First impressions of the business water market

Nearly six months have passed since the non-household retail market opened on 1 April 2017. Marc Burns, Andrew Barroso and Netti Farkas-Mills look at water retailers’ experience has been of the first few months, and consider what the outlook is for the market.

All the water utilities got to the starting line and the market opened without any major technical issues. As a result, non-household customers in England – 1.2 million businesses, public sector bodies and charities – are now able to switch their water retail supplier, while incumbent water companies are able to stop providing retail services for non-household customers (subject to an agreed approval process). New suppliers should find it easier to enter the market.

The non-household retail market opening was a milestone in a series of ongoing industry reforms. These reforms, such as the Water Act 2014 (Act), are driving companies to better prepare for challenges including climate change, affordability and sustainability issues as well as responding to increasing customer expectations.

Water and sewerage businesses in England responded to retail competition by restructuring their businesses prior to market opening. All incumbents have now separated their non-household retail arms from their wholesale operations and decided whether to stay in or exit the market. As the date of market opening approached, a set of leading joint-venture retailers emerged, followed by a longer list of retail businesses of smaller incumbents, self-suppliers and niche operators.

Our report is based on discussions with a number of retailers and wholesalers in the first few weeks of the new market. While these discussions acknowledged that the market opened without any major technical difficulties – thanks to the joint efforts of MOSL, the market operator, market participants and regulators – many noted that there were a few areas that needed a continuous improvement focus:

In our opinion, the modest net retail margin is unlikely to be able to support the current number of retailers and this will lead to further consolidation in the market over the next 12-18 months.

Which retailers are likely to succeed? Those, who provide value-added services, such as supporting customers to reduce their water usage, superior customer care or those able to bundle water retail with electricity, gas or other services stand the best chance. Cost-efficient business structures will be crucial: the more retailers can innovate, automate and use data effectively to reduce costs, the better they will able be to retain margins.

The water retail market is a low margin–high resource business and could remain so until further efficiencies are found. While some retailers have already decided to exit and are waiting for offers, some other incumbents may also choose to reallocate their workforce to other, more profitable, parts of the business.

Is the market successful? It is still early days, but in our view customer switching should not be considered as the main measure of market effectiveness. Rather, the market’s success should be measured by improvements in efficiency, services and more sustainable bills over the medium- and long-term. In other words, those who do not switch should still benefit from the changing marketplace.