Ofwat’s State of the market 2020-21: Review of the fourth year of the business retail water market concludes that while business customers who are active and engage in the water retail market continue to benefit from competition and choice, the market is working less well for smaller business customers.
Since 1 April 2017 around 1.2 million business customers in England and Wales have been able to choose their water and wastewater service retailer, allowing customers to choose a service and tariff which best suits their business needs and preferences.
In a report published this morning, the regulator finds that over a quarter (28%) of larger business customers have been active in the market over the last 12 months, compared to 8% of micro-businesses.
Analysis of price offerings by retailers indicates that currently there are only minor savings available to the smallest customers, which may not be providing sufficient incentive for these customers to consider engaging in the market.
The evidence suggests that larger customers have greater incentives to engage in the market than smaller business customers – Ofwat finds medium sized business customers can expect to save around £250 per year from switching retailer compared to £15 for small customers.
Little incentive to offer water efficiency services
Commenting on water efficiency services, the majority of retailers said there is currently little or no incentive for them to offer water efficiency services as they are not seen as important by customers. Investment in water efficiency measures therefore does not provide competitive advantage and reduces margin, especially for those customers on default tariffs.
From a customer perspective, the report says that retailers have noted that there is a lack of customer awareness of the need for water efficiency to tackle water scarcity issues. Furthermore, because the majority of business customers are small with relatively low consumption and bills, there is a potential lack of cost savings associated with the implementations of water efficiency measures which further dampens customer incentives to invest in the services.
Awareness levels in the market have decreased
Awareness levels in the market have decreased compared to previous years' findings with 43% of business customers aware that they have a choice of retailer. This compares to 58% in 2019-20 and 53% in 2018-19.
According to Ofwat, the need to address the effects of the Covid-19 pandemic on the business retail market has been a key consideration during 2020-21. However, the report states:
“This has unfortunately diverted some industry attention away from resolving market frictions and in some cases temporarily reversed some progress, for example concerning the proportion of meters that have not been read for more than a year.”
The report says:
“It is not yet clear how enduring the pandemic's effects on activity and awareness levels in the market will be.”
Market must step up efforts to resolve poor quality market data
The regulator said it considers the business retail market has the potential to deliver improved outcomes for customers, society and the environment. However, “it is clear this will require market participants to take action, including by stepping up efforts to resolve poor quality market data.”
According to the report, Ofwat’s market monitoring work, as well as dialogue with industry and stakeholders, has once again found that the same three principal market frictions are consistently highlighted as impeding the effective function of the market.
Poor quality consumption, customer and asset data: Poor quality data impedes parties’ ability to trade effectively and can lead to inaccurate or disputed billing and undermines water efficiency measures.
Cumbersome Wholesaler-Retailer interactions: Retailers are responsible for meeting customer requests – including where these need wholesaler action. Ineffective communication between retailers and wholesalers can result in a poorer customer experience.
Inadequate Wholesaler performance: Includes poor aggregate performance of wholesalers in meeting industry requirements increases retailer costs.
“Urgent and coordinated action is required to improve the quality of market data,” the regulator says.
Consistent with previous years' findings Ofwat’s research also finds that customers who are more likely to be active in the water business retail market are also more likely to be active in other utility markets (such as gas or electricity) with a higher number of large customers reporting having switched their electricity or gas bill in the last 12 months than smaller customers.
"Business retail market should benefit customers, but not if costs from inefficiencies are passed onto them"
Georgina Mills, Director Business Retail Market at Ofwat commented:
“Our state of the market report demonstrates that while the market continues to deliver benefits for some, mainly larger, business customers, the market is working less well for smaller customers. We consider the market can deliver improved outcomes for customers, but this requires urgent action from market participants, including to improve data quality.
“A strong and sustainable business retail market should benefit customers, but not if costs from inefficiencies are passed onto them. Our review of the business retail price caps will look to address this.”
Alongside the report, Ofwat has also launched a consultation on its review of the price and non-price protections applying to business customers who have not actively negotiated or agreed new contract terms with their retailer. Ofwat assesses that competition is not yet working effectively for smaller customers and so proposes to retain price protections for these customers.
Ofwat expects to consult on specific proposals in summer 2022. Final decisions are expected towards the end of 2022, with any revisions taking effect from April 2023.
Click here to download State of the market 2020-21: Review of the fourth year of the business retail water market