The water and sewerage industry in England & Wales faces challenges on multiple fronts, including climate change, population growth, environmental quality, long term asset health and resilience of the system, as well as broader questions of trust and legitimacy.
Companies have a good understanding of the delivery challenges they face in AMP6. The PR14 determinations were the most complex to date. Leading companies are well into their programmes to maximise efficiency, while at the same time out-performing on customer and service delivery, and laying the groundwork for AMP7. And the laggards have less than two years left avoid being left even further behind and receiving significant outcome penalties.
The industry is also deep in preparations for PR19, with business plans due in September 2018, followed by a lengthy process of review by Ofwat, leading up to final determinations in December 2019.
The non-household retail market opened in April 2017. Participants continue to refine their retail strategies, the structure and functions of wholesale businesses, and their processes, data and systems. We have seen new entry, acquisitions of retail books, and joint ventures among incumbents. Over 5% of customers (11% by volume) have switched in the first year of the market.
Meanwhile, Ofwat is continuing to lay the ground for upstream reform. PR19 will involve further separation of the value chain and price controls, particularly for water resources (alongside a wider DEFRA/EA programme of abstraction reform) and sludge transport, treatment and disposal, which are being split off from the network and treatment parts of the wholesale value chain. Performance requirements and incentives will be tailored accordingly to each part of the value chain, but market forces will need some time to play out.
Policy and regulatory developments to support housebuilding growth will also drive significant change in the water companies’ Developer Services activities over the next few years.
The debate about trust and legitimacy in the water sector, and utilities more generally, permeates all of this. Ultimately, re-nationalisation of the sector is a potent threat, and is forcing change around Board governance and financial structuring of the water companies, as well as greater engagement with customers on these issues.