Industry minds are racing towards April 2017, when the Secretary of State flicks the proverbial switch, unleashing expanded retail competition on the non-household sector for water. However, beyond this, much lies ahead that will fundamentally reshape the industry.

“This is only the start of what could be a seismic shift in how the industry looks, as companies start to grapple with the practicalities of this new competitive market,” said Liz McRobb, Partner at leading law firm Shepherd and Wedderburn, whose team developed the market codes as part of the Open Water Programme. “We’ve already seen big shifts like joint ventures, mergers and exits. This is likely to continue as competition develops and embeds into the industry culture. Fundamentally though we will have to see how this market and regulatory framework, a product of many years of design and development, will function in the real world. It will be an exciting few years.”

As market participants begin to unlock the different possibilities that competition will bring, regulators too will be learning and adapting their approach as the new world brings unknown challenges to the forefront. Retailer strategies will be tested and adapted. Regulatory activity will flow depending on the success or otherwise of competition. All the preparation, training and investment for market opening will finally be tested. Eventually, over the coming years as these strategies adapt and shift, the market landscape could look significantly different.

“There is certainly scope in the industry for greater innovation in terms of business structures, particularly with multi-utility offerings,” says George Boyle, Corporate Partner at Shepherd and Wedderburn, who acted for Albion Water Group in their recent Joint Venture transaction with Wessex Water.  “These can be quite novel and therefore risky, so when devising these arrangements, detail and expertise is essential. Get it right however, and the rewards can be greater competitive advantage and a better service for customers.”

With domestic competition now looking like a near- certainty, market activity over the next few years is likely to be critical for those in the retail market looking to establish themselves as a ‘retailer of choice.’

Beyond retail and up into the stream

With Ofwat driving competition across different areas of the market, there will no doubt be many different opportunities for both companies and those operating in the supply chain for both water resources and sludge. Specialists that can unlock the potential in the circular economy, or reduce the cost to serve customers outside of populated centres have the potential to reap rewards.

Gareth Parry, Partner in Infrastructure at Shepherd and Wedderburn comments that “regulatory barriers and an uncertain industry support regime have arguably built barriers to wider investment in this sector, for example in AAD (Advanced Anaerobic Digestion). There will need to be an element of certainty and stability in trading conditions before we see big investments in this area from new entrants.”

Managing risk and change

A key element in successfully implementing upstream competition will be careful development of the agreements that underpin these activities between incumbents and new service providers. While the industry is no stranger to significant procurement activities with the wider supply chain, upstream markets could cut much deeper into what are currently vertically integrated businesses.  The appropriate allocation of risk and reward is important, as well as a good understanding of the technical aspects of the technology and services being deployed. The challenges will be both technical and cultural.

“Through various litigations, we have seen some very technically difficult and protracted disputes on the waste water side of the industry,” comments David Anderson, Partner and litigation specialist at Shepherd and Wedderburn. “It is critical that the technical details are right in any agreement. But there also needs to be scope for flexibility where appropriate to reflect the nature of the product that is being dealt with – I think all water companies can agree that waste water treatment can be a bit of a dark art.”

For many incumbents in the industry, breaking up the value chain in this way will be a great leap. Others already have experience in service provision under PFI- type arrangements. These differing levels of experience and approaches may well be a key driver in the future evolution of sludge markets.

Then of course, there is the issue of Brexit and whatever regulatory change this brings in the future. Ofwat have been pretty clear that it is business as usual for now, to an extent – which is of course correct. However, come 2020, the policy environment might look quite different. As an industry so driven by environmental regulation and with big, long terms investments at stake, policy makers will need to ensure a level of certainty in market conditions if innovation in the value chain is to truly take off.

One thing however is certain – for many reasons, the long term future for the industry is unlikely to be business as usual.