In 2020, the Retailer-Wholesaler Group Water Efficiency Subgroup (RWG WESG) was established to investigate what options might help boost Water Efficiency (WE) in the NHH market. Earlier this year, Economic Insight was commissioned by the RWG WESG, supported by the MOSL Market Improvement Fund through Thames Water to assist with this work.

Specifically, we were asked to: (i) identify and make recommendations on addressing barriers to WE delivery for customers, retailers and wholesalers; and (ii) assess current and potential future mechanisms or incentives that would enable a greater volume of WE activity and achieve more water savings across the UK NHH market.

To do this, we conducted a detailed review of the NHH water retail market, homing in on the current incentives, disincentives and barriers to achieving WE. To aid this review, we had conversations with multiple market participants, including Thames Water, United Utilities, Severn Trent, as well as WaterScan and Business Stream. An important aspect of this work was considering how WE activities could be delivered in the NHH water retail market without negatively affecting competition in this relatively new market. Specifically, we had to carefully consider the interactions between wholesalers and retailers, and provide recommendations that would not preclude retailers from being able to compete on WE. This concern also had to be balanced with ensuring that WE is delivered in line with the national water consumption reduction target of 9% by 2037, in the short-term.

Our research suggests that the key reason for a lack of WE in the NHH water retail market is that customers’ willingness to pay (WTP) for WE is below the efficient cost to supply these services, and therefore, there is currently insufficient value in the market to enable delivery in a competitive market. In order to overcome this lack of demand and value in the market, and to deliver WE savings in line with the 9% target, we have estimated that market participants require funding and incentives amounting to at least £22m per annum. In terms of the specific funding and delivery mechanisms to achieve greater WE, we recommend that a wholesaler-led approach is taken to ensure delivery in the short-term, but that is carefully designed to allow retailers to build their expertise in the area. Specifically, we recommend that a WE levy, visible on customer bills, is applied to raise the funding required, and that this funding is ring-fenced for the delivery of WE services. We recommend that incentives be placed on wholesalers via the price control, such as by setting a price control deliverable (PCD), or via a reward and penalty outcome delivery incentive (ODI). To ensure retailers can develop the WE area of their business, we recommend that the market performance framework (MPD) is used to ring-fence funding for retailers to conduct WE activity.