Major water users encouraged to switch as price protection drains away

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Ofwat have recently announced their plans for deemed contracts in their new Retail Exit Code (REC) documents. The plans involve altering the maximum charge a retailer can place on a customer based on their water consumption. The changes will come into effect after April 2020 and will affect the biggest water consumers who do not actively engage in the market or renegotiate a supply deal after this date.

The new tariffs will be applied according to the users’ current consumption band; 0-0.5Ml, 0.5-50Ml, or >50Ml.

0-0.5Ml

0-0.5Ml customers will be least affected, with price caps only increasing by an inflation adjustment. Retailers have been instructed in the REC that the default tariffs are “not to exceed the wholesale charge”, but the retailer is able to apply a charge to serve and small net margin.

0.5-50Ml

Customers within the 0.5-50Ml band will be subject to a small increase in overall water cost. The updated REC allows retailers to charge 8% and 10% more than the wholesale charge for water and waste respectively. This means the final bill will go up by about 2-4% according to Ofwat’s predictions.

>50Ml

Customers with a consumption of >50Ml will have the highest price cap increase, as there is no explicit price cap in the new REC. Ofwat have instructed retailers to only charge customers a price which is “reasonable and non-discriminatory”, and believe that there is no requirement for an explicit cap due to these larger consumers’ ability to contract and negotiate more.

It is important to note that these changes will only affect customers who have not negotiated a new contract. If the customer contract is still valid by April 2020, their bill will not be affected. Retailers may also decide to gradually increase the prices, rather than immediately applying the new increases. There does not appear to be any specific barriers stopping the retailer from immediately increasing prices from April however, therefore, the prices could increase sharply for those on default contracts.

Wholesale water costs

Controversies in recent years have put the water market under increased pressure for transparency. According to the University of Greenwich, almost £20 billion of pre-tax profit was made by the private water companies and almost the same amount was paid to investors and shareholders. With Ofwat likely to impose tougher regulations on transparency, these companies may be likely to reduce the amount they pay their leadership, and as a consequence, charge consumers less.

In 2018, Ofwat also announced a bundle of reforms that will be present in its Price Review 2019. These reforms will require water companies to be more transparent with their financial activities, and will see customers sharing in the financial gains made by companies with a high level of debt. This will likely see charges for wholesale services decrease, and the improvement of supply reliability to all customers.

How LASER can help

The price cap changes are likely to have an effect on LASER customers’ water bills. Borough and District Councils, along with intermediately sized companies will likely fall into the 0.5-50Ml band and be open to a small price increase. County Councils, hospitals and many universities are likely to fall into the >50Ml band, therefore, contracting and procurement services will be essential to maintaining a good deal.

Through requesting pricing on a wholesale plus percentage basis, LASER’s customers will benefit from any future decreases in whole costs. This allows customers to quickly begin receive the benefits of water market competition, instead of waiting for any wholesale price reductions in April 2020.

LASER’s OJEU compliant Water Procurement Framework is ideally suited to identifying the best matched supplier for individual customer requirements, having been designed to fairly evaluate price, customer service and added value services to achieve noticeable savings.

For more information, please contact our water team at waterprocurement@laserenergy.org.uk or call 01622 236613. Alternatively, you can download our Water Framework factsheet via our website here.

More information on the updated REC are available on the Ofwat website via the following links:

https://www.ofwat.gov.uk/publication/future-protections-for-business-retail-customers-decision-on-retail-exit-code-price-protections/
https://www.ofwat.gov.uk/publication/future-protections-for-business-retail-customers-decision-on-retail-exit-code-non-price-protections/