Probably the most noteworthy element of the otherwise underwhelming Water Act, which received Royal Assent earlier this year, is the advent of full competition in the English Commercial and Industrial retail market. From April 2017, the 5 megalitre threshold at which customers can apply for a competitive supply will be lifted in England. Our view, however, is that this will ultimately prove to be as disappointing as other parts of the Act...
To be fair to the Government, the initial noises bear out their heralding of a new era for water; analysts and investors have muttered about increased risk and volatility being introduced to the sector, and WaSCs in England have been organising themselves to get some practice in by sniffing around the one market already open - Scotland. Thames and Severn Trent have even won some modest C&I contracts there. The Scottish Regulator, WICS, where the shadow of Sir Ian Byatt looms larger than Banquo's ghost, has not been slow to trumpet the success of its C&I market, fully open since 2008. Indeed, it is an instructive example for England - though perhaps not in the way the Government expects.
For although dozens of firms have been licensed to operate in the Scottish C&I Market since 2008, it remains 90%+ dominated by Business Stream, the arm's length C&I retail arm of the bulk supplier, Scottish Water. This is not due to any advantages that relationship confers on Business Stream - managers from the two can't even share a cup of tea without telling WICs in advance; nor is the Scottish market unexciting - the country has vibrant pharma, electronics and food & beverage sectors, all high end water users. Nor is inertia the reason - Business Stream has been very proactive in winning customers with attractive deals. The reasons instead lie in some inescapable facts:
- Business Stream has won most of its contracts by offering to fix the simple things - water waste and inefficient consumption - that drive most of the clients' costs;
- Margins are very low in all but the most sophisticated businesses, and the bulk water element of it will barely change; undercutting Business Stream on price out of the retail element is not a sustainable option for new entrants.
Both factors will play out in England as well, with the additional dimension that
- C&I is a marginal part of most WaSC business compared to their household market
- "Sales" is not in the WaSC skill set or nature (as the "multi-utility" experience of 15 years ago showed) - embedding it will be costly and potentially a distraction to the core engineering business.
So the omens are not suggesting a particularly frantic C&I water retail market in England any time soon. How WaSCs and the regulator could respond I'll discuss in another article.