Uncovering PR24’s Hidden Costs: Impact on Businesses

Hello, Champions of Net Zero!

As we navigate the evolving regulatory landscape marked by the PR24 price review, it is crucial for businesses to grasp that the implications of these changes are likely to be much more significant than the headline figures suggest. At Waterscan, we’ve dedicated the past month to meticulously analysing the PR24 final determination (FD) to better comprehend how these changes will impact our clients, especially those in the self-supply sector and other large users.

While the average percentage increase—such as the reported 36% rise in household bills over the next five years—captures attention, it offers a misleading representation of the true financial strain on large businesses. These figures may initially appear manageable, yet they obscure the harsh reality that businesses will face, especially in the first year when price hikes will be markedly steeper than the overall average indicates.

Front-Loading and Inflation: The Unseen Costs

The foremost concern for businesses to acknowledge is the concept of front-loading price increases. Ofwat’s documentation highlights an average 36% increase spread over five years; however, this statistic glosses over the critical fact that the first year alone is projected to witness an average price surge of 20%. Furthermore, these quoted figures do not account for inflation, which exacerbates the real cost burden. In practice, businesses may confront increases of 50% or more, contingent on their consumption levels and tariff structures.

In some instances, we have observed that the cumulative impact of inflation could elevate the overall increase to as much as 53%. For certain businesses, particularly those situated in high-cost regions, price hikes could escalate to an alarming 100% once all factors are considered. The financial pressure resulting from these increases cannot be overstated.

Neil Pendle, CEO of Waterscan, articulates this concern succinctly: “The headline numbers provided by Ofwat simply do not reflect the true financial burden that businesses will face. The price rises are more front-loaded than most realise, and the lack of clarity surrounding inflation and tariff changes will hit businesses hard. Delaying decisions, such as retendering water contracts, could cost companies hundreds of thousands in unanticipated additional costs.”

The Disconnect Between Real and Reported Price Increases

Whereas the PR24 documents centre primarily on average increases in household bills, the reality for businesses diverges sharply. Water companies have implemented tariff changes across varying consumption levels, meaning that large users will endure price hikes that far exceed the average 36% increase reported by Ofwat.

For example, in certain regions, businesses could witness tariff increases ranging from 40% to 54% for water supply and waste costs. This is not merely an incremental rise; it represents a substantial cost shift, with some enterprises potentially facing bills that nearly double. The changes in pricing structures are not limited to the immediate increases. Many water companies are transitioning away from the falling block tariff system, which historically benefitted high-consumption businesses. This shift will disproportionately impact larger users, compounding the already steep price rises, signalling an industry trend that has been developing for years and is now reaching its tipping point.

The Real Cost of Delaying Retendering

One of the most pressing issues we are witnessing is that numerous businesses are postponing the retendering of their water contracts in response to PR24. Regrettably, this delay can prove to be exceedingly costly. As tariffs increase, businesses that have not already retendered their contracts might find themselves ensnared in unfavourable agreements that reflect outdated pricing models.

With price increases front-loaded, companies that hesitate to act will face inflated costs that could have been mitigated. This delay could result in businesses incurring hundreds of thousands more than if they had proactively renegotiated or retendered their contracts ahead of the anticipated price hikes. The financial impact will be immediate, and the longer businesses wait, the more they stand to lose.

The Urgency for Transparency and Action

What businesses require now is transparency and clarity. At Waterscan, we are committed to equipping our customers with the most accurate information possible, enabling them to make informed decisions regarding the management of these price increases. The lack of clear communication from Ofwat and the water companies concerning tariff changes, inflation adjustments, and price front-loading only serves to complicate matters further.

This moment is critical for businesses to take action. Understanding the full ramifications of PR24 is essential for ensuring effective cost management and avoiding the financial pitfalls emerging from these regulatory changes.

A Call to Action for Businesses

We strongly encourage businesses to act now to comprehend how PR24 will influence their water costs. Delaying retendering or contract renegotiations could lead to significant financial detriment. Instead, businesses should seize the current opportunity to renegotiate contracts, explore alternative water sources, and implement more efficient water management practices.

This situation presents an opportunity for businesses to think beyond the immediate price increases and embrace innovation in water management. By adopting smarter water solutions, businesses can alleviate the impact of these price hikes and cultivate resilience for the future.

As Neil Pendle concludes: “The business fundamentals around water efficiency have materially changed. Investing in innovative water management now will not only help companies reduce their exposure to rising costs but also provide opportunities for long-term sustainability and growth.”

Conclusion

The PR24 price increases will have a far more significant impact on businesses than many are prepared for. The actual cost of these changes will be most acutely felt by those who exhibit a lack of urgency, particularly regarding retendering and adjusting water usage strategies. It is imperative for businesses to be proactive, transparent, and strategic in their response to these regulatory changes.

At Waterscan, we are here to assist businesses in navigating this complex landscape, ensuring they can manage rising costs while simultaneously driving innovation in water efficiency. The sooner businesses take action, the better positioned they will be to manage the implications of PR24 and thrive in a changing market.

For more insights and support, visit us at Waterscan.