Growth and P funded differently and designed to different PE
AMP8 capital delivery: why growth and phosphorus compliance are funded differently at a WRC
The fundamental distinction is that growth investment and environmental compliance investment have different regulatory drivers, different funding mechanisms and different tests of need under Ofwat's price control framework.
Although both investments may ultimately result in physical changes to the same Water Recycling Centre (WRC), they are not necessarily funded on the same basis, designed for the same population equivalent (PE), or delivered as one combined capital scheme.
From an Anglian Water director's perspective, the distinction is fundamentally about protecting customers, demonstrating efficient use of regulated expenditure, meeting statutory environmental obligations and ensuring that developers contribute appropriately towards the infrastructure required to accommodate growth.
I will explain this from a senior water-company director's perspective, rather than attribute views or statements to Darren Rice personally.
1. The two investments have different regulatory drivers
There are two separate investment drivers at work.
The need to accommodate additional wastewater
The driver is population and economic growth in the catchment. The water company must provide sufficient capacity to receive, convey and treat additional wastewater resulting from new connections.
The investment is justified by forecast growth, available treatment headroom, hydraulic capacity, process capacity and the need to maintain compliance as the catchment expands.
The need to improve the quality of the treated effluent
The driver is a new environmental obligation, typically arising from the Water Industry National Environment Programme (WINEP), developed through engagement with the Environment Agency, Defra and other environmental regulators.
The investment is required to meet a tighter environmental permit, for example a reduction in the total phosphorus concentration discharged to a receiving watercourse.
Both can be classified as enhancement expenditure under Ofwat's PR24 framework, but they are assessed separately.
This distinction is important. Ofwat does not simply allocate a pot of money to improve a WRC. It assesses the justification, efficient costs, outputs and regulatory need for each category of investment.
Ofwat's PR24 final determination explicitly identifies separate cost assessment models for:
Growth at sewage treatment works.
Phosphorus removal.
It also challenges companies where enhancement expenditure overlaps with base expenditure, has already been funded, or is not adequately justified.
2. How growth investment is funded
Growth investment is intended to provide the additional infrastructure capacity needed to accommodate new properties and connections.
For AMP8, Anglian Water's growth investment is particularly important because of the scale of planned housing and economic development across the East of England.
The regulatory arrangements include:
Ofwat enhancement allowances
At PR24, Ofwat assessed growth at sewage treatment works separately from other enhancement expenditure. The assessment considers the costs of increasing treatment capacity to accommodate population equivalent growth.
Ofwat's final determination allowed approximately £280.17 million for Anglian Water's growth at sewage treatment works programme (in 2022–23 prices).
Anglian Water's growth Price Control Deliverable
Anglian Water's AMP8 business plan includes a specific Price Control Deliverable (PCD) for growth at WRCs.
The October 2023 technical annex identifies:
£164.3 million of AMP8 investment for this particular WRC growth PCD.
A forecast of 102,548 new property connections by the end of 2030.
Growth forecasts informed by local authority planning data and ONS information.
A requirement to demonstrate that the investment is delivering sufficient capacity for additional connections.
The PCD is particularly important because it protects customers. If growth is lower than forecast, the company may have to return funding. If growth exceeds expectations, the framework provides for additional funding through the over-delivery mechanism.
Developer contributions
There is also a developer-services dimension.
Section 106 of the Water Industry Act 1991 provides a right to connect to the sewerage system, subject to the statutory framework. Developers pay applicable connection and infrastructure charges, which contribute towards the wider costs of providing infrastructure.
However, it is important not to confuse these charges with developers directly funding a particular WRC treatment upgrade. Anglian Water's published planning FAQ explicitly states that developers are unable to fund WRC upgrades through its current WRC capacity process.
The essential point is that growth expenditure is justified by the additional capacity required to accommodate forecast development.
3. How phosphorus consent investment is funded
Phosphorus removal is a different proposition.
The investment is driven by an environmental obligation rather than by the number of new houses being built.
For example, the Environment Agency may require a WRC to move from an existing phosphorus consent of 1 mg/l to a new consent of 0.25 mg/l.
This might be necessary to:
Improve the ecological condition of a receiving watercourse.
Reduce eutrophication.
Meet Water Framework Directive objectives.
Address a water body failing its environmental objectives.
Meet wider statutory phosphorus reduction commitments.
The Environment Agency's requirements are translated into WINEP obligations, which inform the water company's AMP investment programme.
The company then has to develop a technically and economically appropriate solution to meet the required environmental outcome.
For AMP8, Ofwat allowed Anglian Water approximately £952 million for phosphorus reduction. This is a substantial, separately assessed environmental investment programme.
There is an important regulatory distinction here:
The Environment Agency determines the environmental requirements and implements them through environmental permitting.
Defra sets the relevant environmental policy and statutory framework.
Natural England has an important role in advising on protected sites and conservation objectives.
Ofwat determines the revenue and expenditure allowances through the price review process and monitors delivery.
The Environment Agency monitors compliance with the discharge permit.
The company cannot decide to ignore a new phosphorus consent simply because the catchment is not growing. Equally, it cannot automatically use environmental enhancement funding to pay for additional treatment capacity required by population growth.
That would risk double funding and an inappropriate allocation of expenditure to customers.
4. Why the phosphorus solution may be designed for a smaller PE than the growth solution
This is the most interesting part of the question, and it is where the distinction between regulatory funding and engineering design becomes particularly important.
Consider a hypothetical WRC:
Illustrative catchment
EXISTING POPULATION
20,000
PE currently served
FUTURE POPULATION
30,000
PE after planned growth
Phosphorus enhancement
Growth enhancement
There are several reasons why these two design bases can legitimately differ.
A. The phosphorus obligation is established independently of the growth forecast
The WINEP phosphorus obligation is established because the receiving watercourse needs improved environmental protection.
The starting point for the phosphorus investment is therefore the environmental requirement, not the future population forecast.
The investment case identifies:
The existing WRC and its population served.
The existing phosphorus discharge performance.
The new phosphorus permit requirement.
The phosphorus removal technology required.
The cost of achieving the required environmental improvement.
Ofwat's phosphorus removal cost assessment explicitly uses PE served as a cost driver, alongside historical and enhanced phosphorus consent levels and whether the technically achievable limit (TAL) is required.
This is significant because it demonstrates that Ofwat treats the size of the existing treatment population and the stringency of the environmental consent as separate drivers of the phosphorus investment.
In contrast, the growth investment is assessed against the anticipated increase in PE and the associated additional treatment capacity.
B. Growth is not necessarily included in the original WINEP phosphorus design basis
A new phosphorus consent does not automatically mean that the WINEP investment must provide all the additional capacity required by future development.
The environmental obligation and the growth obligation have different origins.
For example:
Existing catchment: 20,000 PE.
Forecast growth: another 10,000 PE.
New phosphorus consent: 0.25 mg/l.
Growth programme: increase treatment capacity to accommodate 30,000 PE.
The phosphorus enhancement may be funded on the basis of the existing 20,000 PE population, while the growth scheme separately funds the additional capacity associated with the 10,000 PE increase.
This is particularly relevant when the phosphorus investment is being developed and approved ahead of the growth investment.
The company needs to demonstrate that the phosphorus scheme is delivering the environmental improvement for which it received funding, rather than absorbing the cost of a future capacity expansion into an environmental compliance project.
C. Ofwat needs to prevent double funding
This is arguably the strongest financial and regulatory explanation.
Ofwat scrutinises expenditure to ensure that the same infrastructure improvement is not funded twice.
Its PR24 determination specifically addresses overlap between growth expenditure and existing permit compliance expenditure.
For growth schemes, Ofwat considers whether the expenditure is genuinely required to accommodate additional population, rather than to remedy an existing compliance problem.
It also considers whether previous investment has already provided some of the required growth capacity.
For phosphorus schemes, the assessment is separately based on the population served and the enhanced permit requirements.
Consequently, if a company were to include the entire future growth population in the phosphorus enhancement funding case, without demonstrating that this was necessary for the environmental obligation, Ofwat could reasonably challenge the additional expenditure.
The principle is that customers should pay for the environmental improvement and the additional growth capacity through their respective regulatory investment allowances, without paying twice for the same asset or capacity.
D. The timing of the two investments can be different
AMP8 covers 2025–2030, but the development of a WRC's capacity requirements does not necessarily happen at the same time as the environmental investment.
A phosphorus scheme may be required to meet a particular WINEP delivery date, while the growth scheme may be driven by the timing of housing development.
The phosphorus investment might therefore be designed around the existing load, with a separate growth project planned to increase capacity as the catchment develops.
This is consistent with Anglian Water's own AMP8 growth approach, which considers different interventions, including optimisation, additional treatment processes, new permits and catchment transfers.
5. The important engineering qualification: PE is not the same as hydraulic or treatment capacity
I would be careful about interpreting the difference in PE as meaning that the phosphorus treatment plant is necessarily incapable of treating the future population.
There is a crucial distinction between:
The population equivalent used to justify and fund the phosphorus enhancement.
The design PE of the existing WRC.
The hydraulic design capacity of the phosphorus treatment process.
The permitted flow and the future flow expected from the catchment.
These are not interchangeable.
A phosphorus removal process might be designed around the existing population equivalent for funding purposes, but still have to accommodate the hydraulic and phosphorus loads associated with future flows if those flows are already permitted or anticipated within the scheme's design requirements.
For example, chemical dosing, tertiary solids removal and filtration may be sized according to flow, phosphorus loading, influent characteristics and the required effluent concentration. Simply specifying a PE does not establish the actual process capacity.
The Environment Agency's treatment and compliance guidance also makes clear that PE is calculated from the BOD load entering the works, including trade and tourist contributions. It is not simply the number of residential properties connected.
This leads to an important distinction:
The phosphorus scheme can have a smaller regulatory funding PE than the ultimate growth PE without necessarily having a smaller hydraulic design capacity.
That is perfectly possible, provided the process design and the regulatory obligations support it.
6. The critical question: can the phosphorus scheme be designed for 20,000 PE if the works will eventually serve 30,000 PE?
This is where I would expect a director, technical authority and project manager to challenge the design basis.
There are two possible scenarios.
Scenario 1: The phosphorus process is genuinely only required to treat the existing population.
The phosphorus project can be designed for the existing PE, with the growth project subsequently providing additional treatment capacity and phosphorus removal capacity where required.
However, there must be a credible plan to ensure that the WRC continues to comply with its environmental permit as additional properties connect.
The company cannot simply rely on future investment without ensuring that the necessary capacity is available when required.
Scenario 2: The phosphorus consent applies to the whole discharge, including future growth.
In this situation, the phosphorus removal process must be capable of achieving the required effluent quality at the relevant future flows and loads.
If the works grows from 20,000 to 30,000 PE, but the phosphorus removal plant can only process the phosphorus load associated with 20,000 PE, the company could find itself unable to comply with its permit.
That would be unacceptable.
The process design must therefore consider the relevant future design horizon, forecast loads, permitted flows, hydraulic constraints and the anticipated growth programme.
It may be appropriate to:
Install a phosphorus removal process initially sized for existing loading.
Provide space and connections for future modular expansion.
Design common infrastructure for ultimate capacity.
Coordinate the phosphorus and growth schemes so that future expansion is not duplicated.
Ensure the programme for additional capacity is aligned with the date at which growth will materialise.
The correct answer depends on the specific permit conditions, WINEP obligation, design horizon and funding approval. There is no general Ofwat rule that says phosphorus removal must always be designed for existing PE rather than ultimate PE.
7. What other regulatory considerations matter?
There are several additional considerations that should be taken into account when developing the investment strategy.
Regulator / legislation | Relevance |
|---|---|
Ofwat | Separate enhancement allowances, cost efficiency, PCDs, prevention of double funding and protection of customers. |
Environment Agency | WINEP obligations, environmental permits, phosphorus limits and discharge compliance. |
Defra | Environmental policy, statutory environmental targets and the regulatory framework. |
Natural England | Protected sites, conservation objectives and nutrient-related environmental considerations. |
Water Industry Act 1991 | Statutory water company functions, connections and developer services. |
Environment Act 2021 | Statutory environmental targets, including phosphorus reduction. |
Water Framework Directive | Environmental objectives for water bodies, including ecological and chemical status. |
One further point is worth highlighting. The Environment Act phosphorus targets include a target for an 80% reduction in phosphorus loading from relevant discharges by 2038, with an interim 55% reduction by December 2030 against the 2020 baseline. This reinforces why phosphorus removal is treated as a major environmental investment programme in its own right.
8. My interpretation as a director: what is the commercial and engineering rationale?
If I were explaining this to a project delivery team, I would put it this way:
We have two different obligations at the same asset. We must not confuse the reason for the investment with the ultimate capacity of the asset.
The phosphorus scheme exists because we have an environmental obligation to improve the quality of our treated effluent. The growth scheme exists because we have an obligation to provide sufficient infrastructure to accommodate additional customers and wastewater.
The two projects therefore have different funding justifications and different regulatory accountability.
The phosphorus scheme should be funded on the basis of the environmental improvement required. The growth scheme should be funded on the basis of the additional capacity required to accommodate forecast development.
That is why it is entirely possible for the phosphorus enhancement business case to have a smaller PE than the ultimate PE of the WRC following growth.
However, this separation of funding does not absolve us of the responsibility to ensure that the completed asset works as an integrated treatment system.
I would expect the engineering team to demonstrate that:
The phosphorus solution meets the new environmental permit.
The growth solution provides the additional treatment capacity required.
The phosphorus treatment process can accommodate the future flows and phosphorus loads, either through its initial design or planned expansion.
There is no duplication of expenditure between the two projects.
The sequencing of delivery does not create a period of environmental non-compliance.
The combined solution represents the most efficient whole-life investment for customers.
The commercial principle is separate funding for separate drivers. The engineering principle is an integrated solution for the ultimate needs of the WRC.
9. The questions I would ask before approving the design
If I were reviewing a phosphorus scheme where the proposed design PE was lower than the future growth PE, I would ask the following:
Question | Why it matters |
|---|---|
What PE was used in the Ofwat phosphorus enhancement submission? | Establishes the funding basis. |
What PE is used in the growth business case? | Establishes the ultimate growth requirement. |
What is the current and future DWF? | Establishes hydraulic loading. |
What is the current and future FFT? | Establishes peak treatment requirements. |
What phosphorus load is the new plant designed to remove? | Establishes actual process capacity. |
Does the new permit apply to future flows and loads? | Establishes the compliance requirement. |
Is there a separate growth project that will increase phosphorus treatment capacity? | Establishes whether the projects are properly integrated. |
Is the phosphorus plant designed for modular expansion? | Avoids future duplication of capital expenditure. |
Has Ofwat's funding allocation been checked against the actual scope? | Avoids funding overlap and potential customer detriment. |
My final conclusion
I would distinguish very carefully between the regulatory funding PE and the ultimate engineering design PE.
The phosphorus investment may legitimately be funded against the existing population because its driver is an environmental improvement obligation. The growth investment is funded separately because its driver is additional population and wastewater treatment capacity.
But if the phosphorus consent applies to the entire future discharge, the company must demonstrate how the phosphorus treatment process will remain compliant as the population increases.
It is not sufficient to say that the growth project will address the additional PE. The interfaces between the projects must be explicitly designed, costed and programmed.
One final point: I would not accept a design justification that simply says, "The phosphorus scheme is funded for a smaller PE, so we have designed it for a smaller PE." That confuses a regulatory cost allocation with an engineering design requirement.
The funding basis explains why the projects are separated. It does not, on its own, establish what the treatment plant needs to be capable of doing.
Primary documents worth having alongside the project business case:
Ofwat: Anglian Water PR24 Final Determination. Particularly useful for the separate phosphorus and growth allowances.
Anglian Water: PR24 Price Control Deliverables Technical Annex. Particularly useful for the £164.3m WRC growth PCD and its customer protection arrangements.
Ofwat: PR24 Final Determinations, Expenditure Allowances. The detailed regulatory cost assessment methodology.
Environment Agency: Wastewater treatment works, treatment and compliance limits. Important for the relationship between PE, treatment and discharge compliance.
I would use these documents as the starting point for any formal AMP8 investment challenge or design assurance review.
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