More regulatory action needed to up pace of market reform

FROM THE JANUARY ISSUE OF THE WATER REPORT

Consultant, KPMG has forecast that further regulatory shift in water was inevitable and likely to spark more disruptive changes possibly beyond the current non-household retail sector and into upstream and distribution operations.

This is all quite exciting stuff but it begs the question: does the water industry and its investors have the stomach for any foray into the sort of investment – of finance and management energy – into the likes of tapping into flood defences as a resource or asset swaps? And is the regulator opening the way for business innovation?

In its Affinity Water-commissioned study KPMG found that the water industry will need to undergo a far more extensive package of reforms than those currently on the table to meet challenges including climate change and population growth. in the report, New business models in the water sector, it said

“Ofwat’s regulatory reforms will continue to drive different behaviours and new business models but on their own are unlikely to address all the challenges.”

The consultant identified six business models that were implied by existing and forthcoming legal and regulatory reforms which included abstraction licence trading; upstream water entrants selling to incumbents and wholesale network operators; and operators taking direct ownership of assets and activities. And KPMG identified another eight “more innovative” business models that were currently in the “alternative” category. They included flood resilience as a source of water and asset and licence area swaps.

Drawing on lessons from other markets, KPMG concluded that further regulatory and legislative reform, and willingness from companies and investors to explore new opportunities, will probably be needed to get

the models up and running. In particular, it highlighted the need for new incentives.

Comment from THE WATER REPORT

UK water sector does not have a clear appetite for market innovation and its investors are in the main encouraging in that. Before now, retail competition remained stalled for more than a decade in the face of industry scepticism. And inset appointments are hard thriving. So are the radical opportunities identified by KPMG even on the horizon?

A bioresources market looks like finding fertile ground in Ofwat’s 2020 plans. There has been talk of a resurgent multi utility retail sector. While consolidation in non-household retail has been swift, the return to pan utility offerings might not reappear so enthusiastically with memories still alive of the last visit to that model and its rapid and inauspicious demise. The better billing and settlement technology available today might make a second bite more fruitful.

The direct procurement initiative could be a draw for global investors with a thirst for infrastructure opportunities. That could bring more dynamism in risk and reward outlook into the UK water sector.

Asset swaps could happen now(ish) but they face regulatory and legal challenges that probably account for their near absence form the market.

The business models identified by KPMG are real enough but there are regulatory and possibly cultural hindrances to address. Whether there is a will to make the way remains to be seen.