In the existing water market, businesses that are supplied with more than five mega-litres of water per year, a threshold akin to an annual bill of about £9,000, can choose their water retailer.
Today (Friday 1 April) marks a year to the day until market opening, when competition will be introduced for the remaining 1.2 million businesses and other non-household customers of providers based mainly or wholly in England. This will expand the current £540 million-per-year water retail market to one worth around £2.5 billion – the largest in the world. The government estimates that the new market will deliver around £200 million of overall benefit to customers and the UK economy by separating out retail services, including things like billing and customer services, from wholesale activities.
It is a moment for which water companies in England have been preparing for years, ever since market competition was merely a twinkle in the eye of government, but this is not the first water market to advance into the world of competition. In April 2008, after a great deal of debate and deliberation, Scotland became the first country in the world to open up water and sewerage services to competition for all public sector, non-profit and business organisations.
The Water Industry Commission for Scotland (Scotland’s answer to Ofwat) worked hard to develop a framework for competition that is simple, fair, and promotes value and choice. This work appears to be paying off as the country reports that there have been significant improvements for water customers, including more than £36 million savings.
Concerns have been expressed that the current 2.5 per cent retail margin for the market will stifle competition when it opens in England. However, Ofwat claims that recent analysis that the Competition and Markets Authority has carried out into the energy market suggests that a 2.5 per cent net margin for retail activity remains “broadly appropriate”.
Plans for the new competitive market in England were first set out back in 2011 in the government’s Water White Paper – Water for Life – to “deal with the challenges facing the water industry” and “encourage better customer service and protection for the environment”. Ofwat also sets out, in its Water 2020 vision for the water sector, plans to promote competition in the industry.
The Water Act 2014, however, was when the idea moved from theoretical to definite, establishing a framework which would be used to create a new water market in England and Wales. The Act laid out plans for new entrants to be able enter the water sector and provide new sources of water or sewerage treatment services.
On top of this, a national water supply network would be established to make it easier for water companies to buy and sell water from each other, and allow owners of small-scale water storage to sell excess water into the public supply.
The market will work in much the same way as in other utility services – and link with the existing market in Scotland – where a range of independent suppliers compete for customers by offering them the best deal.
The key organisations responsible for delivering the new market are Defra, Ofwat and Market Operator Services Limited (MOSL) – headed up by chief executive Ben Jeffs. The programme was overseen by Open Water Markets Limited until August 2015, when its activities were transferred to MOSL and Ofwat as it was deemed to be a public body, and was therefore restricted in its ability to move as swiftly as the programme required.
MOSL is responsible for delivering the core IT systems that will enable registration, customer switching and settlement between wholesalers and retailers, and offering its water company members support and advice on their business readiness activities as the opening of the new market approaches.
The English incumbents have been working on the quality and completeness of their data for more than 18 months, and many have been to Scotland to speak directly with participants north of the border about the best ways to deal with, and find solutions to, the problem. MOSL is heavily involved in these talks and finding a solution that will ensure customers get acceptable service when the market opens.
There are already signs of new entry into the market. Portsmouth Water has announced that from 1 April 2016, Castle Water will provide non-household retail services on its behalf, with the intention that Castle Water will compete in the market from April 2017. Severn Trent and United Utilities have said they will combine their non-household retail activities, which will “make them more effective in the competitive market”.
A number of WASCs are already competing in the Scottish market, with part of the strategic rationale being preparation for the introduction of competition in England. And companies have begun rebranding their existing retail business arms, with Northumbrian Water creating ‘Wave’, and Anglian and at least one other due to rebrand in the near future.
And with every new merger, takeover or rebrand, go-live inches ever closer.
Jeffs says that as the deadline approaches he is “as confident as ever” that it will be met, but he is aware how significant 2016 will be for the industry. The design phase for the market operating system, being completed by CGI, is complete and testing of that system is underway.
Business Stream chief executive Johanna Dow says 2016 will be a “pivotal year” for the water industry, with many of the decisions made being “critical” to determining the success of the new English market.
Defra will not make the final decision on whether the non-household water retail market will open as scheduled in April 2017, until “early 2017” but, as Dow points out, companies cannot afford to wait until then to prepare, so “all efforts must continue on the assumption that it will”.
Time is short. Shadow market opening (the industry’s practice run) is due to begin this October, and companies without fully formed programmes now will struggle to be ready in time.