Gas, electricity and water – in many ways, from a customer’s viewpoint, they are extremely aligned. Once we split utilities into those that are technology led, such as landline telecoms, mobile or internet, and those that are not, and then consider the requirement for onsite meter reading (even if automatically read), these three do seem to fall together. The result for most consumers is a bill they would be happy never to think about so long as three key items are assured:
- safety and reliability of supply,
- accuracy of bill,
- lowest cost.
Shortly after competition opened up the gas and electricity markets, consolidation of bills became standard. It provided customers with an easy way to achieve those key items from one supplier at what should have been the lowest possible cost. Indeed, to bolster the competitive edge, many have gone on to add extra utilities such as landline and mobile telecoms or internet to their portfolio. The uptake, however, has been limited. While there is little technological uniqueness that can be achieved with gas and electricity, technology companies have been able to add value through distinct offerings in telecoms and internet.
Here’s a question: will the default position now become one bill for gas, electricity and water?
This is particularly relevant now there is an opportunity in the non-household sector – and in a few years there may be one for domestic customers. Moving forward, the next logical question is whether existing gas and electricity suppliers should enter the market now, later or not at all.
The first thing to note is that from a customer viewpoint, the benefits of a single, lowest possible cost are clear. The exception is a small number of customers who could benefit from significant added-value services from their water company. However, experience tells us that even they do not go to their water supplier, but an independent supplier, for those services. The question, therefore, becomes: should gas and electricity companies enter the market to meet the demand for low-cost, low-hassle multi-utility services?
Many companies currently involved in gas and electricity have investigated entering the non-household water market already, and the overwhelming feedback is that there is not enough margin in it. This is a valid point: at 8 per cent gross margin on average, and bill values on average 10 per cent of those for gas and electricity, it does not initially seem like an attractive proposition to enter the water market.
This is where game theory and behaviour of the market have to be considered. Not entering the market works so long as nobody else starts to provide a full multi-utility offering. However, the risk is that if anyone does – and customers choose that offering – then the cost to gas and electricity suppliers is not just the loss of the margin on water. It is the loss of margin on gas, electricity and water from the customers who switch away. This is of particular concern for large tenders where procurement departments have realised that it is much cheaper to run one multi-utility procurement than two separate ones.
There is also evidence that the broker market, which has traditionally been much more agile than the larger utility companies, has started to promote this as an option. Currently, this has been managed by them placing contracts with different suppliers. However, when a high-quality single supplier comes to market, this is likely to be an attractive proposition.
The next big consideration is the opening of the domestic market. Many utilities have said they will definitely enter the water market if domestic competition opens, if only to defend their existing gas and electricity customer base. While many believe that customers will continue to be happy with multiple suppliers, one of the stated intents of the government is to reduce customer cost through multi-utility bill consolidation. However, the water market has its own particular requirements and as we have already seen, is fraught with operational dangers even for those water companies experienced in the sector: gaining experience in the non-household water market will be of significant benefit to anyone planning to compete for domestic customers.
There are two ways to gain that experience: acquisition or internal development. Those that take a wait-and-see approach can always acquire in the future if they see the market developing in that way. Currently, the acquisition market is quite open, but is taking the form of water company consolidation and alliances between water and gas/electricity companies. These alliances may turn into something more in time, however there have been no significant movements in that direction to date. The alternative approach – internal development – lets gas and electric suppliers embed knowledge in their own businesses and start to establish their brands in the water market. We saw English water companies dip their toe in the Scottish non-household water market: some pursued customers aggressively but most saw it as an opportunity to prepare for competition in their own regions.
In summary, there seems to be significant alignment between gas, electricity and water – and customers would like to have a single bill. Currently, there has been minimal movement to provide such a service, but if it does happen, and that does appear to be the direction of travel in non-household, then many may have to play catch-up as we expect a sudden shift in the utility industry as a whole. Companies must therefore weigh up the lack of margins available at the moment with the risk of losing profitable customers, mainly because of late market entry.