Market view: What energy can teach water

The water industry can learn a lot from the energy sector about how best to manage competition, not least by adopting smart meters, say Stephen Haw, Steve Airey and Hayley Speller.

Since its privatisation in 1989, the water industry in England and Wales has functioned as a non-competitive market in which regionally regulated businesses operate as both network provider and retailer – managing storage, treatment, supply, billing and customer experience. Customers, as a result, have not been able to switch provider to get a better deal or better customer service.

This is about to change for business customers: competition is being introduced for the first time for all business users in April 2017 in one of the most transformational changes to hit the water industry in decades. As participants and the interested public wait to see how this will materialise, it looks likely that domestic market competition will not be far off.

As water companies prepare for further retail competition, many – particularly in the South and South East of England – have also begun universal smart metering programmes for domestic customers to future-proof water supplies in areas that the environment secretary has deemed severely water stressed.

These companies can learn lessons from the competitive energy retail sector, where the adoption of smart meters is transforming the ways in which consumers interact with companies. Energy retailers are focusing on richer, data-driven customer experiences and are expanding their presence in the digitally enabled ‘connected home’.

Smart meters can bring significant opportunities to both customers and suppliers. Being conscious of this is critically important to the strategic decisions and direction taken by each organisation. As a result, water companies that are not in water-stressed areas may still opt to roll out smart meters (albeit not on a compulsory basis), so that they too can reap the benefits, some of which are covered below.

Reducing water use. Smart water meters can help reduce water use by making customers more aware of what they use, helping customers reduce their water bills and companies better manage peaks and troughs in demand. There have been some successes: customers with smart water meters have cut consumption by 10-15 per cent compared with a reduction of only 2-5 per cent in energy. There have also been challenges: some households are more susceptible than others to bill increases compared with their historic rateable value charge, so are less willing to engage with companies trying to install them.

Southern Water has been something of a flagbearer for smart water meter trials in the UK. A five-year scheme to install meters across the UK’s water-stressed south-east region saved 27 million litres of water every day, according to the provider.

Transforming the organisation. Energy retailers have used new metering technology as a mechanism to deliver large-scale transformational change. Water companies could follow suit, using the opportunity to lower operational costs by investing in people, process, technology; or leveraging smart water meters as a proactive customer positioning vehicle ahead of likely future domestic competition. Companies with data-rich customer service and an ability to offer various tariffs, bundling utility or extra services together, may find this a valuable competitive advantage.

Improving the network. Smart water meters allow utilities to better understand water use and identify where consumption is abnormal. They can act as extra sensors on the network, identifying leaks and providing information to enable better decision-making for capital investment. Better decisions translate to better allocation of large cash-intensive network replacement programmes, ultimately providing water to customers at a lower cost.

In conclusion, Great Britain’s smart metering programme has been transformative and placed pressure on all market participants. Companies first off the mark, as well as fast adopters, are competing for a differentiated position in the market while balancing the inevitable risks associated with large-scale rollouts of new technology.

With smart water meters and the impact of competition, it is likely that new challenger brands will emerge in the water industry and eat into market share. ‘Horizontal growth’ is a key area – where market players can offer extra services related to the core product or a range of different product options. A different strategy is based on being ‘lean and simple’ – targeting operational efficiencies, and products and propositions that reduce the effort of the customer to understand, purchase and transact.

Smart meters are important components of evolving smart networks. Electricity and gas companies are increasingly able to predict and meet demand more effectively through smart meters. For water companies, they are – and will be – a key enabler to optimise the water resource itself and to spend money in the optimum way to produce and deliver this essential resource into customers’ homes.