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Flying too close to the sun – SoLR processes in water and energy blog

Tom Andrews Tom Andrews Senior Analyst
10th April 2019

Yesterday, Aquaflow Utilities entered administration and as a result exited the non-domestic water retail market in England & Wales. This is the first time an English water retailer has suffered an uncontrolled exit from the water market, but over the last 18 months 11 energy suppliers have exited the electricity and gas markets through supplier of last resort (SoLR) processes, managed by the regulator. Cornwall Insight published a short paper on 5 April looking at the SoLR processes across the GB electricity and gas markets, the England & Wales water market and the Scottish water market.

We found that, while the processes have common aims – to protect customers, ensure uninterrupted supply of vital commodities, and minimise financial detriment to the market – implementation differs significantly. In this blog, we examine one facet of the SoLR process in more detail.

The energy regulator Ofgem will select a single SoLR to receive all of a failed supplier’s domestic and non-domestic customers, either appointing this supplier directly (for small customer books) or running a competitive process. In water Ofwat will allocate customers to an SoLR by region whilst in Scotland, the Water Industry Commission for Scotland (WICS) will randomly allocate supplier points amongst all eligible retailers, seeking to balance them evenly across the market.

Each of these approaches has its pros and cons. Allocating all customers to a single supplier is simple, but it can risk overwhelming a supplier’s systems and financial resources. Ofgem’s decision not to separate the domestic and non-domestic customer books of a failed supplier also excludes non-domestic only suppliers from entering the competitive process, thereby harming competition. A supplier’s offer could also represent better value for customers in some distribution regions than others.

On the other hand, allocating customers to a new retailer by region, as undertaken by Ofwat, allows them to select the retailer offering the best pricing and customer service for customers in each wholesaler region. However, this approach also has drawbacks. One of the principal cost-savings in the water retail market is believed to be the value of having a single retailer providing a single bill for all of a company’s sites. By splitting its premises across a number of retailers, this benefit will be eliminated, at least until such time as the customer can arrange and complete a switch.

At the heart of an SoLR process though, even a well-managed one, are additional costs being placed on customers as a result of the failed supplier or retailer business model. It is here that Ofwat demonstrates best practice, as new retailer applicants are required to demonstrate that they meet requirements on managerial competency, technical competency, and financial stability, as well as providing a business plan and projected cashflow statements for the first three years of operations. With Ofgem currently reviewing market entry, it is likely that they will introduce similar requirements.

You can find our paper here. Cornwall Insight will shortly relaunch its flagship water publication, Water Spectrum. This will now be accompanied by a weekly newsletter, Water Weekly. Contact Steven Britton s.britton@cornwall-insight.com to request a trial or find out more.