A roundtable discussion on the future of the water market
Anglian Water Business and Public Sector Executive brought together leaders from the water industry, regulators and customers to discuss the future of the water market once retail competition is brought in, the expectations of public sector customers, and the lessons from other markets and the water market in Scotland. Adam Hewitt reports.
The water market in England is changing, with retail competition to be introduced under government plans to improve efficiency and services for businesses and public sector customers.
Retail water competition was introduced in Scotland in 2008, and its proponents say those reforms improved services and ensured better prices for customers. In England, some retail competition was allowed from 2005, but it only applied to the very biggest non-domestic consumers of water, and only four companies have switched their water supplier (on certain sites) since that date.
But the Cave Review in April 2009 set out a vision for proper competition in England’s water sector, which was followed by Defra’s white paper on the issue in December 2011 and the draft Water Bill in summer 2012. The full Water Bill was published on 27 June 2013.
The government says the new legislation will enable all business, charity and public sector customers in England to switch their water and sewerage supplier.
It will also establish a cross-border arrangement with Scotland; enable businesses to provide new sources of water or sewerage treatment services; develop a national water supply network by making it easier for water companies to buy and sell water from each other, enable owners of small-scale water storage to sell excess water into the public supply; ensure better planning to cope with droughts; enable developers and new water or sewage companies to connect new building developments to the water mains and sewerage system; improve the regulations around mergers of water sewage undertakers, and give Ofwat a new over-arching duty of ensuring long-term resilience; plus a whole host of more technical changes to regulations and rules.
The government is also proposing amendments to its bill to ensure a new approach to flood insurance.
Opening the market
The ambition is to open the new retail market in April 2017, applying to 1 million business and public sector customers in England, up from 27,000 now (the Welsh government is not implementing retail competition for incumbent water and sewerage companies operating wholly or mainly in Wales). This is being driven by government and the Open Water programme, whose work is steered by a ‘high level group’ made up of representatives from Defra, Ofwat, Scotland, Wales, existing market participants, new entrants, and customers. The projected economic benefits amount to £2bn over 30 years.
There has been debate over the need for a functional separation of incumbent water companies’ wholesale and retail arms, to stop discrimination against new entrants into the market. This was a key issue at the roundtable too, as is the linked issue about letting companies exit the market if they so choose.
The roundtable discussion, hosted by Anglian Water Business and Public Sector Executive, was held in London on November 28.
‘Water is not an infinite resource’
Bob Wilson, director of Anglian Water Business, said there had been “false dawns” on competition in the last 10 years, but now the situation was changing. The company operates in East Anglia, the driest part of the country – “drier than Jerusalem” – and Wilson said: “We took the attitude that it was in our customers’ and the company’s best interests for business customers to use as little of our product as possible! And that’s what we’ve been working hard at.”
Others agreed that undoing the profit incentive to simply sell more water was vital for future sustainability. Wilson continued: “We see our future as a separated retail entity, separate from the wholesaler. We’re forging our own identity and looking at what our business model would be over the border, as we’ve worked in Scotland since that market opened.”
He said the goal is to help customers to become water efficient, and explained the company’s work with the Carbon Trust – which also attended the roundtable – on the Water Standard, which certifies organisations that measure, manage and reduce water use year-on-year.
It’s important to remember that water goes hand in hand with energy and carbon, he said, thanks to all the processes needed to treat and transport water and then use it when it reaches a customer’s site. Over 20% of the average household’s energy use is attributed to heating water, and the water industry itself accounts for 3% of the nation’s energy demand and 1% of greenhouse gas emissions.
As part of its Love Every Drop campaign, the Anglian Water group has set some very stretching targets around the management of the impact of growth and climate change in the region. Key to their success is working with customers to help them to understand and reduce their own water and related carbon footprints.
It had committed to promoting the Water Standard to its business and public sector customers and to assess customers working towards it.
Darran Messem, managing director of Carbon Trust Certification, said: “The Standard is designed to help organisations measure, manage and reduce their water use and to capture the economic and greenhouse gas benefits associated with that action. Anglian Water Business’s decision to partner with us on that standard, and to encourage customers to adopt it, really demonstrates the company’s commitment to sustainable development.”
The company has been encouraging local authorities to sign pledges to reduce their water consumption, including Norfolk County Council and Bedford Borough Council, which Wilson called a “double win” as staff working at those organisations then take those water efficiency messages home with them.
The sustainability of water was a concern for roundtable chair, Eliot Whittington, director of The Prince of Wales’s UK corporate leaders group on climate change, and participants were also shown a short video highlighting that population growth, economic
development and shifting lifestyles are increasing stress on water resources. It reiterated the fact that water is not an infinite resource – despite public perceptions.
It’s important that businesses and public sector consumers of water have someone on their boards responsible for a water strategy for their organisation, making them resilient to future changes and better able to manage down their water use.
Not everyone agreed with the video’s messages; some participants said the issue is not overall water scarcity, but its immediate availability and where we’re abstracting it from – and whether as a society we’re willing to pay for resilience. All the evidence suggests that few customers would be prepared to pay more for the water companies to do more on sustainability and resilience.
One participant said: “People are not keen on paying more for resilience. We pay enough already, why pay more?”
But there was general agreement on the overall economic, environmental and social benefits of reducing water consumption.
Others said that water equipment manufacturers also have a role. Asda’s procurement manager David Olivant, for example, said they should do more to market and encourage the sale of more pressure taps, not screw taps, to ensure water isn’t wasted in businesses. Showers with timers fitted were suggested, “to take the human element out of sustainability, so it’s done for them”.
For business and public sector customers, getting employees to take responsibility for the water they use is not easy, especially in organisations with high workforce turnover on low wages. This is why making the equipment and technology do the job of reducing water consumption is so important.
Participants also discussed having a ‘water licence’ for staff – a qualification to ensure behaviour change. Changing behaviours when it comes to water usage might be easier than with energy, it was suggested, as there are fewer disincentives to change. In supermarkets, for example, research suggests that customers equate brightness with cleanliness, which incentivises lots of high-powered lighting and thus high energy consumption.
Messem said: “I think water is amazingly cheap when you consider we use vast quantities without having to think about the energy and capital required to deliver water. Compare the price of a cubic metre of mains water to a cubic metre of any other liquid you buy! But the consequent cost of water use – in terms of opportunity cost, scarcity and energy consumed in heating, cooling and distribution – is often poorly understood. Every business user should be metered.”
Smart meters allow multi-site organisations to see that similar facilities can have very different water consumption patterns.
With the right data, they can then seek to address this. Customers also want to own the smart meter, and for it not to be yet another issue to deal with when attempting to change suppliers, as can happen with energy suppliers.
Messem also advocated the sharing of anonymised water consumption data to establish best practice benchmarks for organisations in different industries to work towards.
‘We’re paying enough’
Robert Leask, senior portfolio manager for utilities at Scottish Procurement, made the point that resilience for the future is a very difficult message to get across to water consumers. Existing customers will wonder why they should foot the bill for new customers in the future.
Other roundtable participants asked: if the cost of water bills go up now, will they ever actually come down again in the future? To gain customers’ trust on this issue, they’d need at least to know the extra measures they were paying for had a finite completion date, after which bills would come back down.
Customer resistance to higher costs to pay for resilience remains even after detailed focus group work explaining the issues in full, so it can’t just be blamed on a lack of understanding of the scale of the problem.
But education remains important, right down to school age, participants said – messages about not leaving lights on in empty rooms and about recycling are ubiquitous among today’s children and teenagers, but the need to avoid wasting water is not at quite the same level.
Lessons from Scotland
Retail competition in Scotland has delivered “far more efficiency” for customers and helped kept bills down, the roundtable heard.
The new competitive environment in England should ensure water companies start doing a better job of offering new services and marketing those services effectively. As Sutherland put it: “It’s difficult for a customer to know what’s possible, as until now it’s been a ‘take it or leave it’ service. Do they know what’s possible and the potential services?”
The participants said the reforms were necessary to try to undo some of the market distortions. These included, they said, the prevention of optimal allocation of choice, regional monopolies, an often unproportional pricing structure because of a lack of metering, an inability to measure consumption, and a lack of free-market information on production and consumption.
Customer expectations in the new system will be high. In Scotland, although only 5% of customers have switched supplier, about half (45,000) have renegotiated terms with their existing supplier thanks to competition. In England, there are already 19 licenced water companies (nine water-only, 10 water and sewerage), with the new structure opening the way to new entrants.
It’s clear customers want an enhanced service and more efficiency, Wilson said, and added: “Our selling pitch is that [helping customers achieve a] 20% reduction in water use is better than a 2% reduction in tariff.”
One contributor to the roundtable debate urged Defra to clarify the retailer/wholesaler split, saying: “In England, wholesale and retail are splitting but not quite, and it’s up to you if you compete or not. There’s a lack of clarity.”
Sutherland added: “If you do not have a separate retail profit centre business, separate from the wholesaler, the retail business is going to be swamped by the much bigger network treatment business.
“The English Water Bill as drafted doesn’t actually allow [separation] to happen very easily, and it doesn’t allow a retailer to exit the market. That’s quite detrimental to the development of the market….water retailers can’t all be successful, not if they’re to meet the aspirations of the most demanding customers.”
Some suggested that while the biggest consumers of water – supermarkets and NHS Property Services both being good examples – would be able to use their size to ensure they have “no shortage of suitors” and could get what they want. But what about a small corner shop, or even a small factory? Will competition really work for them? There were other concerns raised too.
One participant suggested retail water businesses would offer their best rates in each other’s historic ‘patches’, not their own: “They’ll all be fighting each other’s battles in each other’s gardens.”
Messem said: “If we see consolidation of water suppliers but not water buyers, the public sector procurement outcome from de-regulation could potentially be worse, not better. We need an outcome in which there are incentives to switch, not dis-incentives, and therefore clear and relevant price signals.”
There was some discussion about the accountability of wholesalers, and retailers being blamed for their mistakes or mismanagement, plus the issue of large customers going ‘over the head’ of the retailer to the wholesaler.
But another participant gave the analogy of faulty shoes, saying they’d get taken back to the shop you bought them from, not the factory where they were made. It will be similar with the retail/wholesale split, with the retailer managing the relationship from both sides.
Making it simple for customers
Olivant, speaking after the discussion, said water “takes a disproportionate amount of looking after” for a big business like his compared to other utilities, considering the relative size of the bills. He has one electricity supplier and one for gas, but 22 consolidated water bills. But he wanted proof that competition would actually make his life easier as a customer.
It’s also important that less powerful customers are protected under the new system, other participants said.
Wilson insisted that Anglian Water Business would always act “robustly” when dealing with wholesalers and even regulators on behalf of customers, and added: “Irrespective of the hand we may be dealt in what the market looks like, and irrespective of how difficult regulation might be around the retail/wholesale interface, what will attract public services and multi-site customers is to make things simple for them. We’ll take the pain away, make it simple, make it add value, and robustly defend customer interests.”
‘Water needs to move up the agenda’
Speaking after the event, Jennifer Cawkwell of NHS Property Services said the discussion reinforced the view that water deserves equal attention with energy management in terms of sustainability. She said: “The NHS requires water 24/7, and any water shortage would have dire consequences for the health service.
“There has to be contingency planning, and we need a water strategy to complement our action on energy, and our overall sustainability strategy. Today has shown me the need for that. [Water] has been relatively low-cost in the past, but we need to justify every penny not spent on patient care. It needs to be higher up the agenda.”
Nicci Russell, Ofwat’s director of parliamentary and public affairs, said: “There’s a lot of interest in the design of the market, whether that’s legal or operational, and we need to get that right so that the market does work to the benefit of the customer.
“Even from the customers who are looking particularly at price, sustainability is absolutely at their heart of their argument. I come from a water efficiency NGO originally, but there were people around the table making the water efficiency point far more strongly than I was.”
Alan Sutherland, chief executive of the Water Industry Commission for Scotland, called it an “invaluable event”, while Olivant said:
“We’ve still got a long way to go, but Anglian are actually trying to get ahead of the game, by asking the questions and stimulating the debate for everyone.”
Event chair Eliot Whittington concluded: “It was a really good discussion today. It was very wide-ranging, and interesting to hear the different parts of the value chain discussing how this upcoming change will affect the market. From a sustainability perspective, it was interesting that there was a lot of agreement about the opportunity to move forward in terms of delivering a better result on water savings and increased efficiency and water usage, but there are also some concerns…
“There’s some real uncertainty about the market design, and whether that will work with the grain and encourage that activity, or potentially could undermine it.”
The roundtable was run under the Chatham House rule, meaning comments cannot be attributed. Where individuals have been quoted, it is with their permission.