Media Briefings

Optional Water Meters: The Downside Of Allowing Households To Choose

  • Published Date: June 2010

New research casts doubt on the policy in England and Wales that allows households to choose whether or not to have their water use metered and subsidises those who switch to meters.

The study by Dr Simon Cowan, published in the June 2010 issue of the Economic Journal, shows that the incentive to take a meter is particularly strong for households with few members and a high property value. These are unlikely to be the households that can make the greatest savings in water use – which is what the policy aims to achieve. And those who choose to have meters end up being subsidised by those who do not.

The research notes that regulators in England and Wales – and elsewhere in the world, including Argentina – allow households to choose whether or not to have water meters. A household with a meter pays according to the volume of water it uses, instead of a lump-sum charge, and the positive price per unit encourages it to use water efficiently and not to be wasteful.

The purchase and installation of meters is, however, costly – about £200 on average per meter – and there are additional costs of reading and operating meters, so it is generally not efficient to meter all households.

Dr Cowan’s study presents a simple analysis that characterises which households should have meters from society’s point of view and which should not. It shows that the policy that allows households to choose whether to be metered may not work.

The households that should have meters are those that can make the greatest savings in water consumption. These are likely to be households with many members. Such a household will to choose to have a meter if its water bill is reduced sufficiently to make up for the inconvenience of using less water.

The problem is that if the incentive to take a meter is a large bill reduction, this also encourages smaller households to choose meters (when all households without meters pay a common lump-sum charge). The policy of selective metering cannot be maintained in such circumstances.

In practice, households in England and Wales without meters pay water charges that are positively related to property values (rather than a common lump-sum charge). This means that the discount on the bill on taking a meter is automatically targeted towards properties with larger values.

There remains the problem that the incentive to take a meter is particularly strong when the household has relatively few members and the property value is high, and the water saving that such a household makes is likely to be small. The empirical evidence on meter adoption suggests that single and two-person households are more likely to switch to being metered than larger households.

In England and Wales, there is a policy of not charging households who choose to switch to a metered supply for the costs of installation and meter purchase. This ‘free-meters’ policy requires tariff structures to be distorted. Those who choose to have meters are subsidised by those who do not. The rationale for such subsidies is not clear.

ENDS

Notes for editors: ‘The Welfare Economics of Optional Water Metering’ by Simon Cowan is published in the June 2010 issue of the Economic Journal.

Dr Simon Cowan is Wigmore Fellow in Economics at Worcester College, University of Oxford.

For further information: contact Simon Cowan on 01865-278324 (email: simon.cowan@economics.ox.ac.uk); or Romesh Vaitilingam on 07768-661095 (email: romesh@vaitilingam.com).