Operating environment
Our external environment
The largest of NWG’s businesses, NWL, operates in the north east and south east of England. The two areas have very different economic, demographic and water resource characteristics.
In the north east there has been a gradual fall in overall water demand in recent decades as a consequence of a reduction in industrial demand for water. This trend is expected to continue for at least the next five years with a faster decline in the short term due to the impact of the economic recession. The north east compares well to the rest of the country as far as water resources are concerned and our major regional rivers can all be supported by Kielder reservoir. This provides very high security of supply for our customers.
In contrast, NWL’s southern operating area is in a water scarce region that is forecast to experience further economic and population growth in the medium term. While this area has also seen a reduction in demand from heavy industry and the recession is likely to dampen housing growth in the near future, we have a current deficit, meaning supplies are not secure in a severe drought. Future growth will intensify the pressure on the balance between supply and demand. NWL is implementing long term plans to ensure the availability of water supplies to meet both current and future demand in a region where water resources are already constrained. The project to increase the capacity of Abberton reservoir near Colchester, which has recently obtained full planning approval, coupled with ongoing demand management measures, will secure supplies to the Essex area for the foreseeable future.
The current pressures within financial markets have been well documented and the credit crunch has resulted in reduced availability of certain types of finance (such as index linked bonds). It is highly unlikely there will be a return to the exceptionally low cost of debt experienced from late 2005 to early 2007. It is not clear how long current difficult market conditions will persist. With the financing we have already put in place, we are well sheltered from the current short term volatility in the debt markets as we will not need to raise any new debt before 2011.
Regulatory environment
As a monopoly supplier of an essential public service, the UK water industry operates within a demanding regulatory environment.
Essex is the driest county in the UK receiving on average less than 600mm of rain a year. In a dry year Essex already has a deficit of water supply to demand, making development of the Abberton scheme essential for the area. Demand for water is predicted to continue to rise, almost entirely due to a significant increase in population in the area.
This means there is a need for a long term and sustainable increase in water resources for the Essex area. We need to enlarge the existing reservoir at Abberton by 58 per cent as part of the Abberton Scheme to ensure that Essex has a secure water supply for future generations.
Planning permission has been granted to enlarge the reservoir, and build a new pumping station, a pipeline between Wormingford and the reservoir and a further pipeline between Kirtling Green and Wixoe as part of the scheme.
As well as providing a vital new water resource, the scheme has been designed to enhance the reservoir for both people and wildlife. The plan to enlarge the reservoir is the culmination of 15 years of investigation and consultation, during which over 250 locations for a new reservoir were considered.
Construction work is due to start at the reservoir in 2010 and it is expected that the enlarged reservoir will be fully operational by 2014.
