REC review to consider how price caps could support water efficiency

Ofwat is to consider whether and where there is scope to amend Retail Exit Code (REC) price caps to encourage business water efficiency.

That will form part of its review of the price and non-price protections available for business customers on default tariffs (those who have not contracted with a supplier), as set out in the REC. 

The Independent Water Commission flagged up that the current structure of the REC price protections could act as a disincentive to reducing water consumption, as lower usage by customers can mean retailer revenues and margins fall. Ofwat said one option was to move the smallest customers to a fixed retail cost allowance which would de-link retailer revenues and margins from volumes sold.

Elsewhere Ofwat suggested that both existing customer groups that benefit from price protections – Group One customers (with annual consumption below 0.5Ml) and Group Two customers (annual consumption between 0.5Ml and 50Ml) – continue to need protection because awareness and engagement levels remain low. 

It considered its current group definitions continue to offer advantages but said it would consider alternatives. It also indicated it would pursue the same approaches as at present for Group One and Group Two protections, and would set the form and level of protections based on a detailed assessment of retailer costs. The consultation set out possible approaches for this, including seeking detailed cost data and supporting information from retailers and having regard to external benchmarks and cost comparators. 

On non-price protections, the regulator argued these too remain warranted, “on the basis that removal of such protections could expose smaller customers to changes in their terms and conditions that are not in their interests”.

On all matters, Ofwat asked for evidence and supporting information from respondents who preferred alternative routes. The consultation runs until 8 September and the new REC will take effect from April 2027.