Chief executive’s view: the water market’s second year – reflecting and refining

"PR19 provides a real opportunity to address one of the key issues impeding the success of the market"

Well, we’ve made it! The English retail water market has now been operating for a full year. This was no mean feat for the industry and it’s fantastic to see customers now able to reap the benefits of a competitive market, either through switching supplier or accessing a better deal from their current provider. There is of course still much to do to ensure the market is operating as effectively as possible and that all customers – regardless of size or location – are benefiting.

At the recent ‘Open Water – One Year On’ event, Ofwat reflected on the successes of the first year and the challenges ahead, with acknowledgment from Emma Kelso at Ofwat that there is more work to do to ensure that the market works for customers.

The creation of the UK Water Retailer Council, which first met in February this year, is a welcomed step. The Council has been set up to provide a unified voice for the business retail community and to address the key strategic issues impacting retailers and their customers in the new market. The Council will have representation from almost 90 per cent of market participants and has already received strong support from Defra, Ofwat, the CMA, WICS and MOSL, all of whom have expressed an interest in engaging directly with the group. This strong foundation should help to ensure that the Council can become an influential body within the industry and help to deliver tangible improvements to the market.

There was a great deal of consensus amongst members at the first meeting around what the key issues are with the complexity of the marketplace; the quality of market data; and lack of consistency across wholesalers’ policies and performance, all highlighted as priority areas of focus. The Council provides a platform for retailers to collectively agree and propose working solutions for each of these issues.

Another topic discussed by the Council was PR19 (the industry’s next price review) and the impact it will have on retailers and their customers. As part of the price review process, Ofwat will be setting wholesale price controls for water and sewerage companies, for the period from 2020 to 2025, which will determine, amongst other things, how much customers pay for their water services. With wholesale costs accounting for over 90 per cent of a customers’ retail charge, it was encouraging to see the direction of travel on the cost of capital and wholesaler costs, as downward pressure will help to drive down prices for customers.

PR19 provides a real opportunity to address one of the key issues impeding the success of the market – ensuring SMEs can truly access its benefits. To date, the complexity of wholesale tariffs and lack of transparency on retail prices, coupled with the very low margins and the comparatively high cost to serve, has resulted in very low switching levels within the SME sector. A modified version of the current controls, coupled with a reduction in wholesale costs, would help to increase the margin available to fund customer discounts and value added services, such as water efficiency measures, which would be positively received by all customers not just SMEs.

Of course we don’t have to wait on the outcomes from PR19 to make a difference; there are things we can do now to help the market operate more effectively. By addressing some of the priority issues identified by the Retailer Council, including improving the quality of market data and reducing wholesale tariff complexity, we can reduce retailers’ costs and in doing so, help more customers access the market.

Ofwat has acknowledged that the market has got off to a good start, but there is still more to do. The one year anniversary of the market provides us with the opportunity to accurately reflect on the experiences to date, to understand what has worked well and where improvements are needed. By using these experiences to help address the outstanding issues we can ensure the market is working for all customers and reflect back in years to come on a true success story.