David Black, Interim Chief Executive at Ofwat has highlighted ongoing issues in the business retail market, including market frictions in terms of data quality and wholesaler performance, insufficient levels of innovation and failure of the market to deliver improvements to water efficiency.

Speaking at the MOSL CEO Forum which took place at the Institute of Directors on 12 November,David Black opened by saying that the market had still not as yet succeeded in putting customers “truly at the heart of this market”, despite taking important steps in this direction.

Commenting on progress to date in the last year, he highlighted the establishment of a new strategic Panel - which has a majority of independent members – who will provide strategic direction and oversee programmes of work to improve customer outcomes.

This included agreeing a set of strategic priorities for the market and ensuring that market initiatives were focussed on delivering against those priorities.

However, he emphasised that increased efforts to deliver on priorities was “likely to mean that some existing market initiatives will need to stop.” It was therefore important that the new Strategic Panel and its committees had discretion not to pursue proposed changes to the market codes - for example if such changes would not clearly benefit customers.

“We continue to believe that an unrelenting focus on customers is what should drive prioritisation of effort, resources and time in this market,” he added.

Expressing Ofwat’s recognition of efforts achieved to date the 'bilaterals' programme – which essentially aims at making the interactions between trading parties less painful and more efficient through increased standardisation and automation, he told attendees that there was still more work to do.

Market has failed to deliver improvements to water efficiency

Turning to water efficiency, David Black said that when the market opened it was envisaged that retailers would compete on the basis of saving customers money from using less water.

However, despite some notable water savings achieved by some customers – including those who have opted to self-supply, “we have not seen the market deliver the improvements to water efficiency we might have expected at market opening.”

He explained while it was clear from talking to customers that poor quality customer and consumption data was one driver, it was also clear there may be “other factors at play” preventing business customers from using water more efficiently.

Following a request by Ofwat and the Environment Agency in March 2020 for trading parties to work collaboratively to agree and to deliver an action plan. However, while Ofwat had been pleased to see the industry step up and work together in agreeing an action plan to improve water efficiency in the business sector and taking steps to deliver it, “clearly more remains to be done”, he added.

Key areas Ofwat is flagging up where more work needs to be done are:

Market frictions – data quality, wholesaler performance

Introduction of the bilaterals hub is expected to remove unnecessary cost from this market and improve outcomes for customers by making interactions between wholesalers and retailers more efficient. However resolution of market frictions of poor data quality and inadequate wholesaler performance will require further effort from market participants.

David Black said:

“We consider progress in reforming the market performance framework (MPF) has been too slow and needs to accelerate over the coming year. I don't think it is wrong to expect to see substantial progress to have happened by the time we meet again next year. I also want to be clear that when look at the efficient level of retailer costs as part of the REC review, we will not pass onto customers inefficiencies associated with poor market performance.”

Ofwat would like to see trading parties support reform of the current MPF as a priority - including supporting MOSL by making sure there is sufficient resource to take the work forward over the next 18 months.

Innovation - "can't be said that we are seeing significant levels of innovation”

Commenting on innovation, the Ofwat Chief said that while some traction on water efficiency had been seen over the past year, “we still aren't really seeing the level of innovation to significantly benefit customers or the environment …..in the main it can't be said that we are seeing significant levels of innovation.”

Black pointed out that Ofwat was continuing to see smaller customers less aware of and engaged in the market - analysis indicated that small customers can expect to save around £15 a year from switching supplier. “Some small customers may conclude that the effort to engage in this market isn't worth it given the potential price savings,” he said.

He questioned whether that would still be the case if there was meaningful innovation that:

• lowered the costs to customers engaging in the market – for example via multi utility bundling; or
• increased the benefits to customers of engaging – for example via transformation of the retailer offering

He concluded by saying that the market needs to create value for customers, society and the environment, commenting:

“The introduction of the retail market was not about carving up the pie, it was about harnessing market forces to grow the size of the pie.”