In an Expert Focus article for WaterBriefing, Chris Phillips, Marketing Director at UK-headquartered i2O Water, calls for radical restructuring and de-regulation of the UK water sector to drive innovation.

The long awaited draft Water Bill has recently been published with one of the stated aims being to stimulate innovation in the UK water industry. We are all familiar with the saying ‘innovate or die’ and we work in an industry which has sometimes been slow to embrace new ideas and new technologies.

Thankfully the Water Bill, alongside OFWAT’s complementary 2014 Price Review, contains some elements of progress on this front. The moves towards Totex and an outcomes based approach are sensible.

Unfortunately, they don’t go far enough. In most part the Water Bill is disappointing and will do little to encourage any acceleration in innovation. There remain fundamental structural barriers to innovation that could and should be addressed.

A far more radical structural transformation of the water industry and its regulation is required. This would encourage UK utilities to take the strategic steps they need to meet rapidly emerging risks associated with providing clean water.

World leaders in smart water technologies

It would also help create the conditions in which the UK can lead the world in smart water technologies and services. We are well placed to take advantage of this high growth global market.

Despite a conservative approach over the last few years, the UK water industry retains a strong reputation for best practices in water network management.

The setting of leakage targets in 1990s created many of the tools and techniques – including i2O Water’s first iteration of network pressure management technologies – that much of the rest of the world has now adopted. It is no coincidence that many of the pioneering leakage related technologies now in use around the world were developed and first adopted in the UK.

The need to manage water provision more effectively and efficiently around the world is being driven by the climate change, urbanisation and population growth pressures. Traditional approaches to network management will simply not be efficient enough to meet future demand for water. Water scarcity is being forced up the global risk agenda.

The Water Bill includes tentative moves towards structural change focused on introducing more competition into the industry. Using competition as a mechanism to stimulate innovation in the water industry is an ideologically driven mirage. Experiences in the energy industry have shown that it is highly unlikely to result in any significant improvement.

The capital intensive nature of operating a clean water network means that there will never be an effective market in water distribution.

I would advocate a more radical restructuring of the industry and a complete rethink of the focus and goals of regulation.

Overcoming micro-regulation

The UK currently practices what I would describe as ‘micro-regulation’, where individual investment programs are reviewed and approved by OFWAT for funding. This creates huge inertia, locking in specific investment programs over a five year period, and constraining any flexibility to introduce innovation in a shorter cycle time.

The setting of leakage targets is an excellent example. Ambitious initial targets stimulated a wave of innovation in the industry. But over the last 10 years leakage targets have remained essentially flat, based on the incorrect assumption that the sustainable economic level of leakage has remained the same.

That lack of ambition in setting leakage targets has eliminated almost all the pressure on utilities to find more effective ways of reducing leakage.

Valuing water

A further challenge to many investment initiatives is the lack of a realistic internal value of water.

As UK utilities manage the entire water production line, from source to tap, they often only consider the marginal costs of producing water in any business case. That places an artificially low value on the business impact of many innovations.

Separating the retail and wholesale aspects of utilities would force a more realistic price and value for water. This structural incentive would be the engine for innovation as each retail distributor would be required to weigh up the cost of investment alongside the real value of water conserved.

Regulation could focus on the boundaries between the wholesaler and retailer, and also between the retailer and customer.

The role of the regulator would be to ensure that the customer was protected, and that the price and service delivered to the customer were fair. They would be able to set the pricing and service level requirements from the wholesaler to ensure prices are not inflated at this stage.

Beyond that it would provide an opportunity to de-regulate everywhere else. There should be no micro-regulation of individual investments and projects.

This structure would lock in the commercial incentive for the retailer to continuously improve their operations (whilst maintaining their service levels) since that would maximise profits and returns to shareholders.

The retailer would then be free to make their service delivery as cost effective as possible in whatever way they saw fit.

This approach avoids force fitting a competitive market onto the industry. We know from the energy sector that customers want a good service at the best possible price, not necessarily choice per se. There is no reason to believe the same would not be true in the water industry.

International growth opportunity

The water industry must strive to satisfy several different agendas, including increasingly price sensitive customers, their investors/shareholders, and environmental responsibilities.

But beyond these direct concerns, the water industry also represents a strategically important economic growth opportunity for UK plc.

The UK’s water utilities and the supply chain that supports it have the potential to lead the world market for smart water networks. We need to be bold and unleash that potential.

By separating retail and wholesale, and regulating only at the boundaries, we could create the freedom and commercial incentives to drive continuous innovation.

Real innovation in the UK would benefit customers, shareholders and the environment, and encourage high technology, export driven economic growth in new cleaner water technologies.

Chris Phillips is Marketing Director at i20 Water. Based in Southampton, UK, i2O Water's Advanced Pressure Management technology is used to optimise the performance of hundreds of water networks across Asia, Europe, the Middle East and South America. Its technology extends infrastructure lifetimes, improves customer service, and significantly reduces operating costs, energy consumption and wasted water through bursts and leaks.