Thought Leadership White Paper. Wheatley

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1 The effect of water deregulation on England s SME businesses Thought Leadership White Paper Wheatley The contents of this document are the sole and exclusive property of Wheatley Associates Limited trading as Wheatley. They may not be disclosed to any third party, copied or reproduced in any form, or used for any purpose other than that for which they were provided without the express permission of Wheatley Wheatley Associates Limited.

2 Introduction The Water Act 2014 established a framework to create a new water market for England and laid out plans for new entrants to be able to enter the water sector, providing a new source of water or sewage treatment services. Scotland has had a competitive water market since 2008 and this was used as a template for the Open Water programme, which was set up by the UK Government to open the water retail market for businesses, charity and public sector customers in England. Open Water claims that the competitive water market will bring 200 million of benefit to the UK economy, along with environmental benefits. The Water Act came into effect on 1 st April 2017, allowing over 1 million businesses in England to start choosing who they buy their water and sewerage services from. Up until then, this was something that only very large consumers of water (>5m litres p.a.) could do. Now small and medium sized enterprises (SMEs) have the freedom to choose from a range of water retailers, with some opting for a self-supply licence (buying water directly from the wholesaler). This is the biggest transformation in the industry since privatisation in This deregulation means that for the first time, companies can compare the products, prices and services of a range of different water retailers to select the best service for them. For some companies that have sites across different water regions this also means they can now have a single contract with one retailer. To understand the impact of market deregulation on SMEs in England, Wheatley commissioned a survey of senior business leaders (CEOs, managing directors, partners and other senior managers) in SMEs across the 9 regions that make up England (East of England, East Midlands, London, North East, North West, South East, South West, West Midlands and Yorkshire and The Humber). The survey was conducted in May This white paper is essential reading for leadership teams of water retailers, wholesalers and other industry stakeholders who wish to understand the experience of SMEs in the first month of deregulation, exploring; awareness levels; switching behaviour; benefits; and future perspectives on service demand from their water retailers. Key research findings 58% of SMEs were aware of market deregulation one month after the market opened for competition. Increases in awareness have been seen across all SME groups since the Ofwat survey in January % of eligible SMEs switched water provider in the first month of deregulation, with over 50% of those who haven t yet switched planning to do so within the next 18 months Price is the most important factor when making the decision to change water retailer. 77% of respondents rated price as extremely influential or very influential in their decision to change water retailer and 83% of respondents saved money by switching their water contract SMEs utilise added value services from their water companies; during the 12 months between June 2016 and May 2017, 21% of SMEs had their water supply tested. 20% of SMEs contact their water supplier each year as a result of a blocked sewer, with 8% of customers having to do this more than once per year Two thirds of SMEs were positive about the benefits that could arise from having access to the latest water metering technology. Almost three quarters (72%) felt the new meters would be useful for; better control of costs ; no estimated meter readings - more accurate bills ; and leak detection. Despite this, just 22% of businesses said that they were likely or very likely to want the latest water metering technology installed in the future. Page 2 wheatleysolutions.co.uk Confidential

3 60% of respondents were aware that the water market had been deregulated Respondents to the Wheatley water survey were asked in May 2017 Were you aware that you could now change water retailer?. 58% of SMEs in England responded that they were aware, with 42% not being aware one month after the water market opened for competition in England. Figure 1: Awareness of market deregulation Were you aware that you could now change water retailer? 42% 58% Yes No A steady increase in awareness Table 1 below clearly shows the improvement in SME awareness of market deregulation in England. The awareness levels are broken down across four different categories. The market was opened up to competition through the Water Act which received Royal Assent on 14 th May At this time less than of SMEs were aware of the changes that would impact the supply of water and sewage services in In October 2016, the Consumer Council for Water published the results of a survey that showed that awareness had improved; 20% of larger SMEs were aware of the market deregulation. Three months later, awareness had increased, with the biggest improvement among SMEs with employees; 41% of these were aware of the forthcoming competition in the water market (a 28% increase on the results from the previous survey). The Water Act came into force on 1 st April 2017, allowing businesses, charities and public sector organisations in England to change water retailer for the first time. The Wheatley survey was conducted in May 2017, one month after this deregulation. The survey results showed significant increases in awareness across all sizes of SMEs. Micro businesses (with 0-9 employees) were still the least likely to know that competition existed with just half of those surveyed saying they were aware that they could now change water retailer. This compared to 62% of both and employee organisations. The largest awareness was amongst the medium sized companies in band B ( employees) with almost three quarters (73%) of these organisations aware of the market deregulation. Page 3 wheatleysolutions.co.uk Confidential

4 Table 1: Awareness Levels of deregulation in the water market October January May Micro 0-9 employees 6% 9% 28% 50% Small employees 4% 13% 41% 62% Medium A employees 5% 13% 62% 38% Medium B employees 9% 20% 73% Source: 1, 2 Consumer Council for Water, 3 Ofwat, 4 Wheatley Taking advantage of market competition Of the SMEs that were aware that they could switch to a new water retailer (and were eligible), 21% of these had switched within the first month of deregulation. Figure 2: SME switching behaviour Switching behaviour of eligible and aware SMEs 21% 79% I ve appointed a new water retailer I haven t appointed a new water retailer Figure 3 shows that over a third of SMEs (38%) that had switched water retailer were based in London. The next most active switching region was Yorkshire and the Humber accounting for 15% of all switching activity across England in April. These two regions combined with the West Midlands and South East regions, accounted for almost three quarters (73%) of all switching activity in the first month of deregulation. The regions that switched the least during this period were the East of England, East Midlands and the North East, which accounted for 4% of English switching each in April. Page 4 wheatleysolutions.co.uk Confidential

5 Figure 3: Switching activity by region SME regional switching behaviour 40% 35% 30% 25% 20% 15% 5% 0% London Yorkshire and The Humber West Midlands South East North West South West East of England East Midlands North East Over half of businesses plan to change water retailer Of those SMEs that haven t yet switched their water retailer, over 50% plan to switch within the next 18 months, with 47% planning to switch within the next year. 20% of SMEs are undecided and stated that they re not ready to switch and will wait to see what happens in the new market before making any decisions. There were still over a quarter of SMEs (28%) that don t have any plans to change water retailer. Figure 4: 30% SME retailer switching opinions Would you consider changing your water retailer? 25% 20% 15% 5% 0% Yes - within 3 months Yes - within 6 months Yes - within 12 months Yes - within 18 months Undecided No Page 5 wheatleysolutions.co.uk Confidential

6 <6 months 1 year 18 months 2 years >2 years Rolling Don t Know The effect of water deregulation on England s SME businesses New water contract preferences vary Of the 21% of eligible and aware SMEs that switched water provider, equal proportions of respondents opted for; 1 year; 18 month; and 2 year contracts (23% apiece) with 17% of customers opting for a contract over 2 years in length. The majority of these contracts (63%) covered both water and sewerage usage. 23% of contracts were sewage only; this was 13% more than companies that opted for a water only contract ( in total). Figure 5: Water Contracts 25% What contract length did you sign up for? What does the contract cover? 4% 20% 15% 5% 23% 63% 0% Water and sewerage Water only Sewerage only Self Supply Price is the most influential factor when deciding whether to switch Respondents were asked to rate the influence of nine different factors that affected their decision to appoint a new water retailer. SMEs scored the importance out of five categories on a scale ranging from not at all influential to extremely influential. These are the most important factors to SMEs when considering whether to change water retailer: Price is the most important factor when making the decision to change water retailer. 77% of respondents rated price as extremely influential or very influential in their decision to change water retailer Customer service is the next most important factor, with 59% rating it as extremely or very influential on their decision-making The third most important factor is word-of-mouth recommendation with 38% recording this as extremely or very influential Brand was the least important factor when making a decision. Page 6 wheatleysolutions.co.uk Confidential

7 Price Customer Service Word-of-mouth recommendation Single water provider across the UK Value Added Services Location of retailer Bundle different services together Greener provider Brand Other The effect of water deregulation on England s SME businesses Figure 6: 100% 90% 80% 70% 60% 50% 40% 30% 20% 0% Factors affecting water retailer appointments Please rate the influence of the following factors in changing water retailer: Extremely influential Very influential Somewhat influential A little influential Not at all influential Most SMEs that switched water retailer saved money on their bills Companies that had switched within the first month of the water industry opening up to competition in England were asked What cost saving (if any) did you achieve with this contract?. 83% of respondents saved money by switching their water contract (see Figure 7). Three quarters of businesses saved between 0.6% and >5%. The most common cost saving was 1.1%-2.5%; 29% of respondents achieved this, the next most common was 2.6%-5% cost saving; a quarter of companies achieved this saving by switching retailers. A small number of companies (2%) increased their annual spend on water as a result of changing supplier. Page 7 wheatleysolutions.co.uk Confidential

8 Figure 7: New water contract cost savings What cost saving (if any) did you achieve with this contract? >5% 2.6%-5% 1.1%-2.5% 0.6%- 1% <0.5% No saving Costs more Don t Know 0% 5% 15% 20% 25% 30% Awareness of water self-supply is low A self-supply licence allows a business to purchase its water supply and wastewater services directly from the local water wholesaler. This is a system introduced as part of deregulation. In this survey SMEs were asked Is a water self-supply licence something that would be suitable for your business?. Figure 8 shows that 61% of respondents answered that they were either unaware that this was an option or that they didn t understand what it was. Of the 39% of SMEs that had heard of self-supply, 59% said that they would consider switching to this type of arrangement. Those who thought self-supply might be suitable for their business would consider moving to this contract type over the following time periods: 20% of those that answered Yes - it s something I am considering would switch within the next 6 months 36% of those that answered Yes - it s something I am considering would switch within the next 6 to 12 months 19% of those that answered Yes - it s something I am considering would switch within the next 12 to 18 months 21% of those that answered Yes - it s something I am considering would switch but not in the next 18 months, with a further 4% responding Yes other. Page 8 wheatleysolutions.co.uk Confidential

9 Figure 8: Water self-supply Is a water self-supply licence something that would be suitable for your business? 23% 61% 16% Yes No Unaware/don t understand Demand for additional services is highest for blocked sewers Respondents were given a list of 10 services that water suppliers offer their customers and were asked On average, how many times per year do you utilise any of the following services from your water supplier?. This list of services captured the range utilised by SMEs well, with <1% of respondents selecting Other. The responses are summarised below: 20% of SMEs contact their water supplier each year as a result of a blocked sewer. 8% of customers have an issue more than once per year 17% of SMEs require a water supply termination/disconnection. 12% of people have a requirement for this once per year (0.2% more than those who require a sewer unblocking service) 16% of SMEs need a repair to sewer and a further 16% ask for free leakage repair option (if available) 8% of respondents require Industrial waste disposal services more than once per year. This is the largest percentage across the times across all of the ten categories. Page 9 wheatleysolutions.co.uk Confidential

10 Sewer unblocking Water supply termination/disconnection Repair to sewer Free leakage repair option (if available) Industrial waste disposal Water meter exchange/replacement Pipe renewal Changes to your sewer Service pipe addition/new supply Other The effect of water deregulation on England s SME businesses Figure 9: Additional water services On average, how many times per year do you utilise any of the following services from your water supplier? 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% A fifth of SMEs have had their water supply tested During the 12 months between June 2016 and May 2017, 21% of SMEs had their water supply tested. 19% of SMEs plan to have their water supply tested over the next 12 months, a 2% decline year on year. Water pressure remains the most commonly named test for the 12 months ahead with 32% of companies stating that they wanted this test carried out, a 4% increase on 2016/17. Likewise, bacterial tests such as legionnaires disease remained the second most popular named test with 20% of SMEs planning to invest in these tests (4% less than the previous year). Discolouration was the third most common test in 2016/17, with 23% of SMEs requesting it that year, falling by 14% to 9% for the year 2017/18. Its position for 2017/18 was replaced by taste, although this too saw a decline in demand year on year, from 21% down to 18%. Page 10 wheatleysolutions.co.uk Confidential

11 Water pressure Bacteria such as legionnaires disease Discolouration Taste Chemicals such as nitrate and pesticides Metals such as lead Other tests The effect of water deregulation on England s SME businesses Demand for Other tests rose markedly from 17% to 33% year on year (up 16%). These Other tests accounted for the largest percentage of SME demand for 2017/18 and cover tests for chlorine, general water quality/full package of water testing and water hardness. Figure 10: Water supply tests 35% 30% 25% 20% 15% 5% 0% Demand for business water supply tests Tested in past 12 months Plan to test in next 12 months Water metering is the most popular future value added service purchase As well as understanding the current usage of services from water suppliers, the survey sought to understand the future purchasing intentions of SMEs. It did this by asking respondents to indicate how likely it was that their business might purchase one of 14 different value added services from a water retailer in the future. Having access to the latest water metering technology was the most popular service offering, with 22.0% of businesses saying that they were likely or very likely to want this in the future. The second most popular value added service was insurance policy for repairs, this scored 21.8%; 5.6% of SMEs were very likely to want to purchase this solution, which was the highest value in this category. Insurance policy for leak damage was the third most popular. 5.6% of businesses said they were very likely to purchase this solution (a joint position shared with Insurance policy for repairs ), with a further 16% likely to buy it in total (21.6%). Building / site utility management, Sewer blockage sensor, Water harvesting installation and Intelligent water temperature sensors were the least likely services to be bought from a water retailer, with <15% of respondents saying that they were likely or very likely to purchase these. Page 11 wheatleysolutions.co.uk Confidential

12 Latest water metering technology Insurance policy for repairs Insurance policy for leak damage Water quality testing Gas and/or Electricity supply Repairs Intelligent water pressure sensors Water Efficiency Audit Intelligent sensors for water quality Intelligent water temperature sensors Water harvesting installation Sewer blockage sensor Building / site utility management Other The effect of water deregulation on England s SME businesses Figure 11: 100% 90% 80% 70% 60% 50% 40% 30% 20% 0% Value added services purchasing intentions Please indicate how likely it is that your business might purchase the following value added services from your water retailer in the future: Very likely Likely Neither likely nor unlikely Unlikely Very unlikely Better cost control is the most useful feature of new water metering technologies Two thirds of SMEs were positive about the benefits that could arise from access to the latest water metering technology. Almost three quarters (72%) felt that new meters would be useful for better control of costs, no estimated meter readings - more accurate bills and leak detection. In fact, despite only 22% of SMEs being likely or very likely to want the latest water metering technology in the future (Figure 11), almost twice this volume (41%) felt that having access to the latest water metering technology would be very or extremely useful to better control costs. SMEs also saw benefits for no estimated meter readings - more accurate bills, leak detection and understand your usage profile with 40%, 38% and 32% of respondents saying that access to the latest water metering technology would be very or extremely useful respectively. On average, 34% of respondents thought that each feature of water metering technology would be very useful or extremely useful to them. Page 12 wheatleysolutions.co.uk Confidential

13 Better control of costs No estimated meter readings - more accurate bills Leak detection Understand your usage profile More frequent / timely bills Instances of backflow Other The effect of water deregulation on England s SME businesses Figure 12: 100% 90% 80% 70% 60% 50% 40% 30% 20% 0% Latest water metering technology The latest water metering technology offers a range of new features. Please rate how useful these are to your company: Extremely useful Very useful Somewhat useful Slightly useful Not at all useful Over half of businesses would consider a time-of-use tariff SMEs were given some background information explaining that electricity was one of the single biggest costs for water companies. They were then told that with access to the latest metering technology, water retailers could start to offer a time-ofuse water tariff. This would encourage companies to change their water usage habits by providing price incentives at certain times of the day or year, to more accurately reflect environmental pressures or energy costs. As a result, companies could respond by changing the time of day they use water or by using stored water, which could be replenished at off-peak times. Armed with this information, SMEs were asked Would you consider adopting a time-of-use tariff? 58% of SMEs were open to changing their water usage habits (see Figure 13a), but in order to make these changes SMEs wanted to see a decrease in bill size, with almost half of companies (47%) wanting to see a cost saving of >. Page 13 wheatleysolutions.co.uk Confidential

14 Figure 13: Time of use tariffs Would you consider adopting a time-of-use tariff? The cost saving required to consider adopting a time-of-use tariff 50% 40% 30% 42% 20% Yes No 58% 0% If we saved 0-3% on our water costs If we saved 3-6% on our water costs If we saved 6-9% on our water costs If we saved > on our water costs Conclusions Growing awareness of water market deregulation among SMEs Ofwat s survey of water customers in January 2017 showed that 28% of micro companies, 41% of small companies and 38% of medium sized companies were aware of deregulation (see Table 1). These low awareness levels, so close to deregulation, concerned the industry. In response, a national awareness campaign was launched to publicise the new choices available to businesses as a result of deregulation. This campaign appears to have worked. The survey commissioned by Wheatley questioned 500 SMEs across England and asked Were you aware that you could now change water retailer?. An average of 58% of SMEs were aware of market deregulation one month after the market opened for competition. Increases in awareness were seen across all SME customer groups compared to the January 2017 Ofwat survey, but there is still work to be done to ensure that the benefits of competition are available to all businesses; a third of businesses surveyed were unaware of deregulation and so are not able to access the benefits that market competition will bring them. England s SMEs are actively engaging in the water market To underpin the deregulation of the water industry, the Department for Environment, Food and Rural Affairs undertook a cost-benefit analysis which estimated a net benefit for the country of 200m from opening the water market. The Government expects that competition will lead to better customer service, lower costs and more innovation among suppliers as they compete against one another for customers. SME businesses in England are taking advantage of the opportunities that deregulation has presented. The Wheatley survey showed that over a fifth (21%) of eligible and aware SMEs switched water provider in the first month of deregulation. Those who are yet to switch appear to be watching the market closely, with a further 50% of those who haven t yet switched planning to do so within the next 18 months. Page 14 wheatleysolutions.co.uk Confidential

15 It should be noted that 42% of SMEs were not aware of the market deregulation (see Figure 1), so these switching intentions should be closely monitored in the future to ensure that they are representative. One hypothesis could be that those who are unaware of the new regulations are also those who are least engaged in the water market, which might impact on their propensity to switch suppliers in the future. SMEs are reaping the benefits of market competition SMEs are already benefiting from deregulation as they renegotiate contracts with their existing supplier or move to a new water retailer. This has given them the same choice over their water retailer as they currently have for their energy and other essential services. When SMEs are switching water retailer price is the most important factor. 77% of respondents rated price as extremely influential or very influential in their decision to change water retailer and 83% of respondents saved money by switching to a new water contract. SMEs understand the benefits, but still don t want the latest water metering technology Arguments surrounding the latest water metering technology have been circulating for many years, with the high costs of the meter weighed against some of the benefits that might arise from faster leak detection and waste reduction. Two thirds of SMEs were positive about the benefits that could arise from access to the latest water metering technology. Almost three quarters (72%) felt the new meters would be useful for better control of costs, no estimated meter readings - more accurate bills and leak detection. Despite these benefits, just 22% of businesses said that they were likely or very likely to want the latest water metering technology in the future. Whilst SME businesses recognise some of the benefits of advanced metering technology, they do not value it enough to have it installed. These new meters could also allow time of day or seasonal tariffs which may help in demand management. This would mean that customers could be charged more during water shortages to encourage them to save water or at particular times of the day. 58% of SMEs were open to changing their water usage habits (see Figure 13), but in order to make these changes SMEs wanted to see a decrease in bill size, with almost half of companies (47%) wanting to see a cost saving of >. SMEs utilise more than core-services from water retailers As well as providers of core water and sewage services, SMEs also look to water retailers to address other water related problems and issues they face. This creates an exciting opportunity for water retailers to provide added value services. For example, during the 12 months between June 2016 and May 2017, 21% of SMEs had their water supply tested. Likewise, 20% of SMEs contact their water supplier each year as a result of a blocked sewer, with 8% of customers having to do this more than once per year. This is a good base on which water retailers can build, appending more sophisticated services such as providing the latest water metering technology. This was the most popular service offering demanded by SMEs, with 22.0% of businesses saying that they were likely or very likely to want this in the future. The second most popular added value service was insurance policy for repairs, with 21.8% selecting likely or very likely. Insurance policy for leak damage was the third most popular. 21.6% of businesses said they were likely or very likely to purchase this solution in total. Increasing the sophistication of metering technology and the sale of insurance are not new propositions for the water industry, but these opportunities create the potential for more than just additional revenue. Delivering value added services well will help support both customer retention and customer acquisition; when selecting a new supplier; 59% of respondents rated customer service as extremely or very influential when deciding which retailer to switch to. Page 15 wheatleysolutions.co.uk Confidential

16 Whilst the market has MOSL to manage the switching process, it lacks an electronic means of communicating between retailers and wholesalers to support the bilateral requests that many of these added value services would generate. Not only do retailers need to enable smooth and timely switching of supply, they also need to consider how switching will impact the servicing of added value services and the associated communication between stakeholders. As the water market matures and competition intensifies, and fax communication will not be sufficient to deal with these increasing demands. Companies will also require a full audit trail of activity and message exchange to track requests to ensure the information needed is sent and received accurately. This is compounded by the introduction of the General Data Protection Regulation (GDPR) in May 2018, when water companies will have additional responsibilities placed on them regarding the effective, timely and transparent handling of personally identifiable information (PII). These added business process complexities add cost for the water retailers, while water retailers need to compete on price with 77% of respondents rating price as extremely or very influential in their decision-making. Automated consistent communication will be critical to success in this newly competitive market. Effective communication will improve efficiency, creating cost savings that can be passed onto customers, whilst at the same time delivering excellent customer service, improving query resolution and promoting customer retention. Page 16 wheatleysolutions.co.uk Confidential

17 Appendix This report was researched, authored, and produced by Milner Strategic Marketing Ltd in association with Wheatley Associates Ltd. Wheatley is a software provider specialising in business critical and industry compliant solutions for the UK utilities sectors. Research methodology The goal of this research project was to assess the current and the future state of the water industry. In May 2017, Milner Strategic Marketing Ltd, on behalf of Wheatley, conducted 500 online interviews with senior business leaders (CEOs, managing directors, partners and other senior managers) in small to medium sized enterprises (SMEs), these companies have between 1 and 250 employees operating across a range of sectors (including Retail / Wholesale Trade, Manufacturing, Healthcare / Medical and Property / Real Estate) in England. These businesses operated out of owned buildings, as tenants in rented accommodation and as tenant (in serviced premises) across the 9 regions that make up England (East of England, East Midlands, London, North East, North West, South East, South West, West Midlands and Yorkshire and The Humber). Copyright notice and disclaimer The contents of this product are protected by international copyright laws, database rights and other intellectual property rights. The owner of these rights is Wheatley Associates Limited, our affiliates or other third party licensors. All product and company names and logos contained within or appearing on this product are the trademarks, service marks or trading names of their respective owners, including Wheatley Associates Limited. This product may not be copied, reproduced, distributed or transmitted in any form or by any means without the prior permission of Wheatley Associates Limited. Whilst reasonable efforts have been made to ensure that the information and content of this product was correct as at the date of first publication, neither Wheatley Associates Limited nor any person engaged or employed by Wheatley Associates Limited accepts any liability for any errors, omissions or other inaccuracies. Readers should independently verify any facts and figures as no liability can be accepted in this regard readers assume full responsibility and risk accordingly for their use of such information and content. Any views and/or opinions expressed in this product by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Wheatley Associates Limited. Milner Strategic Marketing Ltd This analysis is designed to help you make informed business decisions. If you have further requirements, Milner s Market Analysis team may be able to help you. For more information about Milner s consulting capabilities, please contact Milner directly at jonathan.davenport@milnerltd.com. Page 17 wheatleysolutions.co.uk Confidential