What you need to know

The business environment is in transition across the utility sectors, with the industry challenged by a changing regulatory environment, climate change, security of supply and uncertainties regarding future network requirements. These factors also influence the industry’s approach to capital expenditure.

Infrastructure investment will continue to be a key focus across the utility sectors, driven both by the need to replace old assets and new capacity requirements on networks. However, approaches to investment are now shifting across sectors due to changes in the regulatory environment, including increased pressure to reduce costs for consumers while ensuring security of supply. There is a focus on innovation, efficiencies and long-term outcomes in infrastructure management and investment, replacing the short-term outputs and capital expenditure preferred in the past. The scope for traditional infrastructure investment may be limited, but there will be more opportunities for companies that can provide innovative solutions for efficient network and asset management.

Covered in this Report

This report is segmented between the following sectors:

  • Water and Sewerage

  • Electricity Transmission and Distribution

  • Gas Transmission and Distribution

The definitions of each area of expenditure tends to vary between individual market sectors and can be broadly categorised as follows:

Water & sewerage

Reference is made to certain categories of capital expenditure, as reported by water and sewerage companies.

During the last asset management period AMP5 (2010-15), companies reported capital expenditure under the following categories:

  • Infrastructure renewal expenditure (IRE): refers to the actual expenditure incurred in the financial year in maintaining the operating capability of infrastructure assets through renewal or renovation of those assets.

  • Maintenance non-infrastructure (MNI): refers to all actual or historic expenditure charged to capital maintenance non-infrastructure.

  • Infrastructure enhancements: refers to total infrastructure expenditure for enhancement purposes

  • Non-infrastructure enhancements: refers to total non-infrastructure expenditure for enhancement purposes

For the current asset management period AMP6 (2015-20) and as part of the new total expenditure (totex) analysis of companies’ wholesale water and wastewater businesses, Ofwat has introduced new reporting categories for capital expenditure (capex). During AMP6, companies are required to provide an update on totex, opex and capex in their annual performance report, which is submitted to Ofwat to demonstrate compliance with their separate price controls. During AMP6, capex is reported under the following categories:

  • Maintaining the long-term capability of the assets - infra: Capital expenditure on infrastructure assets, excluding third-party capex, to maintain the long-term capability of assets and deliver base levels of service.

  • Maintaining the long-term capability of the assets – non infra: Capital expenditure on non-infrastructure assets, excluding third-party capex, to maintain the long-term capability of assets and deliver base levels of service.

  • Other capital expenditure - infra: Any capital expenditure on infrastructure assets other than included in ‘maintaining the long-term capability of the assets – infra’ and excluding third-party capex.

  • Other capital expenditure - non infra: Any capital expenditure on infrastructure assets other than spending included in ‘maintaining the long-term capability of the assets – non-infra’. The capital expenditure value is adjusted to include non-infrastructure adoptions.

  • Third-party services: Capital expenditure for providing third-party services, such as bulk supplies, supplies of non-potable water, and rechargeable works where the appointee is a monopoly supplier.

Electricity transmission

Load-related Capex: The investment required to connect new generators and customers to the network, upgrade the existing network, and cater for growth in demand.

Non load-related Capex: The expenditure required to replace existing assets on the network, including expenditure relating to network resilience, flooding, and physical security.

Electricity distribution

Capital expenditure is defined by Ofgem as any expenditure which, for the purpose of regulatory accounts, has been included in the value of a distribution business’ fixed assets, provided that:

(a) the expenditure conforms with at least one of the following:

  • the expenditure relates to the purchase, development or construction of a new asset

  • the expenditure will increase the capacity or functionality of the distribution assets

  • the expenditure will significantly reduce the ongoing maintenance of assets

  • the expenditure will extend the service life of distribution assets beyond that expected when the assets were originally installed

(b) the expenditure is determined in accordance with applicable accounting standards.

Capital expenditure excludes the following:

  • renewal and replacement of insulation medium in switchgear, whether reprocessed or not

  • capitalised interest

  • revaluation amounts

Fault costs are defined as the reactive replacement of a system asset following an occurrence where the asset’s functional failure has resulted in an unplanned incident and where the asset must be replaced before full system functionality can be restored. This includes expenditure incurred following an unplanned incident, as defined for Quality of Service reporting, where such costs are the result of physically replacing assets to return them to their pre-incident performance. Fault costs cease when supplies have been restored, rectification works have been completed, and the DNO foresees no further work required to achieve pre-incident performance.

However, this excludes:

  • all costs where assets are not replaced

  • the cost of planned asset replacement

  • replacement of assets that have faulted in the past (on one or more occasions), been repaired, and then returned to operation and are subsequently replaced as a planned activity due to an assessment of their condition (not in response to a particular unplanned incident occurring)

Load-related new connections and reinforcements costs include new system assets installed on the network as a result of a new customer connection (contestable and non-contestable works), reinforcement as a result of a new connection, and general reinforcement required due to changes in demand on the system.

Non-load, non-fault new and replacement assets costs include the installation of new assets and the planned installation of replacement assets for reasons other than fault replacement or load-related reasons. Related expenditure refers to spending on maintaining the integrity, safety and performance of the distribution network.

Non-operational capital costs are defined as spending on new and replacement assets that are not system assets. This includes:

Gas distribution

Total capital expenditure figures includes total allowed capital expenditure and replacement (repex) expenditure.

It includes spending on LTS & storage facilities, connections, mains reinforcement, other operational and non operational.

Gas transmission

Load related Capex: the installation of new assets to accommodate changes in the level or pattern of electricity or gas supply and demand.

Non-load related Capex: the replacement or refurbishment of assets that are either at the end of their useful life due to age or condition, or need to be replaced on safety or environmental grounds.

All values quoted in this report are at current prices unless otherwise specified.

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