New Report Suggests The Water Retail Market Isn’t Working Optimally
Concerns have been raised about the English water retail market, which opened up back in April 2017, allowing companies around the country to compare business water suppliers and choose a retailer that better suits the specific needs of their firm.
While there are all sorts of benefits associated with switching, such as lower prices, improved quality and a greater variety in service offerings, a new report has identified that suboptimal outcomes could be arising in the market, as well as making recommendations as to how improvements could be delivered.
Carried out by Economic Insight, the Non-Household Water Retail Market study has identified the fact that regulated default tariffs for the lowest usage customers are below the efficient level as being the primary concern currently facing the market at the moment.
It has been estimated that the average allowed cost to serve for customers with 0-0.5Ml usage is £78 per annum. However, the industry average actually incurred cost to serve is £121, not accounting for the effects of the pandemic.
The study didn’t identify any evidence that this difference is due to inefficiency within the market, but it can result in customer harm because there may be insufficient incentives for retailers to engage with customers. In addition, retailers may also not be able to provide an efficient service in the long run, as well as potential for a risk of systemic retailer failure.
Other concerns raised in the report include the crystallisation of bad debt risk, driven by the coronavirus crisis. This is increasing the likelihood of systemic retailer failure in the short term and this could see some customers stranded for a period of time.
In addition, there are other concerns that some customers don’t have access to the necessary information to engage effectively in the market, which could prevent some from fully benefiting from it.
These concerns need to be addressed as a matter of priority and the report authors have made a series of recommendations to remedy the issues.
For example, they’re keen to see increases being made for the allowed costs for customers with the lowest usage, brought in from April 2022, as well as strengthening the bad debt cost recovery mechanism.
Currently, the risk-return balance is insufficient to compensate retailers for the risk, which means there is a risk of systemic retailer failure that wouldn’t be in customers’ interests.
Another suggested remedy was the introduction of price caps being applied on a unique customer basis to better reflect customer behaviour. At the moment, price caps are defined for usage bands on a premises basis, which means customers with relatively high overall usage but multiple small usage premises are subject to the price caps.