Ofwat awards licence for Thames Tideway Tunnel

Posted: Monday 24th August 2015

Thames’s bills set to remain at the current level, before inflation, until 2020.

Ofwat has confirmed the award of a licence to Bazalgette Tunnel Limited to deliver the 25km Thames Tideway Tunnel to deal with the problem of the amount of untreated sewage going into the River Thames.

A new process for awarding the licence, proposed and delivered by Ofwat, has resulted in significant savings for customers, against previous estimates, with Thames Water’s bills expected to remain at the current level, before inflation, until at least 2020.

The project is to be paid for through Thames Water’s customers’ bills, but will be financed and delivered by Bazalgette Tunnel Limited, a new special purpose company separate from Thames Water.

Ofwat’s role is to protect customers by keeping the costs of the tunnel down, while making sure it is delivered efficiently and effectively. Following consultation, the licence has been finalised and it includes strong incentives in the form of clear rewards and penalties to complete the project within time, to quality and at minimum cost. If the project is completed under-budget, customers will benefit from the majority of those savings.

The award of the licence follows a new approach, working with Government and the Thames Tideway Tunnel project, to challenging costs in the sector. In particular market testing the financing costs has resulted in significant savings. This is the first time in the sector that the cost of capital - the minimum rate of return that lenders or investors require to support investment - has been set through a competitive process, which has revealed the efficient cost of managing this project.

The cost of capital for this project, just 2.497%, has resulted in a significant reduction in the cost to customers. Previous worst case forecasts had predicted the impact of the tunnel on average bills would be £70 to £80. In fact the impact is now expected to be much lower than this: around £20 to £25 per year by the mid-2020s. £7 of this is already included in current bills.

Cathryn Ross, Ofwat Chief Executive, said:

“I am delighted that the process for awarding the licence for the tunnel has resulted in a good result for customers. Once the tunnel had been confirmed as the best solution to the problem of sewage in the Thames, our job at Ofwat was to work with Government and the project to make sure that Thames Water’s customers got a fair deal. It is important they have trust and confidence that everything possible is being done to keep costs down and make sure it will be delivered on time with the benefit of a much cleaner Thames. There’s a long way to go, but our work has provided good foundations to make sure customers are protected.

“We have taken an innovative approach to challenging costs on this project and will see how we can use that method more widely in the sector. Going out for competition on the construction and financing costs of the tunnel has resulted in significant savings, and we are keen to explore whether this could work for other big projects in the water sector.”

Today’s announcement builds on cost savings resulting from Ofwat’s effective challenge of the project so far. Last year, as part of its 2014 price review, Ofwat’s challenge to Thames Water’s proposed preparatory costs for the tunnel resulted in savings of around £250m.

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