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Open Water: a Path to Success for Incumbents and New Players

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Open Water: a Path to Success for Incumbents and New Players • Cognizant 20-20 Insights Open Water: A Path to Success for Incumbents and New Players To succeed in the newly deregulated England market, water utilities need to upgrade their IT systems to improve the customer experience, develop differentiated offerings and enable competitive pricing. Executive Summary ity and gas deregulation. Based on our findings, we make recommendations for water utilities to The England water industry is set for deregu- succeed in a deregulated industry by taking a lation in the downstream value chain starting holistic approach. April 2017 for all non-household customers. The changes stipulated by the UK Open Water Open Water: An Introduction program1 present both challenges and oppor - tunities for market participants. Regulatory Competition is not new to the UK water market. agencies set the ball rolling with the publication Two arrangements are currently available to of the “Water for Life” whitepaper in December non-household customers: “supplying for large 2011.2 Since then, a considerable amount of work users” and “supplying in a defined area.” For has been done to develop the MAP4 (post-ven- large water use (five million liters per year in dor MAP) market architecture plan.3 England and 50 million liters per year in Wales), customers can choose their water supply However, a recent independent review4 reveals services from over a dozen service providers. further work is needed to open the market as planned. Additionally, market participants must With the defined-area arrangement, providers be ready with their systems and processes can deliver water and sewerage services or before the go-live date of October 2016 for com- water-only services for a particular geography mencement of the pilot period. in which an existing appointed water company already operates. Roughly 14 companies are In this white paper, we analyse similar market registered for this setup. Despite these options, deregulation implementations in the UK, such only one large-use customer has switched from as the Scottish open water market, and electric- its existing supplier to date. cognizant 20-20 insights | june 2016 Water Value Chains Post Deregulation Water Water Retail Water Extraction Water Treatment Transmission, Services Distribution Water Value Chain Waste-Water Value Chain Non-Household Customers Waste Water Waste Water Waste Water Waste Water Collection, Disposal Treatment Retail Services Transmission Upstream/Wholesale Downstream/Retail Figure 1 Other global deregulated markets have while both existing and new retailers will provide introduced innovative approaches to managing downstream services. The retail function of resources efficiently and delivering benefits to existing utilities will need to demonstrate an customers, including reduced bills, better services arm’s length relationship with the wholesale and a range of tariff options. For example, services side. Scottish Water claims to have saved more than £72.6 million in water charges, more than £54 In addition to wholesalers and retailers, another million in water efficiency, more than 24 billion participant in the deregulated scenario will be liters of water volume and over 42,000 tonnes in market operators (see Figure 2). Market operators 5 will provide the operational capability needed to CO2 emissions. support the market, such as delivering IT systems The intent of the Open Water program in that enable registration, customer switching and England and Wales was to enable competition settlement between wholesalers and retailers. in the retail segment to supply water and waste- water management services to non-house- Ofwat, the organisation responsible for economic hold customers. In England, all non-household regulation of the water sector in England and customers will be able to choose their suppliers, Wales, will continue to play an important role in while in Wales, non-household customers who use market governance and will also be responsible more than the current 50 million liter-per-year for maintaining regulations, such as the Market cap will have supplier choice as per the existing Arrangements Code and the Wholesale-Retail arrangement. Code, as well as providing charging rules, water supply and sewerage licenses, instrument of After deregulation, the market will be separated appointments, eligibility guidance, license appli- into upstream and downstream segments (see cation guidance, the interim supply code, the Figure 1). Existing utilities – which will be known retail exit code, transition schemes, etc. as wholesalers – will provide upstream services, Open Water Market Structure Wholesalers Use and charge Information Operations & service Information Ofwat Ofwat Money Retailer Market Retailer Operator Non-Household Customers Figure 2 Wholesaler cognizant 20-20(Scottish insights Water)2 Water Industry Central Market Agency Commission for Scotland (Effective market (Policy & licensing) operation) Licensed Suppliers/Retailers Non-Household Customers Wholesalers Use and charge Information Operations & service Information Ofwat Ofwat Money Retailer Market Retailer Operator Non-Household Scottish Water ImplementationCustomers Wholesaler (Scottish Water) Water Industry Central Market Agency Commission for Scotland (Effective market (Policy & licensing) operation) Licensed Suppliers/Retailers Non-Household Customers Figure 3 Scottish Water Implementation England and Wales have 32 incumbent service The Scottish water market implementation providers for water and sewerage services. provides a business case for the industry changes This adds to the complexity of managing impending for England and Wales. Retail deregu- transactions among the various wholesalers lation for non-domestic customers in the Scotland and retailers. To this end, the new Wholesale- water market became operational in April 2008 Retail Code and wholesale contract have been and impacted roughly 130,000 non-domestic or included in the new market arrangement. non-household customers. Estimated benefits UK Gas and Electricity Deregulation include about £138 million in 30 years, with £37 million counted up to 2015.6 In comparison, the electricity and gas market is more operationally intensive, given the transac- The Scottish market representatives are playing an tions among market players and the multiple instrumental role in shaping the open water market complexities of the end-to-end implementation. structure, including input on maintaining an arm’s Unlike the retail-only deregulation in the water length relationship between incumbent suppliers market, the gas and electricity markets are open and their retail units; managing the switching to competition for almost the entire value chain element, connections, consumption data and data of wholesale, transmission and distribution, and quality; applying of performance penalties. retail. However, this market provides a good indicator of how robust processes and systems The structure of the open water market in the need to be in order to operate in a deregulated UK is similar to Scotland’s model (see Figure 3). market. The relationships among generation, The major difference is that Scotland has only transmission and distribution companies provide a single wholesaler – Scottish Water – while useful case studies on how business arrange- UK Electricity Market Structure GENERATION TRANSMISSION DISTRIBUTION Power Station Transmission Company Distribution Companies Sales System Operator Balance Responsible Network Access Management Spot Market/ Wholesale Power Exchange Metering Energy Service Providers Customer Financial Market Aggregator Energy Ownership Money Product Service Figure 4 cognizant 20-20 insights 3 UK Gas Market Structure Upstream Midstream Downstream Foreign LNG Power Production Plant Imports Entry Sell Spot Market Buy Exit Distribution Metering Plant Points Points Domestic Well Locals Shipper Transmission Trunk Line Shipper Utility Metering Production Head Factory Foreign Well Storage Production Head Imports Stall Retrieve Distribution Metering Residential Exploration/Production Companies Transmission Companies Distribution Companies Figure 5 Comparative Analysis of Deregulation in Various UK Utilities Parameter Scottish Water Market UK Electricity UK Gas Number of 13 (April 2014) Non-domestic (June 2015): 59 (24 provide both Retailers 18 (March 2015) gas and electricity; 18 provide electricity only, 17 provide gas only). Domestic (June 2015): 31 (26 provide both gas and electricity; 2 provide electricity only, 3 provide gas only). Top Retailers • Business Stream, Scottish Water • British Gas • British Gas • Commercial Services, Thames • E.ON • Total Gas & Power Water • EDF • Carona • United Utilities • RWE npower • Gazprom • Veolia Water • Scottish Power • SSE • Commercial Water Solutions • SSE • E.ON New Retail 2013-2014: 4 new players Non-domestic Entrants 2014-2015: 5 new players 2005-2010: 8 new players 2012-2015: 18 new players Domestic 2012-2013: 9 new players 2013-2015: 8 new players Cross-Market United Utilities, Thames Water, Centrica, Scottish Power, E.ON, EDF, RWE, SSE, Entrants Severn Trent, Veolia Water, Gazprom Northumbrian Water, Anglian Water, South West Water Customer 5% switched Domestic (2002-2014): 70% switched among Switch Rate 50% renegotiated contracts electricity customers and 82% for gas customers. Switch rate 2014: Approximately 3 million for electricity customers and 2 million for gas customers. Non-domestic (2002-2014): 71% switched. Reason for switch: price (90%); customer service (11%); nearing contract
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