Water retail: Looking beyond the friction points

Accounting for one-third of water consumption in the UK the non-domestic sector has a major part to play in efforts to manage demand to protect the environment and lower carbon emissions. Utility Week talks to retailers Wave, Everflow and self-supply manager Waterscan about how the sector wants to contribute to the ambitions of the wider sector and move beyond the friction points that have dogged the sector

The Department for Environment, Food and Rural Affairs (Defra) has given a clear steer to the water sector that the environment must be the top priority in investment and infrastructure decisions over the coming decades. Its strategic policy statement (SPS) to Ofwat centred on improving water quality in rivers, preparing for a drier century and managing water resources in a way that will not overburden future generations of billpayers.

With 30% of all water supplied being used by businesses, industry, agriculture and the public sector, the non-household water market has an essential role in achieving these ambitions.

Celebrating its fifth anniversary in April, the water retail market has experienced persistent points of friction that its participants, the market operator MOSL, and Ofwat have worked together to resolve. These efforts include making transactions between wholesalers and retailers uniform and improving data in the central market operating system (CMOS), particularly from water meters, some of which are difficult to locate.

There is broad agreement that these problems need remedying but market players are looking beyond these to how the sector can contribute to the wider conversations around water efficiency, the environment and reaching net zero.

The SPS laid out expectations that Ofwat should “focus its efforts” on the retail market by using competition to stimulate long-term sustainable investment and benefits for billpayers. Ofwat should, the SPS says, think about whether changes to market rules, processes and structures could boost resilience and investor confidence while delivering better outcomes for customers and the environment.

The SPS, which will inform the 2024 price review, called upon the regulator to monitor and promote how water companies can support the development of a well-functioning business retail market.

MOSL, which worked with Defra while it developed the statement, was pleased to see the final version retained “driving markets to deliver for customers” as one of the four strategic priorities for Ofwat.

A MOSL spokesperson says: “We welcome the increased focus outlined in the final statement on tackling the structural challenges in the non-household water market, as well as the frictions that have been identified over the last five years of market operation.

They say it is essential that the market “promotes competition, enables innovation and delivers benefits to non-household customers”.

“We believe Ofwat has a crucial role (such as through the upcoming PR24 price control period and the review of the Retail Exit Code (REC) price caps) to ensure the market is able to thrive and deliver value for all customers and improved environmental outcomes.”

Ofwat adds: “We consider (the SPS) to be consistent with our vision of a business retail market that creates value for customers, society and the environment. Publication of the Strategic Policy Statement is also very timely as it provides helpful direction to the newly created Strategic Panel.

“We are also pleased it highlights that further improvements to the market cannot be made by Ofwat alone and that all market participants have a role to play.”

Retailers have shown broad support for the SPS, with James Cleave chief financial officer at Everflow stating: “The crucial thing will ultimately be how it gets implemented; how and where specific trade-offs will be managed when looking at key decisions.”

He explains that for Everflow, the main issues are environmental, emphasising how the non-household market can contribute to targets to reduce consumption, improve efficiency and achieve net zero emissions.

Cleave says putting the environment front and centre is the right approach but more details are needed about how this will impact PR24: “At PR19 we saw a focus on affordability and big reductions in bills for household and non-household customer.

“If we’re now saying the environment is the priority, I want to see how the trade-offs will be managed between affordability and investment. It’s going to be interesting to see how that pans out, especially when you look north of the border at Scottish Water’s investment plans.”

The most recent price review in Scotland saw environmental interests trump economic concerns when it comes to investment decisions. While recognising the need to protect customers and those struggling with price and cost of living increases, Cleave says he hopes to see a similar attitude adopted in England: “We’ve got to make sure we do the right thing, but if we focus entirely on low prices then we will not get the outcomes we need on the investment side that will allow us to hit the various targets around net zero or water scarcity that the whole industry faces.”

Cleave also lauds the call for more competition rather than more regulation to deliver better outcomes for consumers.

“At the moment the balance isn’t right between regulation and competition,” he remarks. “It’s really important where we have markets in place that we should be using competition in those markets to drive better customer outcomes rather than reverting to regulation.

“There’s a lot of talk about how we want it to be a competitive market but it’s more the case that regulation is prohibiting customers from accessing the market, rather than that competition hasn’t worked yet.

“Competition hasn’t been given enough chance to drive the right outcomes, whether that’s on a customer engagement perspective, better service, or some of the environmental outcomes. With the right competitive drivers and funding structures the non-household market can make a real contribution to some of the targets we’re seeking to meet as a sector. We’re very much investing in those areas at the moment but there’s much more to be done.”

Cleave says what’s now important is how the SPS is interpreted for price reviews: “That will be where the rubber hits the road and we find out where the balance actually lies. The SPS encourages the use of markets to drive outcomes for customers, as well as ensuring the smallest customers in the non-household market are protected. We believe that competition can do both and can achieve these key objectives better than regulation can.

“Our view is that the reason customers aren’t switching isn’t because of market frictions but because the market hasn’t been allowed to introduce enough competition. The regulation is the thing strangling it,” he adds.

Wave chief executive Lucy Darch likewise welcomes the emphasis on competition: “That is ticking all our boxes. We like that very much. The non-household market can deliver for customers. We don’t think that’s going to be too difficult.”

Similarly to Cleave, she acknowledges the need to address market frictions but says the biggest risk would be Ofwat not taking the opportunity to move towards a more competitive market solution rather than a very regulated market.

“At the moment the restriction of cost recovery and the lack of adequate margin in the retail space is really meaning the market isn’t able to do as much as it could,” says Darch, who sits on the market’s Strategic Panel.

She explains the priorities of the panel are, firstly, getting the basics right around metering, data and billing.

“Secondly, we need to get the money right to make sure retailers are able to make money,” she adds. “Having all retailers loss-making is a big risk to the market. It is an inhibiter. We need to be able to have a cost allocation that lets us address the market frictions and data issues. We need money to address those issues to be able to get things right for customers.”

The SPS needs more detail around metering, specifically smart metering, Darch believes. At present not all wholesalers have short-to-medium rollout plans for smart metering, so older assets will be required to work for longer.

“The sector broadly makes up 30% of the water consumption so it’s important to be measured and controlled. Smart metering rollouts take a long time so we are going to be relying on the current assets for longer than was anticipated so we need wholesalers to focus on the assets being fit for purpose.”

Beyond these, Darch wants to see more opportunities in the market for value added services such as high consumption or leakage alerts for customers as a means to manage usage: “We are all aware the wholesalers are under pressure for water scarcity. A lot of people who really care about the environment work in the retail sector and very driven to save water, help customers save water.”

Aiding customers to save water is paramount to self-supply agents Waterscan’s offering to high-consumption business users. Managing director Neil Pendle tells Utility Week the company is “very much onboard” with the emphasis on net zero programmes, efficiencies and supporting the competitive market.

“We’re very supportive of Ofwat’s drive to get the benefits of the retail market moving, which have been difficult to realise up to now. Hopefully we’ll see a different pace of change – that’s what’s needed in the market and hopefully what we will see delivered now we are getting to a new reality after the pandemic.”

However, you can bring a horse to water retail but not make it drink, as Pendle points out: “Ofwat can agree the strategic priorities, MOSL can support the priorities but eventually trading parties have to change their behaviours.”

To Pendle, this would mean prioritising finding and reading meters, which he insists is not difficult but requires time, money and drive.

Pendle says the SPS is so comprehensive there is a risk that it could be difficult to prioritise what needs to be done now. “Defra have given Ofwat this clear framework and vision and it’s now down to the strategic panel to turn that into an action programme for the non-household market. There’s a lot in there with plenty of work to be done but the track record of making progress is not fantastic. That’s probably the biggest danger.”

For Waterscan, the resilience of water supplies is the most important point.

“It might not be a now problem but if we don’t act now it will be such a big problem by the time we get to it. We really need to get ahead of the curve otherwise in five years’ time interruptions will be a matter of course and we will all be chasing our tails again. That keeps me awake at night.”