Enstra Consulting was asked to interview some water industry professionals to gather perspectives on the future of the water industry in the UK – focusing on the development of the competitive Business to Business market and the broader issues keeping water CxO’s awake at night.
Enstra carried out 3 interviews spanning:
Writes for the Water Report and other industry publications.
A director of a large water company operating in the competitive B2B sector.
Mandy brings over two decades of experience to the research.
For over 6 years now the water sector has been dealing with the introduction of competition for large B2B customers. Interviewees noted that the only winners have been large multi-site organisations with sites spread across a number of different water company areas.
“For multi site customers there has been the benefit of having a single relationship with a retailer rather than multiple relationships. Many have taken up the opportunity”
“From a customer perspective it has allowed large multi-site, multi geography customers to pull everything together with one supplier. Simplifies their administration.”
They have enjoyed simplified administration as they deal with one supplier – with one set of terms rather than a multiplicity of suppliers.
However they have not enjoyed significant price benefit from switching. Indeed, the lack of price incentive to switch has led to a switch rate of only 4% to date.
“Mass engagement and mass switching has not happened because most companies see the savings as very small and therefore not worth the effort.”
This lack of price incentive is something specific to the English water market where retail margins have been set by the Regulator at 3%, whereas in Scotland margins were up to 25% which enabled competition to take-off there.
For some smaller B2B customers the cost to serve is greater than the amount retailers can recover from them, which explains the absence of price incentives for switching.
“There is a fundamental issue with Retailer margins. A study from Economic Insight showed that the cost to serve was higher than the retailer margin for many small customers. This has stunted the growth of the competitive market.”
Another development impacting on the development of competition in B2B markets is the development of self-supply – effectively taking some of the largest customers out of the market.
“The self supply market is growing. This is for the large customers who get a retailer licence for self supply e.g. Sainsburys, Kelloggs, Greene King, BT, and Coca Cola. They cannot sell to others but can provide water to themselves. This has grown faster than most people anticipated. Some local Council e.g. Blackpool and Nottingham have also entered into this activity.”
In addition, when the market was set up there was not enough attempt to standardise processes and check data sets for accuracy. In energy when I&C markets were opened to competition for the first time over 25% of address records were found to be incorrect leading to billing errors and poor levels of customer service and satisfaction. In Water these are still running at over 40% and are leading to similar billing and customer satisfaction issues.
The financial conditions have led to limited investment in systems and processes to solve the data issues. However, MOSL’s bilateral hub project is now starting to address the data and process issues.
Looking at the medium and long term, Climate change impacts the water industry through driving ever greater water scarcity. Broader sustainability requires careful stewardship of the environments from which water is drawn. The UK has the highest water consumption per head in Europe and it is still rising, water leakage rates are above 25%, and sewer overflows into natural habitats are a major issue of public concern.
“Water efficiency has not flourished as hoped – which is important from a sustainability point of view. This is due to a range of factors including the low price of water. The data is poor so it is difficult for customers to manage consumption and create the business case for water efficiency investments. The margins for retailers are too low for them to afford to offer water efficiency services as a benefit for many customers unless these are paid-for.”
Looking short term – we have the cost of living crisis – which increases debt risk dramatically across both residential and B2B markets.
“The cost-of-living crisis is also a major worry. Since water cannot be cut-off water may be the bill that customers do not pay when they have to make difficult choices.”
Yes – significant value can be unlocked through structural change and systems innovation.
This is because value can be unlocked through:
Delivering greater opportunities for profitability across the B2B size spectrum can unlock competition and investments in innovation in services as competitors strive to win customers. – currently the cost to serve for small and medium size customers > the retail margin.
“Most retailers are losing money and the competitive market can be a very difficult place to operate in. The margins on customers on deemed contracts are regulated –and in many instances are insufficient to enable competition. A temporary margin injection to allow an industry data clean-up to solve the legacy issues could help considerably in reducing the challenges, costs to serve, and ultimately improve customer service.”
The rising level of consumer debt exacerbated by the cost of living crisis demands innovative IT Solutions capable of differentiating “can’t pays” from “won’t pays” as quickly as possible and facilitating their proactive management.
“Retailers need to do more work to establish who are “can’t pay” and who are “won’t pay”. There needs to be a lot more proactive management of debt books. Early intervention is particularly important for both the customer and the retailer.”
This then reduces working capital needs, debt collection costs, and levels of bad debt.
“The biggest worry by far for a retailer, whether Business or Retail is debt – the customer’s ability to pay given all the things that are happening in the world.”
“Cash flow management is a big issue within the industry and all of the interviewees pointed out that Suppliers have to pay the wholesalers immediately, and only then collect payments from customers in arrears incurring all of the debt management challenges noted above”.
“Customer management is more important than billing – that is where the risk is. Some systems are mainly geared towards billing. Data issues exist all across the water retail industry, including within the market data and the faults lie within the whole of the industry.”
Billing errors drive higher cost to serve and increased customer dissatisfaction. Reducing a major source of these – poor data quality – will reduce costs and increase customer satisfaction.
“Data is the primary culprit of the competitive market issues. The OFWAT /MOSL initiatives to reconcile data in wholesaler systems and market systems is trying to address this – but this is 6 years after the advent of competition”
The quality of the data in CMOS (the central market database) is poor so some addresses are wrong in the dataset which compounds billing and customer service issues.”
However, one potential solution was identified:
“Occupancy status is a constant issue – there are plenty of reasonable third party providers of dataset checking facilities which if used more frequently could alleviate industry debt and billing problems significantly. If I was building a system I would have data input verified against these third party datasets at the beginning which would be a far cheaper solution.”
The current state of metering is a clear problem in the industry.
“There are 20% of meters which have not been read for at least one year. Some are legacy unread which means they have not been read since the market opened. There is very limited smart metering. Most of the meters are dumb and very limited AMR. So, the market is billed on either estimates or very infrequent meter reads. This leads to no bills, estimated bills, billing errors – and the customer satisfaction impacts that come from that. Larger users are frustrated in this market – compares badly to energy.”
Smart metering would allow customers to reduce their consumption, cutting bills and improving water efficiency. Smart metering would also enable automated alerts of water leaks and enable their more rapid repair to reduce water losses.
“We need stronger policy backing for enabling reduced water consumption, ideally obligatory smart metering. We need more funding for water efficiency – it often the poor relation compared with funding for supply side matters. We need collaboration between the stakeholders to make the messages clearer – a national public information campaign would be brilliant. Down the line we will likely need to see tariff structures that charge more for higher blocks of water.”
“On the leakage side the triggers for investigation should be a lot tighter – triggered by meter readings whenever a spike in consumption is seen. This could be done by wholesalers to meet leakage targets, retailers to manage customer bills, and MOSL to manage industry processes. What is needed is a forum to agree best practice for the industry as a whole rather than each part of the industry doing its own thing.”
Expanding retail margins to stimulate competition and investment in systems innovation could unlock considerable value in B2B water markets.
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