Water retail market witnesses first casualty

As Clear Business Water rescues the customers of Aquaflow after Ofwat triggered its interim supply process, Katey Pigden asks if the first water retailer failure could be a sign of things to come.

Supplier failures have become increasingly common of late in the energy retail space and now the non-domestic water market has witnessed its first casualty.

Ofwat had to trigger its interim supply process for the first time shortly after the open market’s second anniversary last month as Aquaflow Utilities entered liquidation on 9 April.

Around 74 business customers were transferred to Clear Business Water, which was chosen by the regulator through what effectively is the equivalent to energy’s supplier of last resort (SoLR) process.

So far this year three energy retailers have ceased trading – Economy Energy, Our Power and Brilliant Energy. Ofgem chose Ovo Energy, Utilitia and SSE respectively as SoLR.

The three companies the energy sector bid farewell to join a long list of failed suppliers which exited the market last year. And more could be on the way in 2019 with URE Energy and Solarplicity both on Ofgem’s radar. The two companies have been slapped with orders from the regulator – URE for failing to pay government green levies and Solarplicity for poor customer service and not paying several feed-in tariff (FIT) generators.

URE is in danger of having its licence revoked within the next three months if it fails to comply with a final order issued by Ofgem. It is required to pay more than £200,000 by August for its outstanding Renewables Obligation.

But some industry analysts are of the opinion the company may have already shut up shop.

Writing in a recent post on LinkedIn, Ian Barker, managing partner at BFY Consulting, said it was “highly likely” that URE ceased trading in December 2018.

Meanwhile Solarplicity was banned from taking on new customers earlier this year and now the regulator says it believes the supplier failed to pay several FIT generators despite receiving FIT levelisation payments.

Utility Week has repeatedly contacted URE Energy for comment and is yet to receive a response. But Solarplicity defended its position and hit back at Ofgem for “not engaging” with it prior to issuing the FIT order.

The regulator held firm and said it appears that Solarplicity has not been meeting the payment plans it claims to have put in place.

Water follows suit

While Aquaflow is the first water retailer to bow out in such a way it will by no means be the last as the very nature of a competitive market will dictate there will be winners and losers.

Chris Earle, chief executive of Verastar, the parent company of Clear Business Water says it is “saddening, although not unpredictable” to see the first water retailer in England enter the interim supplier allocation process.

He suggests the “tight retail margins set as part of PR16 [the 2016 non-household retail price review], combined with onerous working capital arrangements for non-associated retailers has made it incredibly difficult for businesses to enter and gain traction in this market.”

Earle adds: “The anticipated wholesale cost reductions through PR19 provide Ofwat with a unique opportunity to correct this, enabling competition to enter the market and safeguarding customers by preventing a reoccurrence of this scenario on a potentially much larger scale.”

Responding to the challenge a spokesperson for Ofwat tells Utility Week: “We are keen that customers are able to take advantage of the benefits that a competitive market can deliver; both in terms of the price they pay and the service they receive, and we continue to be encouraged by new entrants into the business retail market.

“We are aware of the concerns that some trading parties have raised with regards to the level of margin available. We are considering this as part of our review of the retail exit code, on which we recently consulted on our proposed approach to future retail price protections that will apply from 1 April 2020.”

The regulator’s senior director of customers and casework, Emma Kelso says it is difficult to see a company fail but acknowledges that not all retailers will “thrive” and it’s possible that in the future others will leave the market too.

She says: “There are many more retailers in the market offering increased benefits for business water customers, and we expect more to join in the coming months.”

Ofwat wasted no time in using its powers under the interim supply code, which it published in March 2017 ahead of market opening. The code comes into effect when a licensee exits the market and its customers need to be reallocated to another supplier.

Speaking when news of Aquaflow’s demise first came to light, a spokesperson for Ofwat told Utility Week: “The interim supply code was put in place to ensure customers are protected in situations such as this. This is the first time that we have had to use the interim supply process in the business retail water market and we can confirm that it is broadly equivalent to the supplier of last resort process in the energy market.”

Aquaflow’s market entry – positive start to 2018

Aquaflow applied to enter the non-domestic water retail market in England – the largest of its kind in the world – shortly after it opened to competition on 1 April 2017.

In its licence application, the company said it was “committed to offering eligible businesses in England and Wales exceptional levels of customer service, a highly competitive pricing strategy and a technology and efficiency driven approach to reducing their water consumption”.

The company was granted its licence on 4 January 2018, which Ofwat’s Kelso described as a “positive start” to the year. She said at the time that greater competition in the market will result in more choice and better deals for customers.

Fast-forward a year and a few months and Aquaflow was forced to get in touch with Ofwat to highlight it was “likely to enter liquidation”.

Huw Powell, partner at Begbies Traynor and joint liquidator of Aquaflow Utilities Limited, tells Utility Week: “Aquaflow Utilities Limited was established in response to changes in regulation for the non-domestic water retail market, which opened up to new entrants in England in April 2017.  Previously, customers were given no choice as to their water supplier, unlike with other utilities.

“The company’s strategy was to build up a customer base of SMEs and small industrial users, and managed to secure in excess of 70 live customers within its first year of trade.  Unfortunately, it did not build a sufficient number of customers to generate the levels of turnover necessary to make a profit. Furthermore, efforts to raise additional funding via institutional investors were unsuccessful. With insufficient cash to meet the monthly payments to the wholesalers, the company had no option but to cease trading, as failure to pay wholesalers constituted a breach of their licence.”

Powell adds: “It is too early to say if this situation is a market trend – Aquaflow Utilities was one of the early entrants into a brand-new market and wasn’t able to establish its customer base quickly enough. While this could happen in any sector, the stringent regulations around licensing are in place to ensure a company’s financial solvency to operate, leaving no margin for error. Therefore, any business in this market must be adequately financed and confident they will be able to establish a significant and stable customer base within the requisite timeframe.”

Market operator MOSL says that while this is the first instance of its kind since the water retail market opened, it believes it is “to be expected” in a maturing competitive market.

“Indeed, we would expect to see retailers both enter and exit, and MOSL will continue to fully support companies as they go through either process,” a spokesperson confirms.

Official farewell

Aquaflow contacted Ofwat on 18 March and stated that its “shareholder will be unable to provide it with funding” for the next financial year (2019-20).

The retailer provided the regulator with information which indicated “it had not yet paid invoices from wholesalers” that were due for April 2019 and which should have been paid by 18 March.

On 25 March, Aquaflow told Ofwat it was “no longer carrying out its customer-facing functions” and provided documentary evidence it could no longer pay its debts.

The regulator subsequently published a “notice of revocation” on its website in relation to Aquaflow, which came into effect at 3pm on 28 March.

When Clear Business was named as the chosen company as part of the interim supply process Earle said: “Ofwat selected Clear Business based on the assurances we provided in ensuring the smooth transition of services for customers, supported by our extensive experience of managing large scale customer base transfers.

“Despite the unfortunate circumstances surrounding this, we are delighted to welcome affected customers to our business.”

Prior to Ofwat revealing who would come to the rescue of Aquaflow’s customers, Business Stream confirmed to Utility Week that it would not be putting itself forward.

The company said that its “key priority” was to ensure the smooth transition of the non-domestic customers it had purchased from Kelda Group.

Scotland’s largest business water retailer says the move to acquire the customers of Yorkshire Water Business Services (YWBS) and Three Sixty, both part of the Kelda Group, will double its market share and “cement its position” as one of the top three retailers in the UK water market.

The deal, the value of which has not been revealed, is expected to take effect this summer, subject to regulatory approvals.

It will see Business Stream manage water and wastewater services for around 140,000 new customers in the Yorkshire area.

Business Stream previously doubled its customer base in 2016 when it acquired Southern Water’s non-domestic customers ahead of opening of the English retail water market.

The English market paved the way for 1.2 million businesses and public bodies in the country being able to choose their water supplier for the first time.

In the relatively short time the market has been open to competition it has already shown signs of consolidating.

Castle Water, another of the largest retailers in the market, has also been active in the world of acquisitions.

The company bought the business customers of Portsmouth Water when the latter become the first English incumbent to announce it would exit the market and in 2017 it also took over the business customers of Thames Water.

It has since gone a step further by acquiring fellow non-domestic water retailer Cobalt Water and more recently Invicta Water for an undisclosed sum. Invicta Water traded as Water Choice and was taken over by Castle in May last year.

The shape of the non-domestic water market will continue to evolve and further consolidation could be on the cards in the coming months and years.

Now the shock of the first failure has been felt, the next will be less of a surprise. It’s just a matter of when.