This WAREG report studies the impact of the energy crisis on the water and waste-water utility sector and reviews measures undertaken by WAREG members to address the crisis.
The findings of the WAREG Report are based on data from 18 member regulators collected through a structured questionnaire as well as interviews with regulator representatives. These discussions sought to understand the extent to which the regulatory governance and the tariff framework among WAREG members are suitable to address the energy crisis.
Over the past two years, Europe has witnessed an unprecedented increase in the cost of energy supply. The increase in energy costs resulted from the combined effect of several factors occurring at the same time in what has been dubbed ‘the perfect storm’ in energy markets. These factors included low natural gas storage levels in Europe, post-Covid economic recovery, and – most notably – Russia seeking to gain political leverage on European countries by curtailing natural gas supplies and exposing customers to higher energy bills.
On the regulatory governance front, the responses suggest that most member regulators are able to review the allowed revenues of regulated water utilities and approve the tariffs required to recover the costs emerging from the crisis. Under most jurisdictions, the tariff framework includes automatic annual adjustments to recover differences between forecast and actual pass-through costs and to index costs to inflation. In the event that regular adjustments are insufficient to capture the effects which occur as a result of an extraordinary event – such as the energy crisis – then extraordinary tariff reviews can take place. This allows for an expedited policy response as, in nearly half of the cases, the tariffs resulting from the extraordinary reviews are effective within a period of 3 months.
Tariff reviews caused by the energy crisis have only taken place in 5 of the 18 members surveyed due to a number of reasons. In the majority of cases where reviews have not taken place, energy supply costs were fixed in long-term bilateral contracts before the effect of the crisis, and these contracts were still in force in 2022. In other cases, the energy supply costs are covered by regulated electricity tariffs similar to household customers or small businesses, and therefore, utilities are shielded from wholesale electricity market volatility. In some jurisdictions, the energy costs paid by water utilities have already risen, while corresponding tariff reviews have not yet taken place. Regulators in jurisdictions where the energy supply costs are linked to the spot market are receiving high numbers of extraordinary review applications, which is making the tariff-setting process an overwhelming regulatory challenge. Automated and streamlined tariff reviews are being put in place to handle the high number of tariff applications in an expedited manner, saving time and effort for both the regulator and the utility company.
Regulators are also considering the newly proposed EU directive on urban wastewater treatment that will impose the target of energy neutrality in the wastewater treatment sector by 2040. This requirement is also an opportunity to harvest some low-hanging fruits in the field of own electricity generation, especially for sludge-based biogas production and solar photovoltaic.
The experience of countries already affected by the crisis may provide an insight into what can be expected from other WAREG members. Policy predictability and the continued experience sharing among the WAREG member base will have critical importance in addressing the impact of the crisis. Detailed case studies in selected countries are analysed and provided in the report.
You can access the full report here
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