Ofwat has today published its preliminary assessment of the costs and benefits of extending retail competition to household water customers – the research says customers would look to save an average of 25% for them to switch, a level of saving which the regulator said “is unlikely to be available.”

Following work to introduce competition to the retail water market for businesses, charities and public sector organisations in England in April 2017, the regulator was asked by the UK government to evaluate the costs and benefits of introducing competition to the residential retail water market in England too.

 The research suggests that approximately half of customers would welcome having a choice as a result of competition – however, many customers say they would want significant savings to switch.

In its emerging findings, Ofwat found that if an innovative, technology-led, competitive market emerges it could deliver average savings per customer of £6 a year, and offer better customer service, new offers and products, improved levels of resilience and put greater emphasis on customer convenience. In particular, it could lead to multi-service bundles – where customers buy a number of utilities or services from a single provider which could deliver even greater savings for customers. Retail costs accounts for about 10% of the average bill of £386.

Half of the customers surveyed  also identified other factors that would be attractive to them – including the convenience of a single utility bill including energy and water.

Ofwat commented:

“Savings are more likely to be achieved if multi-utility retailers enter the market, as they could spread fixed costs over a larger number of customers, and pass on the savings.”

As part of its research Ofwat also reviewed what happened when other markets opened,  commissioning  an independent study into the opening of the energy market. In modelling costs and benefits the regulator also took account of the experience in energy markets, as well as business learnings and technology which were not available at the time of opening the energy market.

Customer research commissioned to inform the review found a majority of people (56%) thought they should have choice, half (50%) would be interested in switching and 61% thought it would result in new offers and innovation.

When asked how much they would like to save off their water bill to convince them to switch, the average was 25% – a level of saving which the regulator said “is unlikely to be available.” However, 45% of people said they would switch if retailers offered additional services even if there was no price saving.

Ofwat also identified and modelled the impact of the potential costs from introducing competition. Under one of Ofwat’s scenarios, where retailers do not compete and customers do not engage with the market, the costs could outweigh the benefits – meaning customers would actually be worse off.

Commenting on the findings, Cathryn Ross, Ofwat Chief Executive, said:

“The picture beginning to emerge from our review is that opening the residential retail water market to competition could deliver a wide range of benefits. We think there could be savings of up to £6 and, while modest, I’m sure customers would rather have that money in their pocket, than not.”

“However, the benefits are not only about lower bills. We think there is real potential for competition to improve customer service, generate new offers and innovations and make customers’ lives a bit easier.”

“We also think it could help the environment. In a competitive market it would make commercial sense for retailers to put more focus on conserving water and using it wisely. Over the longer term, this could reap impressive returns for the environment and the resilience of our water supplies. We see the potential for improved waste water management too.”

To help work through possible costs and benefits, Ofwat modelled outcomes against four possible scenarios ranging from one with widespread innovation and strong customer engagement, to one with disengaged customers and retailers and weak competition.

Ofwat is now consulting on its emerging findings before publishing its final report to government in the autumn. Any decision to open the residential retail market in England to competition is for the UK government - Ofwat will not be making any recommendation as part of its final report. The regulator was not asked to reach a view on whether the government should introduce competition nor or to recommend what form any competitive market should take, which are ultimately decisions for the government.

The research follows the work already in train to open to competition the retail market for businesses, charities and public sector organisations in England in April 2017.

Click here to download a summary of Ofwat’s findings

Click here to download the full emerging findings and technical appendix