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UTILITY Week 29th January 2016

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Insight for leadership All for less than £29 per week. Take advantage, join Utility Week Premium Membership to stay on top of Britain's utilities. © Utility Week Intelligence | Windsor Court, Wood Street, East Grinstead, West Sussex, RH19 1UZ | +44 (0)1342 332000 | www.utilityweekintelligence.co.uk Introduction The Leaders is the only guide that offers an insight into how the leading civil and process engineering companies serving the UK water industry are performing in a very competitive marketplace, especially during the transition from AMP5 to AMP6. Compiled by Utility Week sister journal WET News, the data is based on the past three years of accounts from leading tier 1, 2, and 3 contractors. These reveal how companies are measuring up against their rivals as the industry turns its attention to the new five- year regulatory cycle, and as it continues to emerge from the tough economic conditions experienced in recent years. With more than £40 billion-worth of work over the next five years to fight over, rivalry among contractors has been more intense this time around, with some companies complaining of keen pricing from new entrants, which has put an unprecedented pressure on prices across the board. It is worth noting that some of the "newcomers" that have been successful in AMP6 may have missed out in AMP4/5 because of ten-year frameworks awarded from AMP3. Similarly, contractors that have missed out on AMP6 contracts could be locked out for the next five, ten or even 15 years. Moreover, very few frameworks have been awarded to companies that are not involved in alliances, adding to the intense competition as companies have jockeyed for the right partners to deliver AMP6 programmes and beyond. AMP6: A new approach Projects within AMP6 are expected to be less about big builds and more about maintenance and refurbishment. This fits with a move by some contractors to encourage engineers to think how about how existing assets can be evolved, thus requiring less new build. The use of Building Information Modelling (BIM) for asset management, a growing trend within the water sector, will certainly help with that. PREMIUM: Exclusive financial data from the UK water sector's leading contractors August 2015 1. FIVE YEAR INDUSTRY TREND: INDEXED TO 100 IN 2009 SOURCE: WET NEWS 140 120 100 80 60 40 20 0 n Sales n Pre-tax profit n Net assets n Return on capital 2009 2010 2011 2012 2013 Beating the regulatory cycle Traditionally, the last year of the five-yearly regulatory cycle has marked a downturn for the water industry's contractors and supply chain. This was made worse in the last 12 months of AMP4 as the recession took hold, but this time around the story appears to be different, with a number of contractors having reported a busy time as AMP5 came to an end, and with several water companies having put early contractor involvement policies in place. For the first time since the industry was privatised 25 years ago there is a sense of optimism that the negative impact of the AMP cycles is at last being resolved. A lot of hard work has been carried out by the cross-industry Cyclicality Working Group and regulator Ofwat, which led to the water companies being allowed to bring forward £440 million of investment from AMP6 into the last year of AMP5. However, it not known how much of this transition investment was actually spent The Leaders For the first time since the industry was privatised 25 years ago there is a sense of optimism that the negative impact of the AMP cycles is at last being resolved. © Utility Week Intelligence | Windsor Court, Wood Street, East Grinstead, West Sussex, RH19 1UZ | +44 (0)1342 332000 | www.utilityweekintelligence.co.uk Introduction The UK energy industry has five years to install more than 30 million domestic smart meters, in one of the biggest government-mandated infrastructure programmes of a generation. The country has signed up to a European target to have smart meters in 80 per cent of homes and businesses by 2020. The mass rollout has been delayed several times, and is now due to officially begin in April 2016. This quarterly trend report from Utility Week Intelligence provides a snapshot of how many smart meters are currently in operation in the UK – and how far the industry has to go. It also highlights the main discussion points and news events of the previous quarter, with regard to the rollout. 1 A steady start l  Graph 1, compiled by Utility Week Intelligence from data from the Department of Energy and Climate Change (Decc), shows that the early adoption of smart meters has grown steadily since late 2012. Following a plateau from mid- 2013 to mid-2014, there has been a growth spurt to the beginning of the 2015, with the total number of domestic smart meters installed rising from 82,081 in Q4 2014 to 126,515 in Q1 2015 and gas meters from 60,882 to 85,202. l  This data indicates that the early adoption of smart meters by suppliers such as British Gas and Eon is beginning to have an impact. In Q1 2015, British Gas and Eon reported installations of 110,000 and 440,000 smart meters respectively. l  In contrast customer complaints, for metering between Q4 2014 and Q1 2015, rose for Eon by 2 per cent but remained constant at 10 per cent for British Gas. 2 What is a smart meter? The definition, or specification, of a smart meter is one of the biggest challenges facing the programme. Officially, a smart meter is one which meets the Smart Meter Equipment Technical Specifications, or SMETS, and only these will count towards the target. The first version of SMETS has been released – but the release of the second and final version has been delayed. SMETS1 meters will count towards meeting the European target, but suppliers may have to upgrade them before the end of the rollout. The picture is further complicated by smart-type meters. These are smart meters Smart meter quarterly trend report July 2015 GRAPH 1. DOMESTIC SMART METERS INSTALLED BY THE LARGER ENERGY SUPPLIERS SOURCE: DECC which were installed before SMETS1 was ready, and do not meet the specifications. British Gas, for example, installed more than 1 million of these. These meters are known as non-SMETS smart (NSS) meters. l  Graph 2, compiled by Utility Week Intelligence from Electralink data, shows the number of SMETS1 meters installed has been steadily rising. l  There is a question mark over the implications of SMETS2 for SMETS1 and NSS meters. The early models could potentially have to be upgraded if they do not meet the eventual specifications of SMETS2. 3 Getting ready for the rollout As the industry prepares for the mass rollout to begin in earnest at the end of the year, numerous operational challenges remain. Number one on the list, according to the Energy and Climate Committee, is the shortage of installation engineers. According to the National Skills Academy for Power, the peak requirement for meter installers and network staff could reach 10,000 – three times current levels. l  Smart Energy GB, in its latest report, claimed that just under 1 in 5 of the population in the UK knows what a smart meter is, see figure 1, overleaf. l  Graph 2 (overleaf), compiled by Ipsos Mori for Decc, shows inconvenience was the main reason for lack of trust among customers (38 per cent), followed closely by concerns about cost (22 per cent) and data security (13 per cent). 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Historic installations estimated (1) Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 (2) Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 (3) 250,000 200,000 150,000 100,000 50,000 0 n Domestic smart meters (electricity) n Domestic smart meters (gas) • • • • • • • • • Domestic smart meters (all) (1) Includes historic installations prior to Q3 2012 for the larger seven suppliers; includes installations prior to Q1 2015 for First Utility and OVO. (2) Utility Warehouse data included from quarter four 2013. (3) First Utility and OVO data included from quarter one 2015. GRAPH 2. SMART METERS INSTALLED PER MONTH SOURCE: ELECTRALINK 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 01/13 02/13 03/13 04/13 05/13 06/13 07/13 08/13 09/13 10/13 11/13 12/13 01/14 02/14 03/14 04/14 05/14 06/14 07/14 08/14 09/14 10/14 11/14 12/14 01/15 02/15 03/15 n Non-SMET smart • • • • • • • • • SMETS1 Eventual target is 53m by 2020 © Utility Week Intelligence | Windsor Court, Wood Street, East Grinstead, West Sussex, RH19 1UZ | +44 (0)1342 332000 | www.utilityweekintelligence.co.uk Summer 2015 has seen the final structural details of the English water market begin to emerge. Following Ofwat's third overhaul of the market's governance structure, the machinery is now in place for Market Operator Services Limited (MOSL) to lead the final design stages and steer companies towards April 2017 and market opening. MOSL has taken a critical step with the appointment of CGI as the market systems operator, so detailed work on the systems can now begin. Meanwhile, the sector continues to debate just how companies should be measured on their preparedness for market opening as the deadline creeps closer. Water Market Quarterly will take you through how the new market is shaping up. New market structure With the overhaul has come a new governance structure. The handover from Open Water Markets Limited (OWML) to Ofwat and MOSL is now complete, and the new structure is bedding in. This structure (see graphic, right) sees a number of different working groups falling under the control of Defra (which has the ultimate say on if and when the market will open), Ofwat, and MOSL. These working groups will meet regularly and feed information into the wider Water Market Quarterly September 2015 programme to ensure each stakeholder is fulfilling its role in developing the retail market. Challenges One of the main challenges facing the entire Open Water project is the tightness of the timeframe. Ofwat chief executive Cathryn Ross admitted earlier this year aŽer the second major overhaul of the scheme: "It's tight – there's no room for any further slippage." Source: Ofwat Open Water Defra Ofwat MOSL Programme group Workplan Review group Assurance Group Market participants OPEN WATER GOVERNANCE Management group Policy Issues group Communications group CGI – the IT systems operator CGI has been named by MOSL as the pre- ferred bidder to build and operate the cen- tral IT systems for the water market. It now has only five months to design, build and test the central balancing and settlement system that will underpin the market and act as its central nervous system. CGI beat off competition from four competitors – Atos IT Services, Capita, TCS, and Wipro – to be named as the central IT system provider. What are they providing? CGI will have to design, build and test the central IT system for the water market. This is the platform that will allow wholesalers and retailers to participate in the market and interact with each other. The company will have to develop a scheme comprising: a registration system and database; a settlement system, including a meter reading preparation system, a charge calculation system, and associated databases; and a management information/business intelligence system. History: CGI has provided a total of 11 market operating platforms for the work, and has experience in the water sector, having built and run the systems for the Central Markets Authority in Scotland. It also built and continues to operate the systems that underpin the UK electricity market for Elexon. The company has long-term outsourcing relationships with companies such as Welsh Water, Northern Powergrid and EDF. It has also provided support for smart grid projects such as InovGrid (Portugal), Low Carbon London (UK) and FALCON (UK). This background has proved to be crucial in helping CGI clinch the deal to provide the central IT system for the water market. A spokesman from MOSL tells Utility Week: "It is great to have that experience on board." Timescale: l   August – building of IT system was due to begin; l   September – CGI confirmed as IT systems operator; l   February 2016 – system testing due to begin; l  Q4 2016 – shadow market operation. Profile Join today at www.utilityweek.co.uk/membership Insight Report: Greenhouse Gas Emissions (publishing October 2015) Insight Report: Water Company League Tables (publishing October 2015) Smart Metering Quarterly Report #2 (publishing November 2015) Trusted Global News Stories Utility Week Premium Intelligence Reports Utility Week Daily News Content DON'T MISS

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