Regulation of the water industry Contents

4The water retail market

63.A relatively new part of the water industry is the retail market. In April 2017, the water retail market opened for business, bringing, according to Ofwat, “the biggest change to the water sector since privatisation”.177 Before the market opened, around 26,000 large business customers could choose their provider of retailer services in England and Wales.178 The 2017 change meant that an additional 1.2 million non-domestic customers, such as businesses and charities, could choose who to buy their water services from.179 According to Waterwise, retailers provide “the ‘customer-facing’ services including billing customers, handling payments, reading meters, and taking calls from customers about network related issues” but not “water resources management, water and sewerage treatment, or management of water or sewerage networks”, which are “referred to as upstream or wholesale services”.180 Customers buy water services from retail suppliers, who buy the physical supply of water and/or removal of wastewater from wholesalers (the water companies that own and operate the network of pipes, mains and treatment works).181 Competition results from customers being able to switch their supplier, which can be either the regional water company or a retail supplier.182 The new market works alongside the existing retail market in Scotland, which is regulated by the Water Industry Commission for Scotland (WICS) and has been operating since 2008.183

Customers eligible to choose their water services supplier (including wastewater removal)184

Who can choose their water services supplier

Who can’t choose their water services supplier

Business customers supplied by an appointed company whose area is wholly or mainly in England

Domestic/household customers in England and Wales

Business customers supplied by an appointed company whose area is wholly or mainly in Wales AND using a minimum of 50 mega litres of water a year

Business customers supplied by an appointed company whose area is wholly or mainly in Wales using less than 50 mega litres of water a year

64.CIWEM considered that “the introduction of competition into the water industry has provided increased choice for non-household customers [and] has increased the focus on customer service as well as on additional services like water management and water efficiency”.185 Bristol Water stated that “the successful, on-time, introduction of the business retail market […] is a welcome change that will help to ensure that business customers get the service they need from the water industry”.186 Mel Karam, CEO of Bristol Water considered that “the largest open water market in the world” was “quite innovative”.187 The retail market has also enabled many water companies to exit the market; Bristol Water, for example, “no longer competes with the retailers”.188 To date, 16 water companies have exited the retail market.189

65.The opening of the water retail market was viewed positively by most of our witnesses. However, there were two areas where the market had not lived up to expectations: water efficiency services and the number of small and medium enterprises switching suppliers. These are addressed below.

Water efficiency

66.Blueprint for Water was concerned that “whilst Government, Ofwat and the environmental regulators have rightly been pushing the water company wholesalers to drive efficiency improvements on domestic use, we are not seeing parallel efforts, ambition or transparency from the retail business market”.190 Waterwise also criticised the performance of retailers in delivering efficiency services, stating that although “water efficiency (and energy efficiency) was a key benefit identified in Scotland, and a key stated goal for Government and regulators in England, we have yet to see this at scale, and some wholesalers have reported non-household water use increasing since market opening”.191 In addition, Waterwise found that “less than 50% of water retailers were identified as offering key water efficiency services, such as leak detection” on their websites and “most offer it to some customers, but very few to SMEs, and most charge extra for this service”.192 Waterwise recommended that the Government “should clearly state that it expects water retailers to play their role in ensuring resilient supplies.”193

67.When we asked John Reynolds, CEO of the water retailer Castle Water, whether water retailers were offering enough water efficiency services, he explained “we try really hard to offer efficiency, and we are trying even harder to get the customers to take it up, but it is not always an open door”.194 He provided some examples of customers showing low interest in water efficiency:

We had our annual customer conference about a month ago. Half of the conference was external experts talking about water usage. None of the customers present asked a single question about the usage. We currently have an advertising campaign giving free automatic meter reading, which is smart metering, to farms. That is national. We have only had six farmers take it up. We have a section on the website giving water efficiency advice. We have offered water efficiency audits when taking on new customers in the voluntary sector with care homes. On the first day of the contract I phoned them and said, “When can we do the efficiency audit we have offered to do for you?” They have said, “Actually, we are too busy to do it”.195

68.Rachel Fletcher, Ofwat, told us that “so far, we have seen up to 500 million litres of water saved as a result of competition, but we think that is just scratching the surface of what we would expect to see as new retailers come into the market with new product offerings to attract customers”.196

Small and medium enterprise (SME) customers

69.John Reynolds, Castle Water, told us that some organisations such as “multi-site operators who have switched to billing on a national basis” were clearly benefitting from the market.197 However, there had not been “enough buy-in from small and medium sized businesses” partly because “the central information to support the market, so that small customers without sophisticated buying operations can understand and trust it, is not very good”.198 He elaborated that:

Even when we offer discounts, which at the smaller end of the market can be 10% of bills, customers are not opting for it. To me that suggests that there is more holding them back. It is not just that water bills in some areas are relatively low. Most people would take a saving like that for a relatively small amount of work if they trusted what was on offer. […] They do not trust switching utilities, full stop. There is not enough to support what is on offer from water to make it worth taking the risk in some cases, which is a shame because there are savings and there is also a choice of different service propositions now.199

70.The impact of the retail market on SMEs was highlighted in Ofwat’s July 2018 review of the market, which found that:

many customers are either not aware of their ability to choose a new retailer, or that they see few benefits in trying to shop around and switch. This is particularly true of smaller or lower expenditure customers. For these customers, savings available from switching may not be high compared to their perceptions of the time and effort needed to engage with the market. In light of this, we recognise the importance of continued price protections for those who have not yet engaged in the market.200

Ofwat also “identified a number of market frictions that have had a negative impact on customers’ experiences of the market, for example, concerning obtaining accurate quotes, reliable billing and smooth switching”.201 These market frictions “raise retailers’ costs and hinder their incentives to reach out to certain customer groups, particularly smaller businesses”.202 John Reynolds stated that “the first year of the market has been hard work” because “a lot of the information, data, processes and systems that were in place historically are not right for the market”.203

71.We questioned Rachel Fletcher on the performance of the retail market. She told us that Ofwat’s “overall assessment is that the first year has shown some promising signs, but there is a huge amount more work to be done for that market to really reach its full potential in terms of the benefits it can bring”.204 She considered that the risk of fragmenting the market was a “legitimate concern” that Ofwat “will be keeping a very close eye on”.205 She added that:

there is a role for competition—new players coming in with products, frankly, that the water companies are quite often slow to offer to their customers. We have already opened up the market for businesses to connect new housing developments, for example, and it is through those new entrants that we are seeing the cutting edge of innovation on introducing dual water systems, grey water systems and quite interesting water efficiency systems. Unless we really allow room for new players to come in, we are constantly going to be looking to the water companies, which have lots of other things on their mind, to bring forward some of the water efficiency that we are hoping to see in the future.206

Ofwat will “continue to monitor the market” and keep under review what actions it should take.207

72.We also explored whether domestic customers should also be able to choose their water supplier. Tony Smith, CEO of the Consumer Council for Water (CCWater), told us that:

the real test is how it works for small business customers, as that will give us a strong indication of how it would work for domestic customers. A couple of years ago, Ofwat did an analysis of the opportunity for domestic retail competition, which showed that although many domestic customers wanted a choice, they were disappointed with the potential savings on offer. Somewhere between £10 and £40 is really the maximum amount of money you are going to get out of the retail market. As we have seen in the energy sector, where customers are not switching for £200, that small saving was likely to create a bit of disinterest in the market.208

73.It is interesting to note that the water retail market was first introduced in the UK in Scotland in the context of a publicly owned water industry. The water retail market in England and Wales is in its infancy and we expect teething problems to occur. However, the first year has delivered unimpressive results for water efficiency and we are concerned at suggestions that water retailers may not be taking water efficiency seriously enough.

74.It is disappointing that small and medium enterprises (SMEs) have not engaged well in the market as customers. Big businesses should not be the main beneficiaries of the retail market. As market frictions are reduced, we would like to see water retailers attracting more SME customers. Ofwat should consider ways to incentivise this.

75.Although water retailers are private companies, they have a key role in improving water efficiency and resilience, which are in the public interest. We are pleased that Ofwat has reviewed the state of the market. We recommend that Ofwat undertakes annual reviews until the market is shown to be delivering real competition and water efficiency.


177 Ofwat, Business retail market, accessed September 2018

181 Ofwat, Business retail market, accessed September 2018

182 Ofwat, Business retail market, accessed September 2018

183 Water Industry Commission for Scotland, History, accessed September 2018

184 Ofwat, Business retail market: who is eligible?, accessed September 2018

185 Chartered Institution of Water and Environmental Management (RWI0021) para 17

186 Bristol Water (RWI0040) para 1.3

187 Q 110

188 Q 110

189 Department for Environment, Food and Rural Affairs, Companies with approval to withdraw from the non-household retail market for water, April 2018

190 Blueprint for Water (RWI0020) para 1.3.3

191 Waterwise (RWI0019) para 33

192 Waterwise (RWI0019) para 34

193 Waterwise (RWI0019) para 35

194 Q 151

195 Q 151

196 Q 199

197 Q 111

198 Q 111

199 Qq 111–112

203 Q 111

204 Q 199

205 Q 199

206 Q 199

208 Q 202




Published: 9 October 2018