Disable your ad blocker to enjoy the full interactive features of this document.
Insight
What’s the state of play with water tariff innovation?
What’s the state of play with water tariff innovation?
When it comes to water tariffs, the story used to be simple: across the country, everything was the same.
Water was plentiful, and cheap. And climate change was a thing that was happening at some point in the future.
Why innovate with prices when there was no need? By the standards of most bills, water was unobtrusive: people and businesses didn’t worry about it much because water was inexpensive and – at the time – the industry wasn’t attracting adverse attention.
Fast-forward to 2024 and the landscape for water is different. Bills are rising amid a cost-of-living crisis. Public discontent with utilities – and especially water companies – is at a high. And the environment and climate are front and centre of consumers’ minds.
There are already water shortages in parts of Sussex, Cambridgeshire, Suffolk and Norfolk. There were exceptional droughts in Britain in 2018 and 2022 (in the latter, reservoir levels were at a 25-year low, and a hosepipe ban was introduced in Cornwall for the first time in a quarter-century).
And while the last 18 months have been very wet by historical standards, there is a lack of new infrastructure to capture rainfall – no new major reservoirs have been built in the past 30 years. Climate change and population growth mean existing water supplies are not enough: and that means behavioural change to cut consumption is essential. By 2050, to support a growing population, we will need about five billion litres a day more water, according to the Environment Agency. (An average person needs about two litres of drinking water per day. This means five billion litres could provide drinking water for 6.8 million people for a year.)
Additional extra litres of water a day the UK will need by 2050 so support population growth.
Water companies are now hoping that changing the way some customers are charged will in turn help change perspectives on water use and drive down per capita consumption (PCC) overall. That means that after a long period of homogeneity, there’s growing interest in creating greater diversity in tariffs across the water sector, which is what this Utility Week Intelligence report with our partner Gentrack explores.
Read on to find out why new approaches such as seasonal and rising block tariffs are being trialled, some of the barriers to their adoption, and what water companies hope to achieve by changing the ways in which they charge customers.
No new major reservoirs have been built in the past 30 years
When it comes to water tariffs, the story used to be simple: across the country, everything was the same.
Water was plentiful, and cheap. And climate change was a thing that was happening at some point in the future.
Why innovate with prices when there was no need? By the standards of most bills, water was unobtrusive: people and businesses didn’t worry about it much because water was inexpensive and – at the time – the industry wasn’t attracting adverse attention.
Fast-forward to 2024 and the landscape for water is different. Bills are rising amid a cost-of-living crisis. Public discontent with utilities – and especially water companies – is at a high. And the environment and climate are front and centre of consumers’ minds.
There are already water shortages in parts of Sussex, Cambridgeshire, Suffolk and Norfolk. There were exceptional droughts in Britain in 2018 and 2022 (in the latter, reservoir levels were at a 25-year low, and a hosepipe ban was introduced in Cornwall for the first time in a quarter-century).
And while the last 18 months have been very wet by historical standards, there is a lack of new infrastructure to capture rainfall – no new major reservoirs have been built in the past 30 years. Climate change and population growth mean existing water supplies are not enough: and that means behavioural change to cut consumption is essential. By 2050, to support a growing population, we will need about five billion litres a day more water, according to the Environment Agency. (An average person needs about two litres of drinking water per day. This means five billion litres could provide drinking water for 6.8 million people for a year.)
Additional extra litres of water a day the UK will need by 2050 so support population growth.
Water companies are now hoping that changing the way some customers are charged will in turn help change perspectives on water use and drive down per capita consumption (PCC) overall. That means that after a long period of homogeneity, there’s growing interest in creating greater diversity in tariffs across the water sector, which is what this Utility Week Intelligence report with our partner Gentrack explores.
Read on to find out why new approaches such as seasonal and rising block tariffs are being trialled, some of the barriers to their adoption, and what water companies hope to achieve by changing the ways in which they charge customers.
No new major reservoirs have been built in the past 30 years
Tariff innovation: A quick introduction
There is interest in introducing new types of water tariffs right now but that hasn’t always been the case.
“There is an inertia when it comes to tariffs,” explains Neil Manning, head of income and tariffs at Anglian Water. “With privatisation there was effectively one tariff, and it covered households and non-households.”
Since then, he says, there has been a steady disaggregation of charges, so they more accurately reflect the costs of supplying water to homes and businesses. That began with the introduction of non-household and household prices.
“As our management accounting and cost capture systems have improved,” Manning adds, “we’ve been able to track what drives cost in terms of the service we provide for water and wastewater. We therefore know which classes of customer give rise to more or less of the cost in terms of providing a water service or sewage service.
“We’ve now reached arguably an optimum point of tariff cost reflectivity within the current understanding of the charging rules and the desirable limits of tariff complexity,” Manning says.
In the late 1990s and early 2000s, there was tariff innovation when it came to subsidising customers who were less able to pay their water bill. These developments were enshrined in law in the Flood and Water Management Act 2010, which specifically allowed a cross-subsidy to fund social tariffs for water. (There is also the WaterSure scheme, which helps customers on benefits with high essential water use – because of medical conditions, for example – pay their bills.)
More than a decade on, there is fresh impetus for tariff innovation.
This time, it’s needed to help ensure there is enough water for everyone.
When it comes to developing new tariffs, there are several considerations for water companies. For one thing, Ofwat’s revenue control limits how much money they can make. “Another important consideration is that, because water is a basic necessity, there is a public sentiment that paying for it can feel burdensome, or challenging to justify,” explains Charlotte Glass, innovation leader at Gentrack. “Tariff innovation should focus on ensuring water is accessible for everyone. A shift in perception is needed where consumers recognise that if they use too much water, they should pay a bit more. If people adopt water-conscious habits, their bills may stay the same – or even decrease." There are examples of this already in the international industry. Hunter Water, which serves 600,000 people in homes and businesses in New South Wales, has loaded more cost into its variable charges in response to requests from customers to have more control over their bills, notes Glass.
Another issue is engagement. Water companies need to be able to explain why they are introducing changes to tariffs (and why bills are going up) at a time when trust in the industry is low. Making the case for new tariffs is crucial, and that’s where new sources of information, such as smart meter data, can help.
“When it comes to developing a new tariff, you must ask what information justifies charging one set of customers price ‘X’, and another set of customers price ‘Y’?” says Manning. “I need evidence that tells me the cost of supplying one customer is more than another. So, innovation in data is driving innovation in tariffs.
“We need to know customers will react to the price signal. If the customer doesn’t react to that price signal, then effectively all we are doing is changing who we recover revenue from, not necessarily getting a behavioural change.
“A specific tariff innovation [to improve water security] is only successful if it does drive the targeted change in consumer behaviour.”
“There is an inertia when it comes to tariffs. With privatisation there was effectively one tariff, and it covered households and non-households.”
Neil Manning, head of income and tariffs, Anglian Water
“Because water is a basic need, there is a public perception that paying for it is unfair,.”
Charlotte Glass, innovation leader, Gentrack
Tariff innovation: A quick introduction
There is interest in introducing new types of water tariffs right now but that hasn’t always been the case.
“There is an inertia when it comes to tariffs,” explains Neil Manning, head of income and tariffs at Anglian Water. “With privatisation there was effectively one tariff, and it covered households and non-households.”
Since then, he says, there has been a steady disaggregation of charges, so they more accurately reflect the costs of supplying water to homes and businesses. That began with the introduction of non-household and household prices.
“As our management accounting and cost capture systems have improved,” Manning adds, “we’ve been able to track what drives cost in terms of the service we provide for water and wastewater. We therefore know which classes of customer give rise to more or less of the cost in terms of providing a water service or sewage service.
“We’ve now reached arguably an optimum point of tariff cost reflectivity within the current understanding of the charging rules and the desirable limits of tariff complexity,” Manning says.
In the late 1990s and early 2000s, there was tariff innovation when it came to subsidising customers who were less able to pay their water bill. These developments were enshrined in law in the Flood and Water Management Act 2010, which specifically allowed a cross-subsidy to fund social tariffs for water. (There is also the WaterSure scheme, which helps customers on benefits with high essential water use – because of medical conditions, for example – pay their bills.)
More than a decade on, there is fresh impetus for tariff innovation.
This time, it’s needed to help ensure there is enough water for everyone.
When it comes to developing new tariffs, there are several considerations for water companies. For one thing, Ofwat’s revenue control limits how much money they can make. “Another important consideration is that, because water is a basic necessity, there is a public sentiment that paying for it can feel burdensome, or challenging to justify,” explains Charlotte Glass, innovation leader at Gentrack. “Tariff innovation should focus on ensuring water is accessible for everyone. A shift in perception is needed where consumers recognise that if they use too much water, they should pay a bit more. If people adopt water-conscious habits, their bills may stay the same – or even decrease." There are examples of this already in the international industry. Hunter Water, which serves 600,000 people in homes and businesses in New South Wales, has loaded more cost into its variable charges in response to requests from customers to have more control over their bills, notes Glass.
Another issue is engagement. Water companies need to be able to explain why they are introducing changes to tariffs (and why bills are going up) at a time when trust in the industry is low. Making the case for new tariffs is crucial, and that’s where new sources of information, such as smart meter data, can help.
“When it comes to developing a new tariff, you must ask what information justifies charging one set of customers price ‘X’, and another set of customers price ‘Y’?” says Manning. “I need evidence that tells me the cost of supplying one customer is more than another. So, innovation in data is driving innovation in tariffs.
“We need to know customers will react to the price signal. If the customer doesn’t react to that price signal, then effectively all we are doing is changing who we recover revenue from, not necessarily getting a behavioural change.
“A specific tariff innovation [to improve water security] is only successful if it does drive the targeted change in consumer behaviour.”
“There is an inertia when it comes to tariffs. With privatisation there was effectively one tariff, and it covered households and non-households.”
Neil Manning, head of income and tariffs, Anglian Water
“Because water is a basic need, there is a public perception that paying for it is unfair,.”
Charlotte Glass, innovation leader, Gentrack
