Utility Week

UTILITY Week 21st April 2017

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Page 26 of 31

Customers UTILITY WEEK | 21ST - 27TH APRIL 2017 | 27 Market view W ater market reforms present tre- mendous opportunities for the water industry – but to take full advantage we must be prepared to embrace the change and innovate. Ofwat has a clear view of what it wants to see from water market reforms. This includes value creation and allocation, bringing new investors into the fold, continued incentivi- sation of long-term investment and ensuring water companies act in customers' interest. In order to achieve this, water companies must create new and attractive propositions for investors and customers alike. In short, they must be disruptors. As market reform takes shape, we have seen an array of non-household retail mod- els forming. Some companies have retained a traditional approach, preserving existing market share, typically through establish- ing a separate retail business. Elsewhere, we have seen others retain or extend their services to non-household customers, while others have exited. In each case, companies are attempting to differentiate value propositions to their cur- rent market. Some are seeking to achieve this by differentiating their focus on particular sectors. Others have sought a range of advi- sory services, to help customers save money and spend less, as a value-add proposition. These changes are certainly innovative, but it is not clear if they are really creating the benefits that customers want or what market reforms were designed to deliver. There is an argument that opening up the retail market will create a burden on water companies and that customers might not necessarily benefit from the efficiencies that come from reform. Arguably, the mar- gins between firms are too fine to stimulate switching. This view gains traction when applied to the opening of the household market to competition. It is also possible that customers are unaware of the opportunity market reforms present. The decision of Greene King, the pub retailer and brewer, to provide its own retail services, is a prime example of the sort of innovation that reforms can bring: Greene King took the opportunity to cut out the mid- dle man and buy its water services at whole- sale prices. However, the process of applying for retail licences is complex. Streamlin- ing will be needed before Ofwat's market reforms are achieved and continue to stimu- late innovation. Nonetheless, through checks and bal- ances for customers, alongside incentivi- sation, Ofwat has the ability to facilitate game-changing innovation, and to allow sustainable investment into the sector. Looking further ahead at the opening of the domestic market, there will be oppor- tunities and challenges for wholesalers and retailers. It may lead to a round of consolida- tion among incumbents as retailers outside the water sector enter the market. There is real potential for disruption by other service providers to drive efficiency through scale and the consolidation of utility companies. The result for the consumer? One bill for gas, water, electricity and even telecoms services. Retail competition might also present a tremendous chance to deliver sustained reductions in energy needs and carbon emis- sions. We have already seen significant mon- etary savings and environmental benefits with the use of advanced wastewater treat- ment processes to generate energy, such as anaerobic digestion, together with better use of land to establish solar and wind electricity generation. Taking this to the next level, it might result in widespread distributed, sustainable energy generation. If this is to become a real- ity, the regulator must pre-empt such change and be in a position to support innovation. While we are not yet sure of the future, market reforms will foster change and it is likely this will come from both incumbents and newcomers. For water companies to take advantage of disruption, they will have to make strategic decisions sooner rather than later. If they act now, water companies will have the golden opportunity to spearhead disruptive change and drive radical shis in the ways we produce water and energy. Ken Gedman, business consultancy director, MWH (now part of Stantec) The changing water market Water market reform can drive disruptive change across the utilities sector, says Ken Gedman. T he water sector is changing, and every- one involved has the opportunity to help drive forward that transformation. Introducing competition into the non- household retail part of the water industry is part of a wider agenda by Ofwat to create a different form of pressure on the sector, using markets to drive innovation. Retailers will be expected to challenge wholesaler cost performance and offer customers the prospect of a better price for a better service, in order to keep customers and stay in business. At the Utility Week Water Customer Conference just over a year ago, Ben Jeffs – outgoing chief executive of Market Operator Services Limited (MOSL) – asked a room of delegates whether they thought non-house- hold retail competition would drive the next efficiency frontier across the water sector. Nearly everyone put their hand up, which illustrates the order of transformation the industry is expecting from customers having a choice of retailer and retailers challenging the cost-service paradigm. Market opening, Jeffs says, is a "major change" in pressures on water companies around cost and service performance. The companies are not the only water sector members to be faced with a multitude of changes and challenges. In setting up the market, MOSL had to pull together many different companies with different strategies and starting points to ensure they all got over the line together on 1 April. MOSL had to do this in a way that joined up the policy intent from Defra with the policy implemen- tation from Ofwat. But while this has been an immense challenge, it is a challenge that Jeffs says has been met, leaving the market in "very good shape". The collaboration in the water sector to get the market open on time has been remarkable, and has created a market which, although not perfect, is at a good starting point. It is essential that everyone involved in the sector continues to work together to drive down prices and drive up service for the benefit of customers. "Water companies have worked together to make the market a success." Column Lois Vallely

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