Through thick and thin

Water sector leaders are pondering how to support customers through economic turbulence and engage them in efforts tackle the implications of climate crisis. Utility Week hosted a private debate to explore the options and challenges involved.

Strom clouds are gathering over the UK water sector. A cost of living crisis today is expected to feed through major bad debt challenges in the coming year as deepening financial difficulties cause customers to default on more household bills. Meanwhile, the frightening impacts of climate change – including extreme weather and water shortage – pose increasingly proximate risks to service reliability.

Notwithstanding these challenges, water companies must continue to provide life’s essentials – clean water and sanitation – to all households. This means finding ways to protect and bolster their own financial and operational resilience. According  to industry leaders at a recent round table debate hosted by Utility Week, in association with cloud technology specialist Gentrack, this will require battle plans to be drawn up on two major fronts.

Firstly, water companies must drive efficiency and accuracy in their dealings with customers by adopting digital service channels and improving the volume and quality of data they hold in relation to customers and their properties. This will add credibility and measurability to the provision of more tailored solutions for struggling customers, according to experts from within the industry. It will also “help me credibly and measurably track shareholder return on those [technology] investments”, added on senior leader with responsibility for credit risk.

Secondly, water companies must find new ways of influencing demand by engaging consumers and incentivising reductions in water usage – especially at times of particular stress for infrastructure, such as storm events or droughts.

For this objective to be achieved “aggressive” growth is needed in smart water metering, said our sector leaders. Better consumption data, coupled with the improvements in “know-your-customer” data mentioned above could then make it possible for water companies to implement meaningful new tariffs and pricing models designed to drive consumer behaviour change and deliver the substantial changes in consumption which are needed to head off water scarcity.

“Anything we can implement that will help to dampen that peak in customer contacts that we get in April in association with the annual billing cycle, we have to do it.” Debate participant

Leading discussion around the first point, a senior figure from an English water and sewerage company admitted that, while hard evidence of the cost of living crisis as a driver for late or non- payment of bills is not yet apparent, his company is braced for this to manifest in the coming months.

“My nervousness is around the annual billing cycle,” said this industry representative. “On the whole, we’re not seeing the impacts of the cost of living crisis yet. Direct debit rates are going up and customer contacts to ask about support or payment plans are going up – but we’ve done a lot of over promotion about those things so its hard to say what’s driving the trend.

“But half my customers are still on an annual billing cycle and we are now in that part of the cycle where they don’t pay. So, in this gap where they don’t have to think about water, will energy bills and other calls on the customer wallet mean that they can’t pay me in a couple of months? That’s what worries me.”

Others echoed this feeling of anxiety, sharing their concerns about how to prepare for a surge in customer contact and payment issues, both operationally, and from a financial planning perspective.

Digitise customer pathways

To get ahead of these issues, and help customers achieve better financial management in the process, several debate participants said there is an immediate and intensified focus in their organisations on digitising customer pathways and service channels.

“For customer operations the future has to be digital” said one senior attendee. “Anything we can implement that will help to dampen that peak in customer contacts that we get in April in association with the annual billing cycle, we have to do it.” Furthermore, compared to other possible investment areas which are harder to build business cases for, digital customer offerings “are a lot easier to tie to customer payment behaviours and therefore bad debt and also our opex performance. All of which are important to Ofwat.”

Expanding this point and touching on the ways in which digital customer offerings can support customers who find themselves struggling as a result of the cost of living crisis, this financial leader continued: “There are so many incentives for us to do this. For example, I can implement a digital I&E [income and expenditure] and drive affordable payment plans on these which is brilliant because I can help vulnerable customers, credibly and measurably. At the same time I can track shareholder return [on the digital investment] credibly and measurably.”

Deploy smart metering

Others agreed with this powerful logic for investment in digital customer offerings. However, they also mused on the challenge of building business cases for other, harder to justify, technology investments which, they said, are essential for long term resilience. Primarily, these included smart metering, customer engagement tools and systems capable of supporting new water pricing structures.

In the case of smart metering – a topic which gained extensive air time at this debate – participants acknowledged that “aggressive” deployment is an absolute essential for meeting per capita consumption reduction targets in the next price control period (PR24) and heading off the dual risks posed to security of supply by population growth and water scarcity. By gaining better understanding of consumption, and growing an ability to influence it, attendees also identified an opportunity to gain efficiencies in asset investment and implement smarter network operations.

“Everyone is talking about innovative tariffs…but that doesn’t make them easy to implement.” Debate participant

One attendee, whose organisation has recently substantially increased its smart meter footprint, said “leakage is the big immediate win. It highlights continual leakage – like toilet leakage. That’s the real win and massively more so than we ever dreamed.”

Looking further down the line, this senior wholesale services leader, said a high penetration of smart metering should help with intelligent asset planning. “It should lead to reduced operational costs and asset costs – if we can confidently influence that demand and get it down then we don’t need to invest in reservoirs and so on.”

By linking consumption to asset value and network optimisation the same participant suggested an opportunity could arise to introduce new forms of water pricing, designed to help companies manage water resources and manage constraints in their asset base. Others agreed, sharing insights into new innovation pilots focused on innovative pricing and new tariff structures.

However, getting this joined up thinking working will be hard in reality it was acknowledged. One attendee in particular expressed sharply defined views on the challenges involved. “Everyone is talking about innovative tariffs [as a potential smart metering benefit] but that doesn’t make them easy to implement.

“If you want to drive down consumption you could in theory introduce price blocks for customers with different pricing points. But obviously because the household size massively influences the consumption it would have to be some kind of per capita pricing and I don’t see that in the current software infrastructure being viable.”

Expanding on this point, the same attendee said that while smart metering offers extensive value via its scope to “reduce consumption, address leakage, become more sustainable and improve operations,” these opportunities will only be reached with substantial complimentary technology investments.

“My question is, who is going create the logic to query that smart meter data and put it in a presentation that will drive customised communication to consumer to say – hey look you are consuming a lot of water for your household, what’s going on?”

They continued: “It’s a problem – the time and money needed to develop it…How will I justify the money that needs to be spent. Especially when the benefits fall across operations, billing, bad debt and customer service? The funding requires cross-functional effort and the pay back is likely to be long term.” In the current industry environment, this leader said this makes it hard to build the business case for investment in technologies which would maximise the value of smart meters, notwithstanding the value these would unlock across the water value chain.

As talk of challenges and dependencies took off, others pitched in with their views on the major blockers to effectively influencing consumption and proactively tackling the implications of climate crisis for water. “When we’re thinking about what benefits novel pricing and tariffs could unlock, you’ve got to acknowledge that pricing regulation for household water is antiquated,” said one attendee wearily. “It’s thirty-five years old and has a whole load of contradictory rules in different places. Ofwat are trying to allow a bit more flexibility with some pilots that are running this year. However they are pilots. They do nothing to change any of the core pricing regs in the background.”

Pushing an urgent message to the regulator, this attendee stated: “At the moment no pilot in this space could actually end up being a real tariff unless Ofwat changes its position.” Getting into the specifics of what regulation needs to change as a priority, this participant pointed to the constraints of “Condition E” in water company licenses, a clause which prohibits the use of pricing which might be seen to create space for “undue preference” or discrimination for different customer segments.

This attendees complaints drew nods of understanding and empathy from around the table, but also prompted a serious discussion about the implications of tariff innovation for customer vulnerability – a topic which felt especially sensitive in the context of the affordability crisis.

“Data quality is a pre-requisite to all of this.” Debate participant

“The reality is that when you look at the evidence around engagement with water efficiency drives which we’ve done in the past, ninety-five per cent of the time the people that get involved are affluent,” said one attendee. By extension of logic, they suggested: “Solutions on dynamic pricing always benefit those that are actually able to flex. They never benefit the most vulnerable.”

This point was widely acknowledged around the table with many drawing comparison to the energy sector where experiments with dynamic pricing and energy flexibility are throwing up major challenges around equality of access to market and consumer detriment considerations. One participant simply argued: “These [dynamic] markets just don’t really work for the vulnerable and you’ve got to do something different for them.”

While others at the table didn’t necessarily share this sentiment, there was consensus that pricing innovation will need to be supported with better customer segmentation so that offers can be targeted appropriately. And again, this is easier said than done according to our credit risk leader. “It takes us back to data quality and knowing the property base a lot better than we do today,” they said. “The issue is that we are talking about literally millions of properties. And on the edges of the supply area there is even cross billing going on because it’s often so difficult to keep track of who is my customer or your customer.”

Summing up the starting point for any aspiration to support customers through the current period of economic turbulence as well as the longer running climate crisis, they emphasized: “Data quality is a pre-requisite to all of this.”

Viewpoint

Gentrack sales director Adrian Alexandru offers reflections on the debate.

It was a privilege to attend the recent round table event and discuss key challenges with leading water industry figures. The encouraging sign though, was the potential for technology to address these challenges and provide better experiences for water customers.

Gentrack plays a pivotal role in delivering the services behind two of the world’s most precious resources: energy and water, and it is a role we take very seriously. The Water sector has an ambitious set of long-term targets to meet ranging from zero serious pollution incidents to cutting leakage by half and delivering net zero emissions.

The most recent planning period, commonly known as PR24, places an unprecedented focus on adaptive planning with Ofwat is expecting Water companies to be efficient and innovative – driving the frontier forward on service and cost efficiency.

This can be achieved by effective use of technology – in at least two main areas:

• driving operational efficiencies
• better engaging with the customer.

While the perception of utilities has historically been that they have failed to effectively engage with the customers, the good news is that turning this trend around does not require a massive overhaul; it takes clarity of vision – and adoption of the right tools & technology.

To start with, analysing consumer data provides critical insights into usage patterns, peak demand, and customer behaviour; thus helping Water companies to optimize the network and incentivize customer behavioural change in water consumption. As with the energy industry, I believe that the more smart meters can be implemented, the more data can be analysed, and the more benefits will be achieved.

For example, smart meter data could be used to feed advanced models to forecast demand and, would go a long way to addressing at least a couple of challenges:

• design the network for the actual need, instead of “always at peak”;
• identify areas where customers are using excessive amounts of water – and target those areas with educational campaigns to encourage more responsible water use.

Secondly, digitalisation of customer service is long overdue. The last few years have seen a shift in customers’ expectations – fueled by the rise of brands like Amazon and Uber. Water companies cannot afford to ignore this trend, indeed interacting with customer via their (multi-)channel of choice, reaps many benefits such as:

• alleviate the pressure on their Customer Service units.
• Fewer customer complaints
• And overall, increase customer satisfaction.

Last but not least, automation of customer journeys has the potential to free up precious (human) resource from the mundane, repetitive tasks – and boost the capacity in areas at the forefront of innovation.