First impressions of the business water market

All the water utilities got to the starting line and the market opened without any major technical issues. As a result, non-household customers in England – 1.2 million businesses, public sector bodies and charities – are now able to switch their water retail supplier, while incumbent water companies are able to stop providing retail services for non-household customers (subject to an agreed approval process). New suppliers should find it easier to enter the market.

The non-household retail market opening was a milestone in a series of ongoing industry reforms. These reforms, such as the Water Act 2014 (Act), are driving companies to better prepare for challenges including climate change, affordability and sustainability issues as well as responding to increasing customer expectations.

Water and sewerage businesses in England responded to retail competition by restructuring their businesses prior to market opening. All incumbents have now separated their non-household retail arms from their wholesale operations and decided whether to stay in or exit the market. As the date of market opening approached, a set of leading joint-venture retailers emerged, followed by a longer list of retail businesses of smaller incumbents, self-suppliers and niche operators.

Our report is based on discussions with a number of retailers and wholesalers in the first few weeks of the new market. While these discussions acknowledged that the market opened without any major technical difficulties – thanks to the joint efforts of MOSL, the market operator, market participants and regulators – many noted that there were a few areas that needed a continuous improvement focus:

• Systems, data and consistency challenges - A number of companies noted that some of their IT and billing systems still require further enhancements and releases, post -market opening. Some experienced unexpected technical faults and there were also outstanding data integrity/disaggregation issues to resolve. Retailers also mentioned the lack of consistency across wholesaler information portals and pricing mechanisms that make simple tasks more complex and time consuming.
• Focus on compliance meant a slower commercial start - A number of companies commented on the focus on compliance rather than the customer journey during the readiness phase in the lead up to market opening. There was a good reason for this: the principles that underpin the Wholesale and Retail Code, combined with the Open Water Assurance Framework, required companies to demonstrate market readiness on a regular basis. Non-compliance would have risked potential penalties amounting to ten per cent of revenues in the future.
• Lack of customer switching and low customer awareness - Most companies have viewed the level of switching and customer contract enquiries in the first few weeks of the market as low. Few large customers, who were expected to switch suppliers, have done so. A number of factors could contribute to this, including the limited savings currently on offer from retailers. Some linked the low level of customer awareness to the relatively 'soft' market launch. While some retailers would have liked to see more activity from the regulator, others preferred to do their own marketing.
• Low margins threatening ability to operate - The true costs of the business are gradually becoming clear. Some of these costs have already been higher than expected, but there have been other unexpected expenses that are cutting into the slim margins retailers can make. While retailers understand the pressure on the regulator to keep margins low, the question arises as to whether a market with margins at this level can actually succeed.

In our opinion, the modest net retail margin is unlikely to be able to support the current number of retailers and this will lead to further consolidation in the market over the next 12-18 months.

Which retailers are likely to succeed?
Those, who provide value-added services, such as supporting customers to reduce their water usage, superior customer care or those able to bundle water retail with electricity, gas or other services stand the best chance. Cost-efficient business structures will be crucial: the more retailers can innovate, automate and use data effectively to reduce costs, the better they will able be to retain margins.

The water retail market is a low margin–high resource business and could remain so until further efficiencies are found. While some retailers have already decided to exit and are waiting for offers, some other incumbents may also choose to reallocate their workforce to other, more profitable, parts of the business.

Is the market successful?
It is still early days, but in our view customer switching should not be considered as the main measure of market effectiveness. Rather, the market’s success should be measured by improvements in efficiency, services and more sustainable bills over the medium- and long-term. In other words, those who do not switch should still benefit from the changing marketplace.

Further reading

Understand Deloitte's thinking around issues impacting the energy sector

• Non-household retail water market: What's next?
• Connected Assets: The Connected Series
• Connected Home: The Connected Series