EurEau

Revenue drains

Falling water consumption in many parts of Western Europe is impacting the business model of water suppliers. How do we deal with this drop in revenue?

Why is the demand for drinking water decreasing? Evidence shows that in Europe, but more acutely in Western Europe, drinking water consumption per capita is falling.

 

This is also the case in Belgium, where consumption per capita is reducing each year at an annual average rate of 1–1.5% (Figure 1). Even if demographic growth means that overall demand should be increasing, it is not enough to maintain the sales from year to year.

 

 

 

There are two main reasons for this decline in water consumption in Belgium.

  1. More efficient devices

The fall in demand is linked with more water efficient domestic appliances such as washing machines, dishwashers and toilets.

  1. Changes in economic activity

The shift in the economy from secondary to tertiary activities, reinforced by the recent global economic crises, means that industries in Western Europe, especially, are using less and less water.

 

The evolution of the price of water is often mentioned as having a high potential impact on water consumption. While it is true that the overall price of drinking water is increasing in most countries, there is no evidence that the overall price increase per cubic metre explains the fall in demand, as price elasticity for water is usually very low. Water stress across Europe Generally, Europe has adequate water resources, although significant differences exist between regions. Indeed, if we look at the state of water resources in Western Europe, only 7.1% of groundwater bodies are of poor quantitative status.

Nonetheless, water scarcity and drought are increasingly frequent and widespread phenomena, with demand for water sometimes exceeding resources. Water stress occurs when the demand for water exceeds the available amount during a certain period or when poor quality restricts its use. Water stress causes deterioration of freshwater resources in terms of quantity (aquifer over-exploitation, dry rivers, etc).

The recent update of the indicator for water stress (Water Exploitation Index Plus, or WEI+), published by the European Environment Agency, shows that, at river basin level, the highest stress levels are found in the Mediterranean region during spring and summer.

For the rest of the year this region, and the rest of the EU generally, uses less than 10% of the annual renewable amount of water in the catchment areas of its river basins. If we take a deeper look at these figures, we can see that agriculture is by far the greatest user of water and, therefore, largely responsible for high water stress in the Mediterranean region. Abstraction by agriculture also explains the inter-seasonal variability of this index. As shown by these figures, public water supply does not impact heavily on the quantitative status of water bodies.

 

 

Impacts of lower water consumption

In many countries that apply the full Cost-Recovery Principle – among them Belgium – water sales are the only way to recover costs and to gather funds in order to invest in infrastructure. Water pricing schemes usually tend to incorporate a high variable part. This is to incentivise water savings as stipulated by European directives. These pricing schemes are contrary to the cost structure of water services. Indeed, about 80% of the cost of service provision is related to infrastructure and services and, therefore, only about 20% of the total cost is related to the quantity of water delivered.

As water consumption declines, so does the income of water suppliers, while costs do not reduce accordingly. To compensate for this, operators have three solutions:

~ Increase the price of water.

~ Reduce the amount invested in infrastructure.

~ Or a combination of both.

The first solution is not popular among users and often operators are not free to set water prices as a lot of countries have economic regulations regarding the price of water. Added to this, consumers are very critical about price increases. Water operators must explain clearly why these increases happen, especially when the product and the service remain unchanged.

The second solution is not sustainable as it creates a hidden debt for future generations. The lack of investment in the public network has a negative impact on the economy due to jobs not being created and missed economic growth. It can also be counterproductive to water saving efforts because this underinvestment can result in more leakages and/or a deteriorated service.

Water service providers need a long term vision on their investment needs. Water pipes or sewers usually last for several decades and utilities tend to strive for a 1% annual renewal rate.

When faced with reduced revenues and increasing costs, water operators tend to opt for the third solution, i.e. combining both approaches by limiting price increases and reducing investment. This has two consequences: a higher price for today and higher investment costs in the future.

But the main problem of increasing water bills is that more consumers have difficulty in paying them. This is particularly the case in southern Belgium where the difficulty in paying for water is, in the long term, directly proportional to the mean price of water (Figure 2). The latter, as previously demonstrated, being negatively correlated with the consumption level.

 

 

Affordability can then be hampered by this consumption decrease, leading to less efficient water services. Indeed, more payment difficulties mean more costs for operators, and more costs also put a stress on the price of water that must then be increased in turn in order to balance the budget.

As the price increases, affordability is lowered, giving birth to a vicious circle, reducing the efficiency of water services and again affordability, especially for households.

 

 

Mitigating the negative consequences of reducing water consumption

Operators, aware of these problems and of the fact that this decline will probably go on for many years, try to mitigate the consequences of the drop in consumption. One of the solutions is to make all policymakers aware of these consequences, which are not usually well known by them, though it is a major preoccupation of water utilities.

Another measure that can be taken is to adopt a pricing scheme which has a larger fixed component, as is the case, for instance, in Switzerland, making it more in line with the cost structure of water and waste water services. The counterpart of this is that the volumetric price of water will be less dependent on the level of consumption, therefore reducing the negative impact of the drop in demand on water prices.

Regarding affordability issues, water operators have implemented various systems in order to address the problems that can be encountered for a small part of the population, such as solidarity funds, discounts for some categories of the population or reduced prices for a quantity of cubic metres.

Consumers may be more open to price changes if they are included in the decision, through, for example, having consumers on water management boards. Consumers are also included in economic regulatory bodies or advisory councils.

 

 

Conclusions

Generally, water consumption reduction is a good thing when it comes to saving energy and making the best use of our scarce water resources. However, we, like other EurEau members, would like to draw attention to the imperative need for a careful analysis of economic and social impacts and its potential effect on the sustainability of the level of services.

It is clear that water service providers have to adjust their business and pricing models. Consumers must be included in the decision-making process. Belgian, as well as other European, operators are in favour of a pricing scheme that has a higher fixed price component. This can ensure the long term planning of investments while reducing the risk of lacking the necessary funds to reach this goal.

Finally, water saving measures should be applied according to the local conditions and take into account the availability of water as well as considering a holistic approach, including all water users.

 

By Cédric Prevedello, Scientific Advisor, Aquawal on behalf of Belgaqua

 

Read more in Water Matters.

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