Increasing competition in the water industry

UPDATE: A competitive water retail market opened for non-household customers in England in April 2017. Please see the Library briefing paper, Water: non-household retail competition (CBP8925) for updates on the progress of the market. This paper provides background and historical context. 

Reforming the water industry

The water industry in England and Wales has been a regulated regional monopoly business since privatisation in 1989. This means that, with limited exceptions, customers cannot choose their water supplier and the sector cannot function as an open competitive market. 

After a long period of review and consultation, the Coalition Government introduced a legislative framework for a significant degree of market reform in England and Wales, including increasing competition in the provision of water and sewerage services. This follows the introduction of similar market reforms in Scotland in 2008.

There are currently no plans to introduce similar reforms in Northern Ireland.

What are the relevant reforms?

The framework for the market reforms is set out in the Water Act 2014. Much of the detail is or will be included in secondary legislation.

The reforms aim to make it easier for non-domestic users to switch their water suppliers and to open up the water and sewerage market to new companies. A cross-border English-Scottish market will also be established.

The relevant reforms are focused in two key areas: retail and upstream.

Retail competition for non-household customers

The reformed retail market for non household customers (businesses, charities and public sector) is due to commence in England in April 2017.

This stage of retail reform will allow all non-household customers to be able to switch water supplier (currently only customers using more than 5 megalitres of water use can switch).

The reforms will also make it easier for new entrant companies to enter the market and will allow incumbent companies to stop providing retail services to customers and exit the non-household retail market.

Progressing towards the new retail market

Detailed information on workstreams, progress and latest news can be found on Ofwat’s webpages on the Retail market for business customers.

Some major developments include:

• The Coalition Government established the Open Water Programme to design and deliver the new retail market.
• A new market operator (Market Operator System Limited or MOSL) was set up in October 2014 and is responsible for developing and delivering the core IT systems and processes that will enable customers to switch between suppliers.
• Ofwat opened the application process for new entrants to apply for a water supply and/or sewerage licence in April 2016. Ofwat lists 15 holders of licences as at November 2016.
• The Water and Sewerage Undertakers (Exit from Non-Household Retail Market) Regulations 2016 came into force on 3 October to allow the submission of exit applications. So far three companies have confirmed they will exit the non-household retail market (Portsmouth Water, Thames Water and Southern Water).

The Welsh Government published a Water Strategy for Wales in May 2015 and has decided not to introduce non-household retail competition in Wales. 

What about domestic customers?

Originally, when the Water Bill was being debated and discussed, the Government did not intend to extend retail competition to domestic / household water customers. Domestic customers are not covered by the Water Act 2014 reforms and they will not have the opportunity to switch their water supplier under the reformed retail market once it is operating from April 2017.

However, in November 2015 the Government announced that it will also seek to extend retail competition to domestic customers in England, beginning the transition before the end of this Parliament.

Consumer Council for Water carried out research into household customers’ views on water competion in May 2016; and Ofwat published an assessment of the costs and benefits of extending retail competition to domestic customers in September 2016. 

Upstream competition

The upstream end of the supply chain relates to the supply of raw or treated water into a company’s network or the removal of waste water or sewage for treatment. Once implemented, the reforms will enable new entrants to provide upstream services without being obliged to also provide retail services, thus introducing more potential for competition.

The Coalition Government suggested that it would not implement changes until 2019 at the earliest, once work is completed work on wider water abstraction reform.

Background on the Water Act 2014

For more information on the background and justitfications for the competition provisions in the Water Act 2014, please refer to the Library Briefing Paper on the Water Bill.