Water Efficiency in Retail Competition - experience so far

We have had retail competition for water in England since April 2017. I attended an All Party Parliamentary Water Group meeting on 5 September at the House of Commons, which included discussions on the experience so far and what the future holds from the perspective of customers, retailers, wholesalers, and regulators. This was a great format with 5 minute presentations and opportunities for questions and discussions around it and it has been one of the best events I've attended covering retail competition for water.

Water efficiency was also raised as important across all perspectives, however the challenges of the price of water compared with electricity and gas as well as perceptions of water efficiency services remain. Angela Smith raised the question of how retailers are considering sustainability and the environment within service provision. Several speakers commented that many water efficiency and leakage services have been available in the sector from water companies or consultancies, however retail competition provides the platform the market and raise awareness of these.

In this blog post I outline the discussions and implications for water efficiency.

Speakers at the meeting - photo from APPWG Twitter

What is retail competition?

Through retail competition for water, nonhousehold customers are free to change from their existing monopoly water company to another water supplier – now the case in Scotland and England. This is really about the “customer-facing” services including billing customers, handling payments, reading meters, and taking calls from customers about network related issues. It does not include water resources management, water and sewerage treatment, or management of water or sewerage networks. These are referred to as upstream or wholesale services.

Customer's Perspective

Large customers - The experience of large customers was presented by Karma Loveday from the Major Energy Users Council. They have undertaken a survey three months after market opening, which identified there had been many early movers and that 1/4 had switched or were in the process, with the main reason being the ability to rationalise accounts for multi-site organisations. However, those who said they weren't switching didn't believe the risk impact or the savings outweighed the effort (an example was given of an organisation with a £1m water bill being quoted a £5k saving). Although switching was working, there have been reports of issues with data quality.

Although bill rationalisation was the major reason for changing, how many stated changes to service provision as a factor?

SMEs - The perspective of Small and Medium Enterprises was covered by Paul Horton from the Future Water Association. This included the need for innovation in service provision and a focus on customer service from the supply chain perspective. Ofwat stated that they see the importance of providing services to SMEs and are currently setting up an SME panel.

The experience of SMEs and risk of lack of engagement was brought up at a Waterwise workshop in January 2017. CCWater have recently published results of survey including 500 micro, small and medium-sized businesses from across a wide variety of sectors. Around 43% of businesses are now aware that they can change retailer, however only 26% had a clear understanding that choice only related to retail services, including billing, meter reading and customer service. Over half said they planned to switch or renegotiate contracts, however 39% were unlikely to switch or negotiate a better water deal felt their organisation did not use enough water to save any money.

How can we better engage with SMEs around the benefits of water efficiency for both water and energy bills as well as the benefit of improved resilience for their business to drought?

Retailer's perspective

The retailer perspective was presented by Michael Dugdale from WAVE (Northumbrian Water and Anglian Water Business). They are finding that the market is working in terms of interactions between different actors and have seen over 300 large customers and 3000 SMEs with over £300m in annual water revenues change. There have been some issues with data, 18 different processes for wholesalers, and brand identify loss. Driving water and energy efficiency opportunities has seen over £3m in savings projected for water and energy efficiency and has already saved £250k this year. One element not captured by current reporting is the number of customers who stay with incumbents after negotiation, which is still a sign of a well functioning market.

How can we monitor water and energy efficiency savings from retailers and their customers?

Wholesaler's perspective

Affinity Water's Jo-Ann Lee provided a positive perspective from the Wholesaler, with no deterioration in service. They have seen a 1.7% switch in customers, mainly focussed on combined bulling. Jo-Ann suggested that service level agreements and market codes are improving performance and they are already seeing improved service with quicker operations and better information getting to customers.

Ryan Davies, from Wessex Water, outlined a story slow and steady progress. He discussed the issue of large incidents (flooding and drought) that still need to be handled mainly by the wholesalers due to existing expertise. They are seeing continuous improvement in internal services and view the future as being effortless for customers, value for money, and a greater focus on vulnerable customers.

A question was asked on spillover effects between retail for household and household. Both speakers suggested they had gained efficiencies in operations such as locating stop taps and identifying/ fixing leaks quickly. Whereas operations were bound by rigid timeframes previously, retail competition has been pushing expectations on efficiency of delivery. Wessex Water also said they gained form having non-household and household operations staff working next to each other and sharing best practice.

Regulators' perspective

MOSL, the market operator, was represented by Steve Arthur. Key points include the successful opening of the market, a sound assurance process for retailers and ongoing development of market codes. He suggested is was good that TPIs were engaged and new retailers with different business models were coming into the market. Financially, around £1bn has been paid by retailers to wholesalers so far and around 50,000 switches have been seen to date. Going forward there is a need to improve data and better use technology for engagement and transparency.

The Quarterly report from MOSL provides some further insight to the market so far. The percentage of switching by market profile is summarised below. Based on this data it suggests there has been a relatively large number of switching for lower consumption groups and SMEs.

Consumption profiles and switching April to June 2017

Ofwat's Priya Sinha said they are happy with the market opening and around 10k switches steadily being made each month. Issues identified so far have included a lack of price transparency, which makes it hard for customers to compare retailers, and issues with behaviours of Third Party Intermediaries (TPIs). Different customers need different support, where SMEs don't have the same level of procurement support to deal with retailers. Ofwat are setting up an SME panel to find out more bout their experience. Priya also identified that Ofwat doesn't have powers to address some of the issues coming up and that Government should consider giving them some competition and market authority powers around TPIs as well as the ability to monitor and request information from TPIs.

Where next for water efficiency in retail competition?

The story so far paints a positive image for larger customers and SMEs. However, the questions of how well water efficiency services are being delivered remains open. The benefits of water efficiency have been a success story since retail opening in Scotland, however there is currently no monitoring of this element of retail competition.

Challenges identified in the Water Efficiency Strategy for the UK included:

• Capacity of new retailers to deliver water efficiency services - this is not yet clear, especially with a broad supply chain delivering any services
• Customer awareness of competition and water efficiency services - this appears to be increasing
• Some water companies have outcome delivery incentives from Ofwat linked to non-domestic water efficiency that need to be delivered in this price review period (before 2020). How can this be achieved within the constraints of competition law? 
• Water resources planning and access to data to support forecasting (sharing with the wholesale water company) - how effective has this been to date?
• Bundling water as the cheapest service along with others such as telecoms and energy with higher margins – this would reduce any price signals towards water conservation.

Now is the time to ensure that adequate monitoring is in place to help answer the above questions and in particular ensure that the volumetric benefits of water efficiency services are reliably assessed and reported.