The retail water market - the first step to a new UK water sector
Since 1 April 2017, over 1.3 million organisations across England have been able to choose who supplies their water and wastewater services. This is the most significant change in the regulated water industry since privatisation.
The regulator has implemented these changes to enable comparison of retail water services which will allow businesses to negotiate a greater deal in terms of price and service, whilst also encouraging greater innovation, reductions in water consumption, and achieving significant environmental benefits.
What has changed?
Since 1 April 2017, monopoly water companies have continued to provide wholesale services to source, treat and pipe water, and carry away wastewater for treatment and disposal. However, retail services which include customer-facing activity such as billing, meter reading, management of the customer relationship and accounts, are now provided by a retailer who sits between the customer and the wholesaler.
Wholesale services continue to be provided by the regional water and sewerage companies but they now sell their water and sewerage services to retailers under a wholesale services agreement. The retailers buy water and waste water services from the wholesalers and package these with their own services for going to market.
Therefore under the recent changes, eligible businesses can now choose who supplies their water and wastewater services, regardless of where they are in England or Scotland, or where the supplier is.
When the competitive market opened on 1 April 2017, there were over 20 water retailers licensed to operate. These were comprised of retail arms of the monopoly water companies, established retailers from the Scottish market, and new market entrants.
What is the impact to date?
Retailers appear to have focussed their efforts on offering a better service to the customer and proposing a range of services customised to meet individual customer needs. These have included water demand management and access to specialist advice to help businesses understand, manage and reduce their water consumption.
The new market has also seen brokers from the more established competitive gas and electricity markets align with retailers to extend their packaged gas and energy multi-utility and total-utility service and product ranges.
Despite this, on 25 October 2017, the market operator (MOSL) reported that over 61,000 business customers (supply points) had switched their supplier, with 25,000 of these switches in this quarter at a rate of 1000 to 2000 per week. This represents just 2.3% of the 2.7 million supply points in the market. This indicates that generally customers are unaware, are not informed about the impact, or simply do not perceive there to be a benefit.
Impacts for construction
The infrastructure and construction sector has not been a specific target market for any particular retailer as yet but the construction industry and its supply chain are significant water consumers and have their own niche requirements. For example:
- Airports: The new water retail market provides some of the busiest airports in the UK with potential cost savings through working with their water retailer to develop integrated water management solutions that extract the maximum value from resources.
- Developers: Real estate developers may benefit through seeking a retailer who specialises in the transition of new properties, both domestic and commercial, across to landlords, occupiers or tenants following construction. Understanding the changes and potential benefits of consolidation or alignment with a specialist retailer may deliver commercial benefits.
- Public sector infrastructure stakeholders: National public sector organisations such as Network Rail, the NHS, Environment Agency or Highways England have premises and facilities across the UK. Consolidation of all their water services to a single provider may simplify the complexity and cost of administration and billing.
- Major infrastructure projects and programmes: Developers of major infrastructure might be interested in a retailer who can provide water and wastewater transport, storage and management services in more isolated or hard to reach locations for welfare or concrete batching, or perhaps the provision of temporary dedicated water supplies for construction.
Collaboration for mutual benefit
Closer collaboration between the infrastructure sector and its water retailers will greatly assist in identifying and realising the opportunities. Ultimately this will reduce the wholesale cost of a unit of water, reduce the pressure on water companies and create savings for the sector. Through greater collaboration, both parties can also:
- Address key opportunities such as the use of innovative technologies, designs and construction practices which minimise water consumption/treatment
- Address opportunities to create or evolve sustainable integrated practices for the collection and abstraction of water.
- Stimulate investment in long term sustainable and integrated solutions to the challenges faced by the water sector which will ultimately benefit all.
The first step in water sector innovation
The opening of the retail water market is part of OFWAT’s wider challenge to industry to be more innovative and deliver better value. In addition to the retail water market changes, OFWAT is also considering the potential deregulation of the residential water market in 2020 which would introduce competition and consumer choice in the domestic water market.
These changes have the potential to re-structure the entire regulated water industry. For example, water companies have been forced to focus on their strengths, some opting to withdraw from the retail market to concentrate on their regulated operations. These market changes stimulate businesses to think differently about their own water usage and opportunities to extract greater value.
This new industry structure will stimulate innovation and investment to exploit new sources of water and water re-use technologies benefitting the customer and water companies.
We also expect to see the evolution of new delivery models for new major infrastructure projects such as Tideway Tunnel. With new private infrastructure developers and operators and new financing models outside of the Asset Management Period (AMP) cycle.
Competition within these markets will drive innovation and efficiency, it will reduce the cost of a unit of treated water or treated wastewater and improve customer service. These changes will provide the consumer with choices and ultimately value.
The changes to the retail water market will affect all businesses in England however, many may not be aware of the opportunities associated with this regulatory change, noticing only a change to billing arrangements from their old local monopoly company to the new retailer. Having a firm understanding of the potential benefits and opportunities available may have direct commercial benefits and for a high use sector such as infrastructure and construction . Key considerations are:
- Consider your specific needs: Benefit will be achieved from having a thorough understanding of specific needs, now and in the future, and from aligning with a water retailer who best caters to these.
Businesses should not be afraid of undertaking an analysis of the current costs, future projects or needs and looking at the retailers who best meet these needs. The result of this will be a reduction in water consumption, elimination of waste and to remove cost.
- Not all retailers are the same: As many of us do in our personal lives, shopping around for the right deal for your needs is an option for businesses. Water retailers are increasingly likely to specialise and provide bespoke services particular to the needs of different business types.
- Consider value added services: Linked to the above, water retailers are also likely to provide a range of value added services to attract and retain business customers. Services may include access to technical specialists who can assist with the implementation of sustainable water, waste and energy reduction initiatives.
The construction industry can be a significant beneficiary of the changing water sector. Through considering the current changes and subsequent changes expect from OFWAT, innovative solutions will be possible for the management of water services on major infrastructure programmes and cost savings possible. Ultimately, benefits will realised across the water and infrastructure sector for years to come.