The way businesses can buy water is changing
Water may be crucial for life, but it can cause headaches for economists. It is scarce in some areas and abundant in others but, with no truly national grid or interconnectors, it is costly to transport from one place to another.
Since the water industry was privatised in 1989 it has done well on several fronts. Investment has doubled and supply interruptions have fallen. Prices have risen, but by less than before privatisation.
“Markets provide a flexible process better suited to conditions of uncertainty than regulation in many contexts. We are considering where and how markets could be introduced to deliver better services to water and waste water customers than the existing regulatory arrangements”, according to OFWAT.
The next step is to transform customer service, reckons OFWAT, the water regulator. To this end, in May 2014 the Government legislated to introduce competition at the retail level for non-household customers such as businesses, charities, and local authorities. Currently, these customers are usually served by their local regulated monopoly apart for businesses using five million litres of water a year or more.
From April 2017, new entrants in England will be able to tap into the incumbents’ networks for a price agreed with Ofwat, and sell the service downstream—much as in the market for broadband or mobile phones. This will expand the current £540 million-a-year water retail market to one worth £2.5 billion.
The potential benefits for customers are huge.
In Scotland, competition has already been introduced. In 2008 the non-household arm of Scottish Water, the incumbent, was spun out into a new company, Business Stream, which now competes with new entrants. Initially, the change had a limited impact, but Business Stream has been losing significant market share since 2013.
But more interestingly, in the first five years to April 2013, Business Stream achieved more than £35 million in Water efficiency savings; experienced a 26% increase in customer satisfaction; made available more than £30m worth of discounts; saved public sector customers more than £20m in three years; helped customers save 16 billion litres of water and more than 28,000 tonnes of CO2.
“In the long run, a sprinkling of competition might be introduced to the upstream market. The hope is to encourage more localised water trading between suppliers. In 2010, a hosepipe ban was introduced in the north-west due to drought. United Utilities, the incumbent supplier, sought permission to extract more water from environmentally sensitive sites. Yet water in Manchester’s ship canal sat untapped. Reformers hope that the owners of such resources might be incentivised to supply them to the market”, according to an article published last November in the Economist.
But water prices currently reflect the average cost of all water extracted, not the marginal cost of getting at more, and this could create huge incentives for FM companies to find efficiencies where they are most needed and make water retail a very profitable proposition.
An example would be an FM company working with a client to reduce their water bill. The saving is made by the introduction of water efficient kit and metering against a set benchmark. The savings could be divided between the client and the provider and form the basis of a Water Performance Contract.
The water companies themselves would be the main suppliers until 2017, in the majority of cases. After 2017 the market is open to competition. Facilities Management companies will want to undertake this work rather than lose water contracts to their competition in the sites that they manage.
The Energy Managers Association (EMA), under Lord Redesdale, has formed Utilities Compliance Assurance Body (UCAB) to protect its members from mis-selling. It will run a Code of Conduct based on transparency that will allow companies to be on a Compliance Register.
UCAB wants to gather the views of the whole industry at a conference at the Institute of Civil Engineers, 1 George Street, on the 17th March. This will be your opportunity to hear how the industry is about to change and influence the future water retail marketplace.
Cathryn Ross, CEO of OFWAT, closed the conference and was presented with the views expressed at the afternoon working sessions.