The biggest shakeup in the water industry since privatisation nearly 30 years ago will begin in April, with business customers for the first time allowed to shop around beyond their local supplier for the cheapest deal.
For years, small and medium-sized businesses – along with consumers – have demanded the water industry be deregulated to allow them to choose between suppliers, as they currently do for energy.
From 1 April, 1.2m eligible businesses, charities and public sector organisations in England will for the first time be able to switch water supplier, as they already can in Scotland.
The move is seen as the precursor to allow households to similarly shop around for a cheaper water supplier. Companies – particularly retailers – operating multiple sites around the country are expected to be the biggest beneficiaries, as they will be able to contract a single supplier that will in turn send one bill to cover all locations.
Under the existing water supply regime set up when the industry was privatised in 1989, small and medium businesses – along with domestic consumers – can only buy water from their local supplier, such as Yorkshire Water, Severn Trent or Thames Water.
The Department for Environment, Food and Rural Affairs has said the change could deliver £200m in benefits to customers and the UK economy.
On Thursday, representatives of the water regulator Ofwat will be in London to spell out how in greater detail how the new regime will operate. A new national awareness campaign to show off the benefits of switching supplier will be also be showcased before its launch on 23 January.
The initiative has already had a huge impact on the industry. Last summer the UK’s largest supplier, Thames Water, announced it had agreed to sell its book of business customers to Scottish supplier Castle Water.
Several other domestic water firms have now set up new separate trading divisions, or joint ventures, that will be selling their services to business-only customers. So far 14 water companies have applied to become licensed retailers, and further applications are pending, according to Ofwat.
The industry has a spent the last year preparing for the changes, and private company Market Operator Services Ltd (MOSL) has been set up to create the IT infrastructure to enable switching to happen.
Consumer groups will be hoping that it is a success and encourages the government to allow consumers to also switch water suppliers – as has become the norm in the energy sector. But householders who expect such a move to substantially lower their water bills could be disappointed. Unlike in the energy sector, the regulator still sets out what the private water companies can charge customers, according to a highly complicated set of formulae.
In September, Ofwat published figures that suggested the financial benefits from opening the residential market to competition could be worth £2.9bn over 30 years, which amounts to just £8 per customer per year.
In a feasibility study sent to ministers, Ofwat said a liberated domesticated water market would allow several new entrants to come into the market. They would buy water in bulk from the existing major suppliers, and sell it on to households. In such a market, companies could go a step further and offer households a super-package of all their utilities, which could include their gas and electricity, and even other services such as telecoms.
Cathryn Ross, Ofwat’s chief executive, has argued greater competition would benefit customers by encouraging firms to offer better services, such as allowing them to manage their bills with a mobile phone app. “The uncomfortable truth is that, when it comes to retail offers, water companies provide an analogue service in a digital age,” she said.
Water UK, which represents the water companies, has said extending retail competition to more than 20m households could secure potential benefits, but warned it would also be “a major undertaking and so deserves to be given very careful consideration”.
In recent years the provision of water has become increasingly politicised. The average water bill in the UK is £396 a year; however that masks big regional differences. Customers in the south-west pay more than £540 a year, while those in the Severn Trent area pay £333.
Many of the UK’s water companies are now owned by private equity or foreign investment funds, which bought the businesses because they provide steady profits.
In January 2016 Ofwat was heavily criticised by MPs on the public accounts committee, who blamed the regulator for allowing water bills to rise too much.
The committee said that water firms had gained at least £1.2bn over five years to 2015 from bills being higher than necessary.
