Editor’s letter: Where’s the innovation in the water market?

Ellen Bennett congratulates the water market on meeting its momentous milestone, but questions its ability innovate for customers.

A big well done to all those who have contributed to getting the non-domestic water retail market open on time tomorrow. The date of 1 April 2017 has long been looming over the market – and at one point looked unachievable. The project suffered a series of major setbacks in its early days and all credit to Ofwat, Wics and, of course, the companies for pulling together and delivering on time. The initiative by three companies in particular to set up MOSL, now the official market operator, threw the project a lifeline at a critical moment.

The impact of market opening is already being felt. This week, a third mega-merger was announced as Anglian Water and Northumbrian Water teamed up for non-domestic retail under the “Wave” badge. Six months ago, the water sector looked pretty much as it had at privatisation. Already it looks very different, with market opening forcing companies to ask whether their traditional, integrated business models are fit for purpose in a changing landscape.

At another level, the benefits of market opening have yet to be proven. It was supposed to improve customer service and foster innovation in the market, but are any of the retailers, whether incumbents or new entrants, offering truly innovative solutions? A survey of 11 retailers by Water.Retail, a new sister publication launched by Utility Week this week, found they were all offering the exact same “bespoke” service on leakage. That doesn’t bode well.

Innovation is, or should be, the main benefit of market opening for customers – at least while the low margin limits the potential for cost savings. If Ofwat holds the margin down, companies will be effectively unable to compete on price. If they fail to compete on innovative customer solutions as well, one might be tempted to question the point of the whole costly and time-consuming exercise.

In a market with limited innovation and low margins, there’s only one way to win: scale. That thinking is driving the mergers between incumbents such as Anglian and Northumbrian and, if taken to its logical conclusion, could see an energy market-style “big six” emerge to dominate the market (see analysis, p23). If Ofwat wants to avoid this outcome and tempt in innovative new entrants to shake things up, raising the margin via PR19 is the obvious solution.

•    Utility Week’s new sister brand Water.Retail will be covering the market in depth, with fortnightly investigations, insights and analysis. The first two issues are free – see www.utility-week.co.uk/water-retail for more information