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Business Water Price Rise 2023
Over the last year, small business owners have had to deal with the unprecedented effects of the energy crisis. Those that have weathered the storm so far are about to be hit with more bad news – a significant rise in business water rates.
Here’s our explainer on what to expect for business water rates in 2023 and what you can do to protect your business from rising rates.
Toggle down to each section:
- Will 2023 bring significant business water price rises?
- April 2023 business water price rise by region
- How are business water prices calculated?
- Why are default water rates so important?
- How does the default contract price cap work?
- How the default water price cap works in practice
- The competing recommendations for the 2023 business water price rise
- The AquaSwitch view on 2023 price rises
Will 2023 bring significant business water price rises?
Yes, most companies received a substantial increase in their business water rates from 1 April 2023.
Business water rates increased by an average of 14.4% in April 2023. For a region-by-region breakdown of the water price increase, see below.
Two effects are increasing the cost of business water. Let’s explore each:
Inflationary pressures on business water infrastructure
The energy crisis and other factors have caused UK inflation to rise to a 40-year high. The costs incurred by local water companies to operate the water infrastructure have increased significantly.
In April 2023, wholesale water rates increased, so homes and businesses using water pay for these additional costs.
Water UK (a membership body representing the water industry) is forecasted a 7.5% inflationary rise in water bills in April 2023.
Lifting of the default water price cap
The second is a significant increase in default water rates most businesses pay. Ofwat, the regulator, has reassessed its default price cap calculation, resulting in a 30% increase in the retail rates charged by business water suppliers.
The change, on average, increases overall water bills by 6.4% before inflation.
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April 2023 business water price rise by region
The following table shows how a small company paying default water rates using 120 cubic meters of water annually (about the same as the average home) will be affected by the price rise.
| Region | Default supplier | 2022/23 Annual charge | 2023/24 Annual charge | Increase | Increase % |
|---|---|---|---|---|---|
| Northumbria | Wave | £477 | £558 | £81 | 17% |
| United Utilities | Water Plus | £587 | £663 | £76 | 13% |
| Severn Trent | Water Plus | £471 | £550 | £79 | 17% |
| Anglian Water | Wave | £560 | £618 | £58 | 10% |
| Wessex | Water 2 Business | £551 | £669 | £119 | 22% |
| South West | Source for Business | £720 | £800 | £79 | 11% |
| Thames | Castle Water | £423 | £526 | £102 | 24% |
| Southern | Business Stream | £533 | £627 | £95 | 18% |
| Yorkshire | Business Stream | £507 | £587 | £79 | 16% |
The table above has been collated using the published default business water rates on the website of each default supplier. We have assumed the following:
- A standard water supply pipe of 15mm
- The standard return to sewerage allowance in the region
- The lowest band of surface drainage charges
- The most common tariff in the region (where applicable)
How are business water prices calculated?
The water rates paid by businesses are made of two separate charges:
- Wholesale rates – The amount charged by the local water company for providing a supply of potable water and operating the local water infrastructure.
- Retail rates – The additional amount charged by the business water suppliers for their role of providing customer services, meter readings and billing to their customers.
The underlying wholesale rates in water bills are likely to increase as the cost of operating water infrastructure increases with inflationary pressures.
Business water suppliers have the freedom to choose the retail rates they offer their customers as long as it is below the default rates price cap determined by the regulator Ofwat.
Why are default water rates so important?
Since deregulation in 2017, businesses have had the choice to switch business water suppliers and agree to a fixed lower retail fee with any supplier in the market.
The vast majority of English businesses have never switched supplier, so they pay the “default water rates” with the default water supplier in their region.
The default water supplier in each region publishes their default rates online. Ofwat, the regulator, carefully controls these default retail rates these suppliers can charge with a price cap to protect businesses that have never switched.
The default water suppliers generally charge the maximum allowable under the default price cap, so the determination of the cap directly impacts most businesses.
How does the default contract price cap work?
The Retail Exit Code defines a maximum that can be charged to the following two groups of business water customers on the default contract.
- Group One – less than 500m3 consumption annually – 1,049,000 businesses (85% of the market)
- Group Two – More than 500 but less than 50,000m3 consumption annually – 170,000 businesses (14% of the market)
The Retail Exit Code protects 99% of businesses in the commercial water market. All except high industrial users, who spend so much on water that it is assumed they will look after themselves.
The Retail Exit Code calculates the maximum retail business water rates that can be charged as follows:
Group One water price cap
The Retail Exit Code caps the amount of retail business water rates that can be charged in a default contract as:
Allowed Retail Cost per Customer + Net Margin + Allowed Bad Debt Allowance
The Allowed Retail Cost per Customer intends to represent how much it costs business water suppliers to provide their meter readings, customer service and billing duties.
The Net Margin represents an allowed profit above the cost of serving their customers.
The Bad Debt Allowance is a risk premium representing business water suppliers’ exposure to bad debt risk resulting from the pandemic.
Group Two water price cap
The Retail Exit Code caps the amount of retail business water rates charged in a default contract as 8% of underlying water wholesale charges and 10% of underlying wastewater charges.
How the default water price cap works in practice
To demonstrate how the Retail Exit Code gets applied in practice, here’s a typical example of a Group One customer.
A small London-based office that consumes 120 cubic meters of water annually (about the same as the average household). If the office pays water under a deemed contract, they’ll pay Castle Water (the default supplier in the Thames Water area) £423 each year, broken down into the following:
Source: Figures compiled using the AquaSwitch water comparison model. Source from: Thames Water wholesale rates 22/23 and Castle Water default rates 22/23.
Thames Water levies the wholesale water fees (in blue) for the Operation and Maintenance of the water infrastructure that delivers fresh water and takes away wastewater from the office.
The yellow retail fee of £75.90 is the default charge levied by Castle Water for their work of conducting meter readings, providing customer services and billing the customer. The £75.90 represents the maximum that Castle Water can charge under Group One rules within the Retail Exit Code.
The key question is whether the £75.90 is sufficient for Castle Water to perform its duties as a business water supplier. As we’ll see in the next section, there are significant differences in how high the different parties think this default retail fee should be.
The competing recommendations for the 2023 water price rise
Ofwat have now made their final decision on default non-household water price rises for 2023. However, there continues to be significant disagreement across the industry about the role of the water price cap. Let’s explore the competing views:
Ofwat
Ofwat acknowledges the lack of effective competition in the business water market for small businesses.
Without effective competition, Ofwat maintains that the current price cap mechanism is appropriate and necessary to protect smaller business customers from paying prices that do not reflect costs or the quality of service they receive.
Although Ofwat has maintained its broad approach to the price cap, they have entirely reassessed the benchmark costs used in its calculation.
This reassessment has resulted in a 30% increase in group one price cap. The change is expected to result in a 6.4% before inflation increase in group one water bills.
UK Water Retailer Council
The UK Water Retailer Council is a council formed of the business water suppliers that operate in the deregulated water market.
The UK Water Retailer Council’s view on 2023 default water price rises
The UK Water Retailer Council commissioned this report which analyses the effectiveness of regulation in the non-household water market.
The report recommends that the Group One price cap maximum should be increased significantly.
The report argues that the cost to serve the smallest customers significantly exceeds the retail fee they can charge. The council recommends that the Retail Exit Code be amended to incorporate a 55% increase in the Allowed Retail Cost per Customer.
The report also argues that the allowable margin above these costs should be significantly increased to protect suppliers against the rising risks of bad customer debt.
The Strategic Panel
The Strategic Panel is a group formed of representatives from Wholesalers, Business water suppliers, Independents and representatives from Ofwat and MOSL that seeks to provide strategic direction to improve outcomes for non-household customers.
The Strategic Panel’s view on 2023 default water price rises
The Panel has published its formal response to the Ofwat consultation. The Strategic Panel sets out its view that “current price caps are, in all regions, set too low to allow competition for Group One customers with any retailer.” The Strategic Panel recommends a loosening or lifting of REC price controls for group one customers.
The Panel further states that the current price controls are increasing the risk of incumbent business water supplier bankruptcy as margins for suppliers for Group One customers are so low.
The AquaSwitch view on 2023 price rises
AquaSwitch operates as a third-party intermediary (TPI) in the commercial water market. We work with suppliers from across the market and have helped thousands of companies compare business water suppliers and switch to a cheaper tariff.
Ben Brading, founder of AquaSwitch, provides his view on the current price control for Group One customers:
In a well-functioning market, suppliers compete for new customers by providing the best service at the lowest price.
For 85% of the market made up of smaller businesses, this doesn’t currently happen. Several incumbent business water suppliers make little to no effort to attract Group One customers. The simple rationale is that providing them with water services is not profitable under the current price controls.
Service levels suffer when attracting new customers or even keeping existing ones is not a priority. We agree with the Strategic Panel that loosening price controls for Group One customers is necessary to see the full benefits of water market deregulation.
What happens next for 2023 water price rises?
Each default business water supplier has now determined their default rates for the 2023/24 year. These are published on the website of each supplier.
If your business has not entered into a fixed contract with a business water supplier, you will start to pay these from April 2023.
Businesses can avoid being hit by increased water rates by completing a hassle-free switch before the rise. Get quotes today with AquaSwitch using our business water comparison service.
References:
- Ofwat’s decision on retail exit code
- Ofwat state of the market report
- MOSL market charts
- Ofwat consultation on Retail Exit Code application for 2023/24
- Strategic panel’s response to Ofwat REC consultation
- MOSL’s Assessment of the key issues arising from Ofwat’s REC review consultation
- UK Water Retailer Council commissioned report on non-household water market
- Water UK – Water bills to rise by less than inflation