Spain's water is getting more expensive: the challenge of cost recovery

The cross-cutting nature of water makes it a major aspect of economic progress, social development and environmental conservation. In Spain's regulatory fabric, water occupies a relevant place as it is implicitly recognised as a public good by the Spanish Constitution of 1978. Although the text does not explicitly state it as a fundamental right, its link with essential values such as health, the environment and decent housing highlights its transcendental importance in the constitutional context.

Royal Legislative Decree 1/2001, of 20 July, which approves the revised text of the Water Law, establishes "the regulation of the public water domain, the use of water and the exercise of the powers attributed to the State in matters related to this domain within the framework of the competences delimited in Article 149 of the Constitution". In other words, its ownership is always exercised by the Public Administration and access to water is regulated by a Law that determines which uses are freely accessible and which must obtain some kind of authorisation or licence. However, despite this state ownership, water management in Spain has undergone a trend towards decentralisation, with decisions on its use being entrusted to the Autonomous Communities and the hydrographic confederations. This is particularly evident in the urban sphere, where local councils have the power to manage water resources, opting for public, private or mixed management models.

In the field of urban water management, including the formulation of tariff policies, Law 7/1985, Regulating the Bases of Local Regime, establishes that this is a competence of local entities. According to Enrique Hernández Moreno, Director General of the Spanish Association of Urban Water Services Management Companies (AGA): "Urban water is a municipal competence, which means that each municipality, regardless of its management model, has the autonomy to set the prices it considers most appropriate. Naturally, this situation generates a notable disparity in tariffs," adds Hernández Moreno.

The tariff structure in Spain

Water management and administration in Spain is governed by principles established in European and Spanish legislation

Water management and administration in Spain is governed by principles established in European and Spanish legislation, with the Water Framework Directive 2000/60/EC (WFD) being the main guideline. In its Article 9, the WFD highlights the principle of cost recovery for water services, covering investments, depreciation, environmental aspects, maintenance, operation and management, and also takes into account the 'polluter pays' principle.

In other words, Member States must ensure the implementation of a water pricing policy that incentivises efficient water use and guarantees a sufficient contribution to fully cover the costs - operational, commercial and financial - of water services. In Europe, although the tariff structure differs from one country to another, the most common modality is the binomial tariff -also in Spain-, which consists of a fixed component and a variable component according to consumption, in which a block system is usually applied. There are also often discounts for vulnerable groups, such as low-income families, pensioners and other groups.

While water tariffs contribute to cost recovery in most of Europe, according to EurEau, the European Federation of National Water Services Associations, in some countries it is still necessary to finance part of the costs through a combination of tariffs, transfers and taxes. Spain, compared to other European countries, has significantly low urban water tariffs, at 45% below the European average, which raises questions about whether the 'polluter pays' principle is being adequately met, according to Pascual Fernandez, president of the Spanish Association of Water Supply and Sanitation (AEAS).

The 2022 Tariff Study (AEAS-AGA) reveals that tariffs in Spain do not adequately cover the costs of services, as established by the Water Framework Directive (WFD). The director general of AGA, Enrique Hernández Moreno, points out that this does not justify raising tariffs to bring us into line with other countries, but it must be explained that tariffs in Spain do not recover all the costs. The average price of water for domestic use in Spain is 1.97 €/m³ (without VAT), distributed in 1.09 €/m³ (55%) for the supply service and 0.88 €/m³ (45%) for the sanitation service. According to Pascual Fernández, this tariff sometimes only covers operational costs, but does not address the costs associated with infrastructure, such as depreciation, renovation and improvements to guarantee the quality of the water supply.

Both organisations stress that overcoming the significant investment deficit and tackling the ageing of infrastructures are the main challenges for the urban water sector in Spain. "An efficient tariff must adequately cover all the costs of management and provision of the resource, including specifically the amortisation of infrastructures, and must comply with European and Spanish regulations, especially the principles of 'cost recovery', 'polluter pays' and 'adequate user contribution'", underlines the president of AEAS.

In Spain, there is a notorious disparity in water costs between different cities. A revealing example is the latest price analysis carried out by the Organisation of Consumers and Users (OCU), which highlights notable differences in both the fixed and variable components, the latter stipulated for an average consumption of 175 m3, typical of a household with three or four people. The contrasts are significant: while residents of Guadalajara pay €164 for this consumption, in Barcelona the bill rises to €520, more than three times as much. Similarly, in cities such as Murcia, Alicante, Palma, Huelva, Lérida, Tarragona and Cádiz, bills exceed €400 per year.

These disparities underline the marked variability in water costs at the local level, raising questions about the reasons behind this. While there are legitimate reasons, such as natural differences in water source and quality, economies of scale in metropolitan areas, population density, and geographical and topographical characteristics, these do not fully justify the variations in prices paid by citizens. The main reason lies in the lack of a structured rule for costs, resulting in a lack of transparency in cost disclosure - mainly due to investment deficits - which allows political decisions to exert a significant influence on price determination.

The price of water in Spain rises in 2024

"The price of water, its cost of supply and its value are not synonymous; the price is simply a tool to align the use of water with its values", says the United Nations Water Development Report 2021, The Value of Water. In this sense, the tariff is more than an instrument to cover costs; it is an essential element in the investment policy to maintain the service or, better still, to modernise it to make it more efficient and sustainable.

Overcoming the investment deficit and ageing infrastructures are the main challenges facing the urban water sector in Spain

According to the AEAS-AGA study, even though Spain faces a significant scarcity of water resources compared to other European countries, the economic burden of water bills for households is, on average, less than 0.7%. This is well below the 3% set by the UN as the limit to guarantee the affordability of the Human Right to Water in terms of supply. Our effort, expressed as the ratio of what is paid to household income, is 29% below the European average for water. In contrast, for electricity and telephony, we are 23% and 25% above the European average, respectively.

The lack of cost recovery in Spain has a negative impact on the sustainability of services, and if we want to preserve an essential service, we must all pull together. From the citizen's perspective, this translates into an unwelcome increase in tariffs. Overall, between 2010 and 2019, few systems experienced increases in urban water tariffs, as the Consumer Price Index (CPI) had a moderate increase - 12% cumulatively over ten years. However, in the last three years, an increase of 13% has been observed, explains Pascual Fernández, which the water sector has taken on without affecting the bill until now. The increase in costs is evident, and its reflection in tariffs will be more pronounced in those places where the accumulated deficit over these years is more significant. "It is important to bear in mind that these increases must be contextualised by the particular circumstances of each system. Some may have been more affected by energy costs, such as the massive use of pumping, or by adverse weather conditions, such as drought, which may have required the construction of alternative infrastructures to guarantee supply".

The situation will change as of 1 January 2024. During the last quarter of 2023, several Spanish municipalities announced increases in water tariffs. This adjustment not only responds to the need to adapt prices to rising inflation, but also to the urgency of addressing the persistent drought and compensating for the shortfall in infrastructure investment. It is important to note that, in all cases, it was also announced that the tariff update will allow approval of the increase in bonuses for vulnerable families.

In October, the Board of Directors of Ens d'Abastament d'Aigua Ter-Llobregat (ATL) approved a tariff review for a 33% increase, following its freeze in 2017, which will affect the different municipalities differently. This increase responds to the increase in "key costs" for the water cycle, such as energy and drought, in response to which the Generalitat has argued that the ATL needs to be able to guarantee the water supply service and the costs derived from it. It is also important to note that Catalonia is currently facing a situation of "drought pre-emergency".

In Santa Cruz de Bezana, Cantabria, a 5.9% increase in the water tariff is anticipated due to the lack of updating in line with the CPI since 2014. The mayor, Carmen Pérez Tejedor, explained that this increase is linked to a contract signed by the previous government.

In Zaragoza, the water bill is projected to increase by 8.5% by 2024 due to the rising cost of energy. This will force the City Council to assume an additional cost of €2.3m, according to Blanca Solans, Councillor for Finance. This variation will mainly affect the variable part of the bill, with the aim of encouraging efficient use and saving water.

In the south, Emasesa approved a "modulated" water increase in the twelve municipalities of Seville, varying between 15% and 18% depending on whether domestic consumption is efficient or normal. This adjustment will be spread over 2024 and 2025 and will result in monthly increases of €1.15 and €1.85 for efficient and normal consumers, respectively. "The situation is critical due to the drought and complicated by Emasesa's deficit. These are not simple measures, but they are necessary," said Juan De la Rosa, the urban planning delegate responsible for Emasesa.

In Malaga, after eight years with frozen tariffs, the average increase in the bill will be 32.8% by 2024, justified to cope with rising costs and the integration of a specific charge to finance infrastructure investments. This represents an increase of €4.79 per month. The increase will not stop there, but in the second year of application (mid-2025) there will be an additional €0.36 per month; another €0.36 in 2026; an additional €0.48 in 2027 and another €0.48 in 2028.

In Toledo, the City Council announced an increase in the water bill in compliance with a court ruling related to the previous government's failure to update tariffs. For the typical consumer, representing 80% of the population, an increase of 8.8 euros per two-month period is expected in the total bill, from 28.23 euros to 37.02 euros (VAT included), i.e. an increase of 31.4%.

Tariffs are crucial mechanisms for allocating the appropriate contribution of users to the recovery of service costs. Citizens are often unaware of the complexity and technology required to bring water to the tap and return used water to the public watercourse with natural quality. In addition, the water sector, already at the limit, stresses the need to update tariffs to ensure sustainable management of the resource. AEAS is calling for the implementation of "a clear and transparent cost and tariff structure that reflects the real value of water and ensures long-term sustainable management and the necessary investments". The water sector works tirelessly with a social and environmental commitment to ensure that the purity and safety that water represents reaches our homes directly through the tap.