Consultation outcome

Water resources charges review: economic impact assessment

Updated 1 April 2022

1. Introduction

In order to understand the potential impact of our charging proposals for water resources we have conducted this first stage impact assessment focusing on the largest charge increases and small companies.

The data that we used for this analysis mostly refers to subsistence charges, not applications. Subsistence charges are a better indication of impact as they are an ongoing charge as opposed to a one-off application charge. Though application charges are considered for one sector where there are currently no subsistence charges (hydropower).

It is important to note that this impact assessment uses in most cases pre-COVID-19 company and sector information and therefore reflects a different economic state based on steadier conditions. At the moment, some of these companies will be facing uncertainty and disruption, but the economic impact of this is still unknown and therefore has not been included in the analysis.

We recognise that the charges that businesses pay are commercially sensitive, for this reason we do not name any specific licensee in this document.

The rest of this document presents the detailed analysis of the impacts.

2. Economic impact assessment

2.1 Methodology

We have reviewed the data considering the current level of charge and the proposed charge. We have analysed the data looking at the additional charge that licence holders will pay under the proposals and their turnover in order to assess the potential impact of the increase. For this part of the assessment we are looking at subsistence charges only.

For multiple licence holders, we have calculated the total amount they will pay for all their licences. It is worth noting that not all of the charges are increasing, and for some multiple licence holders the increases will be offset by the decreases.

The methodology used means that we have considered the impact on private companies and individuals. We have not looked at the impacts on local authorities and other public sector bodies, as public bodies are funded differently and therefore the affordability of charges cannot be assessed by considering turnover and profits.

In order to assess the significance of the impacts we have used company turnover and gross profit data (where available) from publicly available sources (Companies House). The data is usually available some months after the close of a company’s financial year, so represents the period prior to the coronavirus pandemic. Table 1 shows the range of impact on affordability relative to turnover and gross profit.

Table 1: Indicative reference values

Annual costs relative to:	Low	Moderate	High
Turnover	less than 0.5%	0.5 to 5%	greater than 5%
Gross profit	less than 10%	10 to 100%	greater than 100%

Source: Based on Vercaemst (2002) and as discussed in RPA (2015)

2.2 Overview of the data

The total number of licences in the dataset was 16,857. Around 5,050 of these were identified as belonging to individuals and households and had to be removed from the analysis, as there is no Companies House information about these customers, leaving just under 12,000 licences. The charges that were decreasing were removed. The dataset was then analysed to identify multiple licence holders and the net change in their charges. In total 5,416 licences were removed as the cost to the licence holder was decreasing, leaving 6,388 licences belonging to 3,018 licence holders.

Table 2 groups these licences into wide sectors and shows the number of licences and licence holders in each sector as well as the total and average increases in each category.

Table 2: Overview of the licence holders who see an increase, data excludes licence holders who see a decrease in charges.

Type of organisation	Number of licence holders	Number of licences	Total increase	Average increase (per licence)	Range of increase	% of total increase
Water companies	15	1,387	£31,281,379	£22,553	£76,000 to £6.7million	93.3%
Agriculture (see note 1)	1,536	2,750	£415,241	£151	Up to £20,000	1.2%
Companies (see note 2)	193	251	£41,330	£165	Up to £6,000	0.1%
Limited companies (see note 3)	995	1,569	£1,426,588	£909	Up to £250,000	4.3%
PLC (large companies)	28	56	£195,884	£3,498	Up to £180,000	0.6%
Universities, schools and colleges	43	58	£12,000	£207	Up to £6,000	0.0%
Hospitals	25	28	£13,082	£467	Up to £1,700	0.0%
Other organisations and trusts (see note 4)	90	135	£104,866	£777	Up to £65,000	0.3%
Local authorities	74	109	£14,774	£136	Up to £2,700	0.0%
Environment and conservation (see note 5)	19	45	£6,646	£148	Up to £4,500	0.0%
Total	3,018	6,388	£33,511,790	£5,246	-	-

Note 1 - These are companies, limited companies, other organisations that can be confidently identified as farming businesses.

Note 2 - This might include also farms, individuals, large and small companies. However, this is not clear from the name of the licence holder and can only be clarified once further analysis undertaken.

Note 3 - Limited companies might include farms, large and small companies from different sectors.

Note 4 - Includes various associations (for example, religious, charities) and private and charitable trusts that do not fit in any other category.

Note 5 - Includes organisations such as non-governmental organisations (NGOs), wildlife trusts and so forth.

Water companies currently pay some 90% of the total charge income and are seeing a proportionate amount of the increase in charges. Even though the numbers are large, water companies are big companies with large turnovers, so we do not anticipate any significant impacts from the charge increases.

The largest category in terms of number of both licence holders and actual licences (almost half of total licences) is agriculture. Despite the size of the category, it only pays for 1.2% of the total increase in charges. The impacts on this group are assessed in the next section.

The limited companies category is the second largest in terms of number of licences and licence holders and accounts for 4.3% of the total increase in charge payments.

3. Impact assessment

The rest of this impact assessment focuses on only 3 of the categories identified earlier – ‘agriculture’, ‘companies’ and ‘limited companies’. This is because we particularly want to focus on the impacts for small, medium enterprises (SMEs) and these can be found within these 3 categories only.

3.1 Analysis

The range of charge increases in the remaining licences is very variable both in terms of percentage change but also in actual terms (£). In order to identify material impacts all charge increases up to £50 were removed, regardless of the % increase this represented. Next, we removed all increases up to 20%, as again they are not expected to have any material impact on the finances of the companies. This left 1,962 licence holders in all categories, 1,739 of which are in the 3 categories we are focusing on.

We then selected a sample from the remaining licences, focussing particularly on the small companies with less than 50 employees. Information on size, turnover and gross profit was collected (from Companies’ House) where available.

The results are presented as follows.

No impacts

Companies that will face no impacts either because they are too big for the changes to be material or have been dissolved or dormant.

No impacts SME

Companies that are small (less than 50 employees) but their turnover is high enough for them not to face any negative impacts from the charge increases, that is the new proposed charge is less than 0.5% of their turnover.

Impacts unknown SME

Companies that are small or micro-companies, we have found them registered but no financial information is available in order to calculate the impacts. This is because some companies^{[footnote 1]} are exempt from publishing their detailed accounts, therefore information on turnover and profit is not available.

Impacts known SME

Companies that are small or micro-companies and we were able to find information on their turnover. We have found that the charge will be more than 0.5% of their turnover and therefore we conclude that there may be a negative impact.

Not found

These are licence holders that we were not able to find as registered.

3.2 Results

The following tables show the results of the draft impact assessment. In total, we sampled 521 of the remaining 1,739 licence holders, focussing especially on the largest increases.

It is important to note here that while some of these increase percentages seem very large, in terms of actual monetary increase they are often small.

The first table shows the number of companies in every charge increase band and the number we sampled from each category. Overall, we sampled 30% of all licence holders.

Table 3: Number of companies by % charge increase

Category	Number of licence holders or sample	Less than 100%	100% to 250%	250% to 500%	500% to 1000%	Less than 1000%	Total
Companies	Number of licence holders	41	26	56	1	0	124
Companies	Sample	8	5	28	1	0	42
Agriculture	Number of licence holders	482	278	123	29	3	915
Agriculture	Sample	80	70	87	29	3	269
Limited	Number of licence holders	375	135	184	5	1	700
Limited	Sample	76	36	92	5	1	210
Total	Number of licence holders	898	439	363	35	4	1,739
Total	Sample	164	111	207	35	4	521

Table 4: Impact assessment results

Results	Companies number	Companies % of sample	Agriculture number	Agriculture % of sample	Limited number	Limited % of sample	All companies Total	All companies % of sample
No impact	12	29%	36	13%	120	57%	168	32%
No impact SME	2	5%	6	0%	22	10%	30	6%
Impact unknown SME	10	24%	118	44%	56	27%	184	35%
Impact known SME	0	0%	0	0%	2	1%	2	0%
Not found	18	43%	109	41%	10	5%	137	26%

As the results show we could not find any registration for just over a quarter of the companies in the sample. These are mostly small farms that are probably family businesses and are not registered with Companies House as they belong to individuals.

Over a third of the companies in the sample has been identified as small companies, but since we do not have any information on their financial statements we cannot assess the impact. It is possible that there will be some negative impact on them. Only 2 companies were identified as SMEs and were likely to experience some negative impact from the increase in charges.

Over a third of the sample is either a large, dormant or dissolved company that will not see any significant impact from the increases.

4. Agricultural sector – small farms income analysis

As shown in the impact analysis above, financial information on individual farms is very difficult to obtain as it is often not published. In order to get a better understanding of potential impacts and the affordability of our charges for farmers we looked at other publicly available information on farming income.

In 2017, before the Environment Agency Strategic Review of Charges, the Environment Agency commissioned Risk and Policy Analysts to do a study^{[footnote 2]} looking at the impacts of changes in charges on the different sectors we regulate, including agriculture. We wanted to gain an understanding of the sectors, their structure and the possible impacts. The Environment Agency classification does not mirror the Standard Industry Classification (SIC), therefore the information that we get is more general, but it still gives us an overview of the sector. The relevant information from this study is summarised in Section 4.1.

4.1 Agriculture – sector information

The agriculture, forestry and fishing sector includes the following SIC codes:

• A01: Crop and animal production, hunting and related service activities
• A02: Forestry and logging
• A03: Fishing and aquaculture

Table 5 presents the number of enterprises within the agriculture, forestry and fishing sector by 2 digit SIC code. The majority of enterprises are categorised within the sub-sector ‘Crop and animal production, hunting and related service activities’ – this sub-sector represents over 95% of the total number of enterprises within the sector.

Table 5: Number of enterprises – agriculture, forestry and fishing in England (2015)

Sector	Number of enterprises	Total %
A 01: Crop and animal production, hunting and related service activities	94,410	95.6%
A 02: Forestry and logging	2,690	2.7%
A 03: Fishing and aquaculture	1,700	1.7%
Total number of enterprises	98,800	100%

Source: UK business; activity size and location dataset, ONS

There is a series of statistics on the economics of agricultural and other land management activities across England. These data sets provide both sectoral level indicators linked to the aggregate agricultural accounts and then indicators at an enterprise level.

At the sectoral level, aggregate agricultural accounts are produced by the Department for Environment, Food & Rural Affairs (Defra) and designed as a tool for analysing the economic situation of agriculture and to support policy making. They include the aggregate income of the agriculture sector, known as Total Income from Farming (TIFF), a measure of the performance of the whole agricultural industry. TIFF is the income generated by production within the agriculture industry and represents business profits plus remuneration for work done by owners and other unpaid workers or Gross Value Added (GVA) after deduction of consumption of fixed capital, taxes, labour costs, interest and rent but including all subsidies).^{[footnote 3]} GVA does not reflect the distribution of income across individual farms. However, it does reflect the contribution that farming makes to the national economy; it is not considered as strong an indicator as TIFF for the purposes of this study.

Table 6: Summary measures for English regions, 2015 first estimate (£m)

Total value of crop output	Total value of livestock output	Gross output at basic prices	Intermediate consumption	GVA at basic prices	Total income from farming
7,408	8,689	17,874	10,988	6,887	3,023

Source: Defra (2017)

Other indicators of profitability include the Gross Operating Rate. At sectoral level, the sector as a whole appears to be performing well, with the gross operating rate at 23.8%.

Table 7: Number of enterprises – agriculture in England by turnover (2014)

Sector	Turnover (£m)	Total %	Profitability (%)
A 01: Crop and animal production, hunting and related service activities	1,280	55.51%	23.8%

Profitability (gross operating rate) = gross operating surplus/turnover = (GVA − employment costs/turnover)

Source: Annual business survey dataset, ONS

By number of employees, most are micro enterprises but the stratification by turnover is quite split for the lower turnover size bands, up to the level of £249,000. This would suggest that there is not a typical farm.

Table 8: Number of enterprises - agriculture in England by turnover band (2015)

Source	Turnover size band (thousands) £0 to £49	Turnover size band (thousands) £50 to £99	Turnover size band (thousands) £100 to £249	Turnover size band (thousands) £250 to £499	Turnover size band (thousands) £500 to £999	Turnover size band (thousands) £1,000 to £4,999	Turnover size band (thousands) £5000+	Total by sector	Total %
A 01: Crop and animal production, hunting and related service activities	26,905	19,355	24,695	11,995	6,960	4,101	490	94,410	95.56%
Total %	28.6%	20.6%	26.3%	12.6%	7.2%	4.2%	0.5%	-	-

Source: UK business; activity size and location dataset, ONS

One of the key sources of agricultural statistics at the firm level is the Farm Business Survey (FBS). The FBS provides information on the physical and economic performance of farm businesses in England, to inform policy decisions on matters affecting the farming sector. The level of Farm Based Income is highly dependent on the type of farming, with grazing and livestock being the least profitable of all types. There are large numbers of small firms undertaking a range of different productive activities having different economic values. Levels of economic performance can vary widely. Information in the FBS is very detailed and in order to make use of it we would have to have much more information on our licence holders than we could find. We therefore could not use it in our analysis.

4.2 Analysis

The results of our impact assessment in Section 3 do not allow us to draw any robust conclusions on the impacts on the agricultural sector since many of the licence holders in the ‘agriculture’ and in the ‘companies’ categories are not found or no information is available. Therefore, we have included a second layer of analysis here based on the distribution of farm turnover in table 8 in Section 4.1.

In order to get a further understanding of potential impacts we did some further analysis based on the assumption that our licence holders follow the same distribution.

The table below shows the distribution of the licence holders according to turnover. This analysis includes all the licence holders in the ‘agriculture’ category but also the ones in the ‘companies’ and ‘limited companies’ category that have agriculture as one of their activities even though they could not be decisively identified as a farming business.

Table 9: Distribution of licences by turnover (turnover size band – thousands)

Category	£0 to £49 (28.6%)	£50 to £99 (20.6%)	£100 to £249 (26.3%)	£250 to £499 (12.6%)	£500 to £999 (7.2%)	£1000 to £4999 (4.2%)	£5000+ (0.5%)	Total (100%)
Agriculture	260	187	239	115	66	38	5	910
Companies	0	0	0	0	0	0	0	0
Limited	1	1	1	0	0	0	0	3
Total	261	188	240	115	66	38	5	913

We looked at the average increases in charges for the three categories and the average new charge they would be paying in order to assess the impact for the companies in each turnover band described above. For the ‘companies’ and ‘limited companies’ categories, we use the average for the companies included in Table 9 above, not for the whole category. Since there were no companies in the ‘companies’ category that fit the description the total is zero, but we still include the category for the purposes of the analysis.

Table 10: Change in charges

Category	Average increase	Average new charge
Agriculture	£400	£845
Companies	£0	£0
Limited	£245	£1,020

Obviously, the companies with turnover in the two upper bands (over £1 million and over £5 million) will not see an impact, since the average charge is not more than £1,020. We therefore exclude them from the analysis. The table below shows the potential impact for the licence holders in each turnover band.

Table 11: Impact assessment based on turnover band

Category	Turnover band (£ thousands)	Average new charge	Charge over turnover	Impact	Number of companies
Agriculture	£0 to £49	£845	3.4%	high	260
Agriculture	£50 to £99	£845	1.1%	moderate	187
Agriculture	£100 to £249	£845	0.5%	moderate	239
Agriculture	£250 to £499	£845	0.2%	low	115
Agriculture	£500 to £999	£845	0.1%	low	66
Companies	£0 to £49	£0	0.0%	moderate	0
Companies	£50 to £99	£0	0.0%	moderate	0
Companies	£100 to £249	£0	0.0%	low	0
Companies	£250 to £499	£0	0.0%	low	0
Companies	£500 to £999	£0	0.0%	low	0
Limited	£0 to £49	£1,020	4.1%	high	1
Limited	£50 to £99	£1,020	1.4%	moderate	1
Limited	£100 to £249	£1,020	0.6%	moderate	1
Limited	£250 to £499	£1,020	0.3%	low	0
Limited	£500 to £999	£1,020	0.1%	low	0

We chose the midpoint of each turnover band to estimate the charge or turnover.

The results show that the average increase will have a high impact on ‘agriculture’ and ‘limited companies’ in the lowest turnover band (less than £50,000). These are 261 companies in total out of 913 (28%) of the companies in this group.

This estimate uses average increases where in reality median increase might be more appropriate as there are a few very large increases that influence the average. It is also a conservative estimate as we use the midpoint of the turnover bands.

5. Water companies – impact on customer bills

The majority of the charge increases will be paid by the water company sector. There are 15 water companies holding 1,387 licences that are facing total increase in charges of £31,281,379.

The average increase per licence is £22,500. This shows that although the total amount paid is large mainly because of the number of licences held by water companies, the actual increase in terms of percentage are not that large in comparison with other categories.

In addition, water companies are companies with large turnovers, so the increase in charges will not have a significant impact on them.

6. Application charges – hydropower sector

The impact of increases in application charges cannot be assessed in the same way as that of subsistence charges. This is because application charges are primarily a one-off rather than an ongoing cost and the potential impact is on the decision of new companies whether to enter the market.

As part of the review, all applications will see a significant charge increase as the charging scheme moves to full cost recovery instead of artificially low historical application fees. This analysis however will focus on the hydropower sector as they are the only ones that are facing an increase only on the application charges (that is, they do not pay subsistence fees).

Based on the last 3 years of application data agricultural licences have made up 60% of the applications, followed by industrial, commercial and public service (10%), water supply (9%) and hydropower (7%).

The proposed application fees change from the £1,500 flat application fee to a range of fees starting from £6,110 and up to £13,392. The exact amount of the fee varies depending on the size of the hydropower scheme but also on the risk. The table below shows the range of the charges for the different categories.

Table 6.1 Proposed application fees

Production of electricity	<15 kW	<15 kW	16 to 50 kW	16 to 50 kW	51 to 100 kW	51 to 100 kW	101 to 500 kW	101 to 500 kW	>500 kW	>500 kW
Risk	Low	High	Low	High	Low	High	Low	High	Low	High
Permit application	£6,110	£6,947	£9,876	£11,383	£10,546	£11,718	£11,383	£12,555	£12,206	£13,392
Normal variation	£3,055	£3,474	£4,938	£5,692	£5,273	£5,859	£5,692	£6,278	£6,103	£6,696
Substantial variation	£5,499	£6,252	£8,888	£10,245	£9,491	£10,546	£10,245	£11,300	£10,985	£12,053
Different terms renewal	£3,444	£3,916	£5,567	£6,416	£5,944	£6,605	£6,416	£7,077	£6,880	£7,549

In addition to the application fees, the table describes the different terms renewal, normal and substantial variation fees that would be applicable if changes are required to the permit after it has been issued.

Supplementary charges are possible in addition to this, for example charges to cover the costs of additional public participation in ‘high public interest’ applications, costs of advertising and costs associated with the assessment of impacts on protected habitats and species.^{[footnote 4]}

The impact of the increase on the decision of a new company to enter the market can be assessed in comparison to the other costs of starting a new hydropower plant.

In order to understand the type and scale of costs faced by a new hydropower plant we have looked into the sector using publicly available sources of information such as Statista, the British Hydropower Association (BHA), Renewables First and others.

6.1 The hydropower sector

Statista records there being a total of 1,561 plants/schemes generating hydroelectricity at the end of 2020. According to the website The Switch there was a 10% increase in hydropower electricity generation between 2016 and 2017. The industry turnover was £639m in 2016 and there were 7,400 (BIS, 2015) hydro jobs.^{[footnote 5]}, ^{[footnote 6]}, ^{[footnote 7]}

A hydropower scheme usually has an 80-year lifetime. In quarter 3, 2020, hydropower contributed 1.6% and quarter 3, 2021, hydropower contributed 1.0%, of total energy production in the UK.^{[footnote 8]} Currently, there is an installed capacity of 1,676 MW generating over 5,000 GW/year in the UK, in addition to a further 2860 MW capacity of existing pumped storage (BHA, 2019).^{[footnote 7]}

There are 2 sub-sectors:

• micro-hydro power (less than 50 kW capacity)
• hydro power plants (more than 50 kW)

6.2 Sector costs

According to the BHA, on average, 70% of the cost of a new hydropower scheme in the UK goes into civil construction, which is procured locally. The majority of new small schemes are in remote rural areas.^{[footnote 7]}

Hydropower shows the lower cost per kW of clean energy of all renewable technologies over the full lifetime of the scheme (BHA, 2019).

The main costs of setting up and running a hydropower scheme are as follows.

Capital costs

These include turbines, drives, generators, valves, controls, pipe costs, welding works, civil works to create the intake, screens, pipeline, and the turbine house, electrical works within the turbine house plus transformer if required, connection costs, including any upgrading of the Grid if required, any new access tracks and routes to the abstraction point, design and licence fees.

Grid connection is arranged by operators with the local Distribution Network Operator (DNO). Large schemes may connect directly to the Transmission Network (BHA). The costs of grid connection are site-specific and depend on: DNO, connection voltage, physical location and access to the network, network capacity and availability, upgrade requirement, and generation technology (BHA).

Running costs

The running costs of a hydro power scheme are business rates, insurance, operation and maintenance, and replacement of key parts after approximately 10 to 5 years (BHA).

For some perspective on likely costs of schemes, we found the following statements.

“For a £250,000 one-off cost [for example, Torrs Hydro New Mills Scheme] you can power seventy homes for twenty-five years” Steve Welsh, managing director of H2ope - Weir-ed and Wonderful, also: “you won’t find any massive schemes like in Scotland, but the government is pushing for distributed energy rather than centrally produced, so there is an opportunity for schemes dotted around the country to make their own contribution”

“The installed cost of small hydro projects usually lies in the range of £2,000 to £3,500 per kilowatt, although refurbishments of derelict sites can be considerably cheaper than this. With the current price in excess of 5.5p/kWh being offered for hydro-electricity (depending on length of contract), a scheme installed for £2,500/kW with a 60 per cent capacity factor can expect to pay back in around ten years, whereas the lifetime of small hydro projects should exceed 50 years with proper maintenance” ^{[footnote 9]}

According to the BHA, the minimum cost of a hydropower scheme is £35,000. Smaller sites can cost £8,000 per kW capacity, whereas larger systems might cost around £4,000 per kW capacity, although the cost is site-dependant.

Table 6.2 Construction costs based on maximum power output

Maximum power output	Estimated project cost	£ / kW installed
25 kW	£169,000	£6,800
50 kW	£300,000	£6,000
100 kW	£529,000	£5,300
250 kW	£963,000	£3,800
500 kW	£1.6m	£3,200

Estimations extracted from Renewables First.

According to the Renewables First website the costs of a typical hydro project of different sizes are shown in the table below. The table shows that the vast majority of the cost – ranging from 89% to 98% of the total – is the cost of installation and construction. The feasibility stage is the smallest cost, while the planning and environmental consent ranges from 2% to 8% of the total for the smallest schemes. We could not find information on how much of that can be attributed to the application fees.

Table 6.3 Costs of a hydropower project

Project stage	5 kW	50 kW	100 kW	500 kW
Development – feasibility	£3,100	£3,100	£3,600	£4,700
Development – planning and environmental consent	£7,500	£13,000	£17,000	£32,000
Installation	£89,000	£312,000	£537,000	£1,810,000
Total	£99,600	£328,100	£557,600	£1,846,700

Source: Renewables First

The costs presented in Table 6.2 are similar to those quotes by the BHA and other sources. We have therefore used them in the analysis of the impact described in Section 6.3

6.3 Impact of application charges

In order to understand the impact of the change in the charges we need to calculate the change as a proportion of the overall costs to set up a hydropower scheme. First, we looked at the number and type of applications we are likely to receive. The numbers listed in table 6.4 are predicted numbers based on the profile of applications over the last few years.

Table 6.4 Number of applications over 5 years (based on profile of received)

Capacity (kW)	Low risk	High risk	Total applications	% of Total
0 to 15	7	7	14	28%
15 to 50	6	5	11	22%
50 to 100	4	1	5	10%
100 to 500	3	14	17	34%
More than 500	0	3	3	6%
Total	-	-	50	-

Table 6.4 shows that just under a third of applications (or less than 3 annually) are for the smallest category, while the most applications are for the 100 to 500kW installations (34% or 3 to 4 applications annually).

Using the costs quoted by the Renewables First we have calculated the range of costs to set up a hydropower scheme for the different categories. Table 6.5 shows the results.

Table 6.5 Start up costs total

Capacity (kW)	Cost (from)	Cost (to)
0 to 15	£ -	£ 102,000
15 to 50	£ 102,000	£ 300,000
50 to 100	£ 300,000	£ 530,000
100 to 500	£ 530,000	£ 1,600,000
More than 500	£ 1,600,000	++++

In order to assess the impact, we have calculated the additional costs that applicants will face as a result of the increase in charge (Table 6.6). The additional costs are the difference between the new proposed fee and the current £1,500 fee. We have then calculated the increase as a percentage of the total costs as shown in Table 6.5. The percentages are calculated for the top and the middle of each cost range in order to understand the average and the maximum impact.

Table 6.6 Impact of application increases

Capacity	Additional costs (low)	Additional costs (high)	Increase as a % of total costs - top of the range (low)	Increase as a % of total costs - middle of the range (low)	Increase as a % of total costs - top of the range (high)	Increase as a % of total costs - middle of the range (high)
0 to 15	4610	5447	5%	5%	9%	11%
15 to 50	8376	9883	3%	3%	4%	5%
50 to 100	9046	10218	2%	2%	2%	2%
100 to 500	9883	11055	0.6%	0.7%	1%	1%
More than 500	10706	11892	0.7%	0.1%	0.2%	0.2%

The results show that while for the majority of the applicants the increases in the charges will not have a significant impact using both average and maximum costs for their category, for the smallest schemes (0 to 15kW) the additional charge will represent between 5% and 11% of the total costs. This category represents just under a third (28%) of the applications and approximately 3 applications per year. This is a significant proportion of the total costs and individuals may reconsider setting up small hydropower schemes.

For the larger schemes, over 50kW, the additional charge is a small proportion of the total costs, ranging from 0.1% to 5%. The most applications will fall in the 100 to 500kW category (35%) where the impacts are negligible. Therefore, the additional charge is not considered to be a barrier for the larger schemes.

In conclusion, the assessment shows that for the smaller hydropower schemes, the change in the application fees represents a significant proportion of the total costs of the scheme. In addition, the application fees have to be paid in advance before any finance is agreed for the construction of the schemes, which means that if the application for finance is rejected then the companies or individuals are facing the loss of the applications fees. Combined with the increase in the level of the charge, this can prove to be more of a disincentive for the small and possibly some of the medium schemes.

7. Economic impact conclusions

The draft impact assessment identified that around a third of the companies in our sample are small companies. With some exceptions, we cannot assess the impact of the changes on these companies without obtaining further details of their financial situation.

The lack of financial information on more than half of the companies in our sample has not allowed us to draw robust conclusions on the impacts of the charge increases on these licence holders. It is important that the consultation draws out and tests any potential impact on these licence holders.

For the licence holders and companies, we have information on, most of the charge increases are not seen as significant in actual £ terms, even though they can be large % increases. The impact of the increases therefore should be insignificant for the majority of the licence holders. Water companies do see a large actual increase in charges but the overall proportion of water abstraction charges they pay to the Environment Agency remains at 90%. In addition, water companies are companies with large turnovers, so we anticipate that the increase in charges will not have a significant impact on them.

We are able to conclude that for 38% of those we are able to analyse there will be a change in the charges the companies pay, but these charges will not have a negative impact on those companies. These are licence holders with increases of less than £50 and all increases up to 20% are not expected to have any material impact on the finances of the companies.

Our further analysis of the agriculture sector highlighted impacts for less than a third of the farms. This analysis is based on assumption around the turnover of the companies, so further work to explore this with licence holders during the consultation is needed to make it more robust.

As described, a desk based study is limited in terms accessible information. It is therefore important that the consultation draws out and tests any potential impact on sectors and licence holders.

8. References

1. The definitions used for small companies’ exemption are: A company is ‘small’ if it has 2 of the following: a) turnover of less than £10.2m, b) £5.1 million or less in the balance sheet and c) 50 or less employees. A company is a micro entity if it has 2 of the following: a) turnover less than £632,000, b) balance sheet of less than £316,000 or c) less than 10 employees ↩

2. ‘Impacts of Charge Variation Scenarios’, RPA and Cambridge Econometrics, 2017 ↩

3. See also ‘Agriculture in the United Kingdom’, 2012, produced by Department for Environment, Food and Rural Affairs, Department of Agriculture and Rural Development (Northern Ireland), Welsh Assembly Government, The Department for Rural Affairs and Heritage, The Scottish Government, Rural and Environment Research and Analysis Directorate ↩

4. New hydropower scheme: apply to build one - GOV.UK ↩

5. UK: hydro energy sites 2020 - Statista ↩

6. Is Hydroelectric Power renewable? Our complete guide (theswitch.co.uk) ↩

7. HYDRO FACTS - British Hydro Association (british-hydro.org) ↩ ↩² ↩³

8. BEIS – Energy Trends: December 2021 – GOV.UK ↩

9. Micro Energy Systems - Google Books ↩