Water market reform can drive disruptive change across the utilities sector

Water market reforms present tremendous opportunities for the water industry – but to take full advantage we must be prepared to embrace the change and innovate.

Ofwat has a clear view of what it wants to see from water market reforms. This includes value creation and allocation, bringing new investors to the fold, continued incentivisation of long-term investment and ensuring water companies act in customers’ interest.

In order to achieve this, water companies must create new and attractive propositions for investors and customers alike. In short, they must be disruptors.

As market reform takes shape, we have seen an array of non-household retail models forming. Some companies have retained a traditional approach, preserving existing market share, typically through establishing a separate retail business. Elsewhere, we have seen others retain or extend their services to non-household customers, whilst others have decided to exit the non-household market altogether.

In each case, companies are attempting to differentiate value propositions to their current market. Some are seeking to achieve this by differentiating their focus on particular sectors, e.g. agriculture or SMEs. Others have sought a range of advisory services, designed to help their customers save money and spend less, as a value-add proposition.

These changes are certainly innovative, but it is not clear if they are really creating the benefits that customers want or what market reforms were designed to deliver.

There is an argument that opening up the retail market will create a burden on water companies and that customers might not necessarily benefit from the efficiencies that will come from reform. Arguably, the margins between firms are too fine to stimulate consumer switching. This view gains further traction when applied to the opening of the household market to competition. It is also possible that customers are unaware of the opportunity market reforms present.

The decision of Greene King, the pub retailer and brewer, to provide its own retail services, is a prime example of the sort of innovation that reforms can bring: Greene King took the opportunity to cut out the middle man and buy its water services at wholesale prices. However, the process of applying for retail licences is complex. Streamlining will be needed before Ofwat’s market reforms are achieved and continue to stimulate innovation.

Nonetheless, through checks and balances for customers, alongside incentivisation, Ofwat has the ability to facilitate game changing innovation, and to allow sustainable investment into the sector.

Looking further ahead at the opening of the domestic market, there will be opportunities and challenges for wholesalers and retailers. It may lead to a round of consolidation amongst incumbents, as retailers outside of the water sector enter the market. There is real potential for disruption by other service providers to drive efficiency through scale and the consolidation of utilities companies. The result for the consumer? One bill for gas, water, electricity and even telecoms services.

Retail competition might also bring a tremendous chance to bring sustained reductions in energy needs and carbon emissions in the utilities sector. We have already seen significant monetary savings and environmental benefits in the water sector with the use of advanced wastewater treatment processes to generate energy, such as anaerobic digestion, together with better use of land to establish solar and wind electricity generation.

Taking this to the next level, it might well result in large scale energy generation facilities becoming a thing of the past, replaced by smaller, distributed, sustainable energy generation.

If this is to become a reality, the regulator must pre-empt such change and be in a position to support innovation.

Whilst we are not yet sure of the future, market reforms will foster change upon the water industry and it is likely that this will come from both incumbents and newcomers. The entrance of both new customers and market entrants, coinciding with heighted customer awareness and confidence will push this issue further into the spotlight.

For water companies to take advantage of disruption, they will have to make strategic decisions sooner rather than later. If they act now, water companies will have the golden opportunity to spearhead disruptive change and drive radical shifts in the ways we produce water and energy.