The evolution of competition in the water market

The competitive landscape is evolving as big firms and minnows vie for market share

For companies once used to the relative calm of regulated monopoly retail service provision, the transition to a fully competitive retail market for 1.2 million business customers has been a challenging journey. With the market now open and running, companies may be tempted to sit back and relax, proud of what the industry has achieved. But it’s too early to call the job done.

For a start, the market hasn’t yet settled down, with a new release of functionality or modifications to the central market operating system (CMOS) occurring every few months. Responding to these changes will continue to draw time and resources away from companies’ own system or process improvement projects, while increasing the potential for customer service disruption.

Meanwhile, as companies gain customers in new regions and set about billing, they are learning if their testing in the shadow market was sufficient, and whether their pricing, invoicing and settlement processes can keep up. Any challenges relating to the accuracy of ambitious profit margins and cost to serve estimates forecast in tenders may soon start rising up the chief financial officer agenda.

Certainly, as customers begin to switch, data issues in the market are already becoming clear. Interactions between retailers and wholesalers to resolve these issues will improve with familiarity, but long-standing data and billing errors will drive complaints if they receive insufficient attention.

The changing shape of the market

At the same time, the competitive landscape is evolving as big firms and minnows alike vie for market share.

With the recent merger of Anglian and Northumbrian creating a new retail business with 250,000 customers, Britain is well on the way to having a big seven rather than a big six. (Although, even then the Severn Trent and United Utilities joint venture, Water Plus, is equal in size to the fifth, sixth and seventh largest firms combined, with a tremendous 400,000 customers.)

Meanwhile, a growing number of new entrants – existing Scottish participants, water service company spin-offs and brand-new retailers – are joining small regional water-only companies in what’s becoming an increasingly crowded “niche” end of the market.

It is likely we’ll see one or two more big deals at the top and continued expansion at the bottom end of the market, echoing energy. In the business electricity retail market, over 150 retailers are on offer, while the top five control two-thirds of the customer base.

Adding to the growing number of options for customers, we expect to see firms active in the energy and telco markets begin to grow their presence in water. Some are already cross-selling into the water market, although many will wait to see how it develops over the next 9-12 months. This will happen in a number of different ways, but the three key scenarios will be:

1. Brokers. The primary route to market for many retailers, particularly when targeting SMEs, will be via brokers. The large energy brokers are all already active in the water market, and we expect the lure of multi-utility discounts to grow brokers’ share of active switchers.
2. Bundling. The true multi-utility offering, covering water, energy and telco services, is a strong driver for firms to branch out. A word of caution to the ambitious energy executive: the complexity and variety of wholesale water tariffs is a significant challenge, meaning your current energy billing system will need hefty investment or integration with, and dependence on, one of the handful of suppliers that provide off-the-shelf solutions.
3. Acquisition. When Castle Water bought Thames Water’s 300,000 business retail customers, it paid £99 million. All business retail units are now run at arms-length from parent wholesale/domestic operations, so for water company shareholders and investors, who are used to the reliable capital returns from infrastructure investments, the opportunity to avoid market volatility and narrow their executive teams’ focus may bring a willingness to sell.