Is the water retail market working?

"Some customers have benefited, but these are generally big consumers"

Smiling local artisanal florists and bearded hipster craft beer producers seeing their water prices slashed, new start up water companies offering amazing new water efficiency technology and free ice-cream to happy customers, CCWater employing more people to deal with all the incoming calls praising retailers, the economy booming as competition drives efficiency in the water sector which is passed on to businesses, and puppies and kittens playing in the street beneath perpetual rainbows. This was what the new water market was supposed to be like. But a year on whilst there are some pictures of bearded artisans on the open water website the rest doesn’t seem to have happened.

So, has the opening of the English water market been a success? Well it’s a mixed bag. On the plus side the mechanics have worked, CMOS didn’t fall over, companies were able to vertically disaggregate, customers have been able to switch, the market rules are workable, there have been some new entrants, retailers are applying different business models, and some people have made savings. But has the market worked for the majority customers, has it increased choice and delivered financial savings, or environmental improvements, or better customer service? I would say no, not yet.

There are around 25 retailers serving England, but very few of these are new real entrants and there have been mergers amongst the associated retailers, leading to some very big players dominating the market. At the same time customer awareness is low and less than 5 per cent of the market has switched. So, it looks like we may be very quickly replicating the worst aspects of the energy market with a few large companies and little real competition.

Yes, some customers have benefited, but these are generally big consumers who can set the terms of their contracts and negotiate lower unit prices, SMEs are unlikely to get these low unit prices and in many cases are being asked to pay in advance, so they may be worse off than before the market opened. Billing errors are common, customer complaints have risen across the market and a lot of the switching that has occurred is out of desperation rather than to seek out a better deal.

Likewise, the environmental benefits haven’t materialised yet. This may be because the current water procurement processes often lead to the wrong questions being asked and to a race to the bottom in terms of lowest unit price for water, with additional services like water efficiency being very much secondary, and this is not helped by some of the larger retailers who are bidding at ridiculously low margins which sets customer expectations. Vertical disaggregation may also be storing up water resource problems for the future because the link between wholesales and customer has been broken which means wholesalers will have to rely on retailers to deliver parts of their water resource plans, but retailers have no duties or obligations to do this. There needs to be a lot more dialogue about water efficiency and water resources between wholesalers and retailers.

So why hasn’t there been more competition? The market codes and licence application are onerous, the margins are low, the credit terms are stacked against new entrants with no trading history or parent company guarantees, the arbitrary decision that retailers should pay VAT on water helps no one, and the poor state of the market data, all make it a difficult market to enter. So, it is likely that a lot of people are sitting on their hands and waiting for things to settle before they throw their hat in the ring.

In summary, the mechanics of the market work, but there are very few real new entrants, the market rules have constrained the liquidity, not many customers have switched, customer complaints are up, the credit terms have passed some risk from wholesalers to retailers and on to customers some of whom are now being asked to pay in advance, the link between wholesalers water resource plans and a quarter of their water users has been cut and there is no obligation on retailers to deliver water efficiency or to have drought plans.

I am just a humble retailer and whilst I have a whole list of complaints, as a company we are able to operate at a profit, but we feel constrained in terms of growth and in terms of delivering customer benefits. It is likely that a lot of problems will get sorted out by the market and many wholesalers are innovating in ways that are helpful to new entrants, and at the same time Ofwat is reviewing some of the major issues. But I think that a lot of the issues require policy decisions rather than review, and my question to Ofwat is “do you want puppies and rainbows and water efficiency, or are we just going to create the water version of the energy market?”

Jacob Tompkins will be speaking at Future Retail #1 on 23 March in London