Water update: What is happening to water prices in your area?

This article discusses the development of the water market since competition was introduced in 2017 and the changes to pricing from 1 April 2020. We’ll share information about the retail prices and update you on how you can benefit in this open-market where you have free choice over your water supplier.

The sections we will cover are:

1. The development of the water market in the UK
2. The role of the wholesaler and retailer
3. Deemed contracts
4. Pricing – how it works and margins
5. Wholesale & retail pricing and margins 2020/21
6. Summary of margins by regional wholesale area
7. What should you be doing and what can Zenergi offer

1. The development of the water market in the UK

The English water industry is going through a gradual process of regulatory reforms over the next five to ten years. These reforms are removing the integrated regional monopoly model, which has barely changed since privatisation in 1989.

Historically, water companies across England provided similar, integrated services with little or no opportunity for customers to switch provider. These services include providing water from source to tap and, for the majority of customers, wastewater services too.

Recommendations for wider structural reforms were first put forward by the 2009 Cave review. It proposed the introduction of retail competition for all non-household customers. The Water Act 2014 adopted the majority of the recommendations of the Cave review and set out the framework for wide-ranging industry reforms. The successful introduction of retail competition for non-household customers in Scotland in 2008 undoubtedly helped convince politicians and regulators that a similar structure could also work in England and benefit customers.

The Act allows all non-household customers – 1.2 million businesses, public sector bodies and charities – to switch their water retail supplier. Competition was introduced to the water market in April 2017.

The overarching objective of the retail market is to encourage retailers to compete for business by providing better customer service, lower prices and/or extra services that would help save water.

This should not only lower customer bills, but also reduce the impact on the environment.

2. The role of the wholesaler and retailer

Your local water company (known as a water wholesaler) still pipes water to and from your premises, but it is independent businesses that provide your retail services, including billing, meter reading and customer services.

Just like with your energy provider, you can now choose your business water retailer based on price, service and what is most important to your business. You now have the power to decide who you pay your bills to, which is a good power to have.

How does water deregulation work?

• Your local water wholesaler (local regional water company) pipes clean water to your business and takes away, treats and cleans wastewater

• Your retailer is responsible for your meter readings, so you only pay for the water you use

• You water retailer sends you a bill that covers both retail and wholesale costs

• You pay your bill

• Your retailer pays the wholesaler

• If you have a question about your water account, it’s your water retailer you should contact

• In a water emergency you can contact your wholesaler directly

Who are the wholesalers and retailers?

In total there are 22 wholesalers in the market and over 30 retailers. Some are missing from the below list since they are just small wholesalers or new entrants to the market but the majority are here. The list below is the retailer that you would be automatically provided with from 2017 for your particular regional wholesale area. For example, in the Thames Water wholesale region, the retailer would be Castle Water.

Wholesaler responsibilities:

Wholesalers are responsible for the supply of clean water, taking away and cleaning wastewater, maintaining reservoirs and the infrastructure of pipes and sewers. Essentially, they look after the network of pipes, reservoirs and treatment works to ensure that businesses get the clean water they need, and that any wastewater is removed and treated.

They are also responsible for:

• Managing network issues, such as burst pipes or blocked sewers

• Installation of new water meters

• Changing the location of a water meter

• Alterations to the size of a water meter

• Repair or replacement of a faulty or damaged water meter

• Responding to queries on the level of consumption

• Responding to a leakage claim

• Conducting a meter accuracy test

It’s worth noting that wholesalers don’t look after the pipework on, or within, your property.

Retailer responsibilities:

Water retailers provide the following services:

• Issue the bills and collect payment for your water and/or wastewater services

• Manage your queries with the wholesalers. So, for instance, if you need a new meter, have a leakage claim or a complaint about water quality, they will raise the work with the Wholesalers on your behalf and see this through to conclusion

• Obtain meter readings and supply them into the water market’s central database

3. Deemed contracts

Business customers in the retail market for water and wastewater services in England are free to choose their retailer. Customers that have not actively engaged in the market continue to be provided by a retailer (as in the table above), but are served on the basis of a ‘deemed contract’, including default tariffs. These tariffs are limited by Ofwat (Government regulator for water) in order to protect these customers. They did this to ensure that customers were ‘no worse off’ by the introduction of competition.

Deemed contract – the relationship between a customer and retailer in the absence of otherwise agreed terms, governed by schemes of terms and conditions published by the retailer. This essentially means – no discount/savings. You pay the same as you did before competition.

Between 2017 and 2020, these contracts placed a limit on the net margin a retailer could earn of 2.5%. However, in July 2019, Ofwat published a document outlining the maximum margins a retailer can charge from April 2020.

Whilst Ofwat have a statutory duty to protect the interests of consumers, wherever appropriate
by promoting effective competition, they do not seek to promote competition for its own sake, but to use it wherever it presents an appropriate tool to achieve good outcomes for customers. The decisions made for different sectors of the market reflect this duty, and take into account the different conditions in those sectors of the market.

For the lowest usage customers (< 500m³ of water/year), the decision is to retain protections at a similar level to currently, with an inflation adjustment.

For medium and higher usage customers, where engagement and awareness levels are higher and bill values greater, they consider that there is greater scope to protect the interests of customers through promoting effective competition. Here they have decided to retain but relax protections.

For 500-50,000m³ of water/year customers (the vast majority of schools fall within this bracket), they are implementing protections on the basis of a gross margin cap of 8% for water customers and 10% for wastewater customers. This should support greater competition between existing retailers and potential new entrants, which in turn should drive improvements in service quality, offer and price in a context where customers are currently better able to engage with and benefit from the market.

For >50,000m³ of water/year customers they have decided to implement a reasonable and non-discriminatory obligation, but no explicit price cap. This is because they are confident that for these customers, competition can provide an appropriate mechanism to protect customer interests.

These protections will be reviewed by Ofwat in 2-3 years’ time, clearly with an intention to reduce price control further.

4. Pricing – how it works and margins

Gross margin – the difference between the wholesale charge and the retail tariff
Net margin – The margin between the total of wholesale costs and cost to serve and the retail tariff. Effectively, profit earned by the retailer.

The amount you pay for your water services can be split into three components:

1. The wholesale element – the amount a retailer will have to pay the water company for the water it provides

2. The retail cost element – the costs the retailer incurs in running and delivering its business (meter readings, IT, staff, customer service, billing etc.)

3. The net margin – effectively the retailer’s profit margin.

The wholesale element is regulated by Ofwat and is set every five years (they have now been set from 2020 to 2025). Between 2017 and 2020, this element of the bill was typically around 95% of the total bill (this varies in different wholesaler’s areas). This left around 5% to cover the retailer’s costs and profit. The net margin is then in turn regulated; companies are allowed to make a net margin of 2.5%.

From 2020 onwards, the gross margin is 8% for water and 10% for wastewater in addition to the wholesale charges (for sites consuming over 500m³ of water/year). After the retail cost element this means more margin available and more scope to encourage competition. It can be explained in this bar chart:

The conclusion that can be drawn from this is that if you don’t switch, do nothing and remain on a deemed contract then the retailer will just have more profit. That is profit that you could have had in savings for your school.

5. Wholesale & retail pricing and margins 2020/21

So, how would you find out the wholesale, retail price and the gross margin for your school or schools in each regional area if you are a MAT?

You would need to find, download and then assess the tariff your school is on from both the wholesale tariff document and scheme of charges document from the retailer that serves your area and compare the two.

This isn’t as easy as you might think. Example of wholesale tariffs for just 1 wholesaler; this was one page of a 58-page document from Severn Trent. Multiply this by the 22 wholesale regions:

Then go to the relevant default retailer (you need to know who this is for each region, for Severn Trent it is Waterplus) to find their default prices to establish the gross margins (a 32 page document):

… and this is just to work out one element of the bill, in this case the water supply charge. There is also all the fixed charges, waste water and drainage charges (maybe Trade Effluent in some cases).

This would be one method. Another method would be to contact a number of retailers directly to get prices – the problem with this is that although they will provide you with a price, you may not know what their customer service is like.

An alternative and much easier option is to ask Zenergi to provide you with the average gross margin in each regional wholesale area….

6. Summary of margins by regional wholesale area

Obviously, we can’t provide the margins for every tariff across the county, since they are thousands of them, however, we have averaged them out in this table here:

7. What should you be doing – and what can Zenergi offer?

Hopefully, you can see that you need to make sure that you don’t remain on a deemed contract. If you don’t switch then you will be paying more for water than you should be and the retailer will be making more money.

You can contact water retailers for a price with the knowledge of the gross margins available in your area from this presentation and switch on that basis. They will present the saving to you in one of two ways:

• Wholesale cost plus the retail charge; or

• Default cost minus a saving.

Another way is to join the Zenergi Water Scheme.

Zenergi Water Scheme

Our scheme is wholesale plus and the charge is around 4.5% (depending on regional fixed costs), delivering a customer saving up to 4.5% (depending on regional deemed contract pricing).

Benefits of the Zenergi Water Scheme:

• Savings of up to 4.5%

• Stress-free invoice account management

• Issues rectified on your behalf

• Monthly billing with consumption and billing information available on our online portal

• Account management from your Zenergi Relationship Manager

• Have your electricity, gas and water managed all in one place

• We manage the transfer for you

• 28-day payment terms by Direct Debit (or BACS)

• Consolidated billing for those customers with larger portfolios

• Further savings available through reducing water consumption/tariff analysis; we often find savings available in the tariff once we are managing the water billing as well as identify potential consumption issues at sites. Billing provided by Water2business who are trusted and proven to provide great customer service

Watch our webinar or contact us for any more information about the Zenergi Water Scheme at bepositive@zenergi.co.uk