expecting from most private operators of essential infrastructure – the user pays. Raising bills, Gosden told The Times, was the “natural process” if people wanted Southern to meet environmental standards. Part of that “natural process” includes the ability for private capital to earn a return on its investment too.
That is indeed how things have always been. But when it comes to climate change, the average citizen will probably count herself/himself among those who contributed the least to the problem they are now being asked to pay for. Conversely, they are likely to lump private infrastructure operators among those who have contributed the most – and now stand to profit from the clean-up too.
Using data from the International Energy Agency, the Guardian recently estimated that in the US, UK, EU and Japan, the richest 10 percent of the population have carbon footprints about 15 times greater than the poorest 10 percent. In all cases, it said, the emissions of the top 10 percent are as high as those of at least the bottom 50 percent.
When you look at it this way, environmental capex has the potential to turn into emotional capex, upending relatively straightforward, age-old costing discussions. That, in turn, may lead to some heated discussions between all stakeholders. And yet, it is vital these fraught discussions are had, and acceptable compromises found.
Resilience capex, while crucial, is not at the flashy end of the energy transition. If trendy decarbonisation plays are rockstar stuff, resilience is the equivalent of cleaning up the morning after the party – decidedly unglamorous work that must, nonetheless, be done.
Like any other type of infrastructure spend, it is going to come at a time when government purses are constrained across the globe, meaning private capital will have to form part of the solution. Private capital that is used to earning a market return on its investments.
The question, then, is whether all parties will be able to let go of business as usual and approach this critical problem with the freshness and ingenuity it deserves. Given how entrenched all positions are, that is not looking like an easy ask.