Managing extreme weather risks in the regulatory framework

Managing extreme weather risks in the regulatory framework

A favourite topic of conversation for us all is the weather. Relatively mild though our climate is, our weather can be highly variable.

British weather extremes range across wind storms, heavy rainfall, floods, droughts, cold snaps, freeze-thaw events and heatwaves. And this is only increasing as climate change increases our risks of extreme weather substantially impacting our lives. This extreme weather can have substantial consequences for water and wastewater customers and companies. For example, Storm Arwen resulted in approximately 8,000 properties experiencing a supply interruption (Northumbrian Water, June 2022, “Northumbrian Water Storm Arwen representation”, Para. 53.).

Controlling the weather is clearly beyond what companies, customers or regulators can do. But companies can influence impacts through how they invest in resilience and respond to extreme events; customers can mitigate impacts to some extent through their behaviour; and regulators can shape their frameworks to provide the incentives for the best outcomes for customers and society as a whole.

In this report, together with Atkins, we review options on getting the right allocation for the risk associated with extreme weather for the most benefit to customers. Our review includes how other UK infrastructure, and the water sector in Australia, approaches this issue. We find that regulatory mechanisms which share the risk of extreme weather are common across other regulated infrastructure sectors.

We find that an option which combines an ex-post pass through of efficiently incurred costs with a temporary and limited suspension of the Outcome Delivery Incentives (ODI) regime in the event of an extreme weather event would be likely to provide the best outcomes for customers.

Please click here to read the full report.

For further information please contact or call +44 (0) 20 7031 7000.