In an Expert Focus article for Waterbriefing, Guy Ledger, client director for UK water utilities at Atkins discusses the upcoming changes in the water sector and the opportunities and challenges they present.

Guy Ledger: Since privatisation the water industry has made modest progress towards competition and choice for customers. But, big waves of change lie ahead that promise to transform the industry and provide exciting new opportunities for companies and investors with vision, and an appetite to influence and exploit the change.

Defra’s Water for Life white paper [2011] and the Government’s subsequent Water Act 2014 have been a catalyst for change in the industry; not only setting out a framework for better environmental management of an important resource, but also paving the way for the introduction of competition to drive more value and choice for customers.

Very soon businesses in England and Wales will have a choice of supplier in the same way businesses currently do in Scotland.  For the first time, companies operating across the UK will have the option to switch suppliers and consolidate their water and wastewater services, creating opportunities to generate savings through competition, efficiencies and economies of scale; an option available with other utility providers for many years.

Under the first wave of change, by April 2017 water and wastewater retailers will be able to play for some 25,000 business customers. In response, and through a forced separation of their retail and wholesale operations, existing water companies are gearing up to face the new non-household competitive market.

The new joint venture between United Utilities and Severn Trent Water to exploit the changing market, and Portsmouth Water’s decision to exit from the non-household retail market, both show how the existing water companies are starting to transform. Without doubt, this is just the beginning as the new rules open up the way for incumbents to adapt, and for new companies to enter the retail sector.

"Seems inevitable retail competition for domestic households will arrive by 2020 target date"

The direction of travel is clear; with the industry already under consultation to introduce competition for household customers it seems inevitable that retail competition for domestic households will arrive by the anticipated 2020 target date.

It's not just the retail market that’s facing change. Promised deregulation of upstream sludge treatment will also create a new competitive market and an opportunity to drive new profits by rationalising sludge treatment and better exploitation of the inherent energy.

On the water supply side, discussion is taking place about the possibility of deregulating water resources in response to growing scarcity of this precious commodity caused by climate change and population growth.  Akin to this, is whether customer bills should be differentiated on the basis of “cost to serve”. Politically, this looks like a step to too far, but in an increasingly competitive world it's easy to see how some customers may not want to subsidise the price paid by others.

Following on from horizontal separation of Retail and Wholesale operations, vertical separation of the wholesale component appears to be the next logical step, and some companies are already organising themselves around this potential future. Such a move will pave the way for a further wave of transformation; opening up opportunities to create larger regional water only companies, or regional wastewater only companies. Coupled with the other changes - deregulation of sludge treatment and water resources - it’s  easy to see how new water only or wastewater only entities could drive greater efficiencies and greater value for customers and shareholders.

"Foreseeable that government will move to create a single utility regulator"

A final thought concerns the regulatory framework. With increasing pressure on the public purse and the convergence of competition across water, gas, electric and telecoms, it’s foreseeable that government will move to create a single utility regulator. Not only would this generate savings for the tax payer, but it may also drive another wave of change. A combined regulator could exploit the nexus between water and energy, and use this to surface new opportunities for innovation and efficiency. 

The waves of change – real and potential – are evident and will have far-reaching impacts for operators, investors and consumers alike. To respond to these challenges everybody involved within the sector – water companies, their supply chain partners, investors and government - need to be ready to shape and grasp these opportunities, and turn foreseeable change to their advantage.

More than 25 years have passed since privatisation, and water companies are now mature enough to shape the destiny of their industry.  Moves are already underway to modify water companies’ licences to enable the changes already planned. The point of power, however, exists now for companies, investors and other stakeholders to influence government so that licences are modified in such a way that facilitates the broadest view of the future.

We have seen an enormous amount achieved over the past quarter century. As the sector goes through this next phase of radical change its clear that the shape of the industry is going to fundamentally change in the years ahead. All in all, we are truly faced with an exciting future that promises to stretch and challenge everyone. Those with the brightest imaginations and courage to lead will benefit the most.