Over the next 40 years, NSW will face strong population growth, particularly in Western Sydney around the South Creek corridor. This rapid urbanisation will place increasing pressure on water-related infrastructure and services as well as on the health of the key waterways and local environments.

Water recycling has the potential to provide significant benefits to both end-customers and the broader community in meeting the demand for water and wastewater services from a growing population, while at the same time protecting sensitive environments and promoting more productive, liveable and resilient urban communities. This requires the right policy and regulatory settings to be in place to promote investment in and use of cost-effective water recycling. Getting these settings right could deliver significant customer, community and environmental benefits to contribute to the Greater Sydney Commission’s vision for a Western Parkland City.

There have been significant changes in the NSW urban water market since the mid-2000s, but despite these changes the uptake of water recycling in metropolitan NSW has plateaued in recent years. This has generated concerns that existing regulatory, policy and institutional arrangements are impeding the potential for investment in and use of recycled water. Aspects of the regulatory framework covering or influencing water recycling in NSW have not been reviewed or updated for over ten years.

Frontier Economics was engaged by Infrastructure NSW to provide independent advice on the optimum regulatory framework for the uptake of cost-effective recycled water initiatives, with a focus on the economic regulatory framework governing the urban water sector.

Our review has found that while many elements of the economic regulatory framework are promoting cost-effective water recycling and remain ‘fit for purpose’, a number of aspects are likely to act as barriers to cost-effective water recycling. These aspects include:

• Lack of consistent, accessible and timely information published by public water utilities on water, wastewater and stormwater system constraints and the potential costs savings in these systems from water recycling, which means market participants cannot identify opportunities for cost-effective water recycling
• Lack of regulatory guidance to ‘encourage’ public water utilities to consider and propose water recycling investment opportunities
• Challenges in incorporating the broader costs and benefits of water recycling in investment and regulatory decision-making
• Additional risks and disincentives for public water utilities to consider investment in water recycling relative to other solutions, even where water recycling may be cost-effective
• Retail usage prices for water and wastewater that may not provide efficient signals regarding use of these services (including the emerging system constraints) or signals that promote investment in water recycling in the right place and at the right time
• Differential application of developer charges to recycled water and other services, which reduces the incentive for developers to consider water recycling
• Uncertainty in how IPART's proposed ‘retail-minus approach’ approach to setting prices for wholesale services for wholesale customers with a recycled water plant will apply in practice, which creates risks for both public water utilities (who provide these services) and private water utilities (who receive and pay for these services) in NSW

Our report makes 32 recommendations aimed at addressing current and potential barriers to cost-effective water recycling. They seek to encourage greater consideration of the broader costs and benefits of water recycling, provide consistent incentives and signals for investment in and use of water recycling, and promote the entry of efficient private sector providers of recycled water. They require action to be taken by the NSW Government, the public water utilities and the Independent Pricing and Regulatory Tribunal (IPART), with an emphasis on acting sooner rather than later.

Not all of the actions recommended in this report are straightforward. But decisions need to be made now to keep ahead of the intense pressure that population growth will place on essential water, wastewater and stormwater infrastructure over the next decade and to avoid the potentially significant adverse impacts of this pressure on the NSW economy, natural environment and communities across the State.

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