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2020 Strategic Directions: Water Report

Ensuring All Customers Have an Equal Opportunity to Receive Leading-Edge Service

Based on a survey of water and wastewater stakeholders, our report examines the issues and trends impacting today’s industry.

Ensuring All Customers Have an Equal Opportunity to Receive Leading-Edge Service

The more you can spend to achieve successful outcomes, the greater the likelihood of success. Since the 2013 Australian Grand Prix, no Formula 1 team other than Red Bull, Ferrari or Mercedes has won a Grand Prix. The “Big Three’s” spending power consistently outstrips the rest of the pack. During the 2019 season, won by Mercedes — with Ferrari second and Red Bull third — the Big Three spent more money than the other seven teams combined.

During the 2018/19 British Premier League season, Liverpool paid £43m to football agents — more than any other club — followed by Chelsea (£26m) and Manchester City (£24m). City beat Liverpool to the title by one point, Chelsea finished third. During the same season, Championship clubs’ combined pay-outs to agents totaled £50m.

Could we see something similar apply to the water industry in England and Wales? It’s an exciting time with digital transformation gaining pace, a renewed appetite for innovation, and the opening up of the sector to tech start-ups. Against this backdrop, is there a chance that customers of bigger water companies — with more to invest in innovation — enjoy better outcomes, better customer experience, than customers of smaller, less affluent water companies? This matters when you are dealing with natural monopolies like water companies, because few customers can choose their supplier, creating the potential for a postal code lottery in digital water services.

Innovation is a prime mover for better services and customer experience. It follows that the more a water company can spend on innovation, the greater the likelihood that the company’s customers will enjoy a better experience. It also follows that the converse is true. If the chance to invest in innovation is limited, customer experience is less likely to improve.

2020 Strategic Directions: Water Report

With its survey of nearly 300 water industry stakeholders as its backbone, Black & Veatch’s 2020 Strategic Directions: Water Report comprehensively analyzes the sector’s complex landscape of challenges and opportunities. The leveraging of data in driving decision-making and optimizing efficiencies in water and wastewater systems is widening even as infrastructure continues to age, climate change strains assets, and the COVID-19 pandemic’s financial havoc pressures the bottom lines of many utilities through lost revenues. We look at all of that and more.

The bigger the innovation investment, the greater the pool of partners and suppliers water companies can draw from. Access to technologies and approaches not traditionally associated with the water sector is enhanced, so is the ability to create multi-company top-tier alliances.

It’s definitely the case that the bigger water companies are making significant investments in initiatives intended to foster innovation.

Anglian Water’s “Future Water Company” initiative uses the Newmarket region of its operating area as a proving ground for innovators and technologies promising the greatest benefits. At Newmarket, the utility is working with more than 100 partners on 62 different projects to achieve zero leakage and bursts; 100 percent customer satisfaction; water consumption of 80 liters per person per day; zero pollution and flooding; 100 percent compliant and chemical-free drinking water; carbon neutrality; and building a circular economy that eliminates the concept of waste.

For the second consecutive year in 2019, United Utilities ran its award-winning Innovation Lab program. The 2019 focus was on how innovative companies can help the utility develop systems thinking and improve service using various connected customers; empowered, knowledgeable colleagues; right information, right place, right time; and the future of water.

During the summer of 2019, more than 3,000 people from nearly 700 leading organizations around the globe attended Northumbrian Water’s Innovation Festival. The aim of the five-day event was to come up with innovative solutions to some of the biggest challenges faced by society and the environment.

For the smaller water companies and new entrants, initiatives on this scale likely are to be too expensive, and difficult to resource effectively, to undertake alone. By partnering with Anglian, however, the much smaller Essex & Suffolk Water was able to participate in September 2019’s three-day Innovate East event. Customers of those companies unable to take part in major innovation initiatives may not enjoy the benefits of any successful innovations that arise.

While justly rewarding good performance, the comparative competition model which underpins economic regulation of the water industry in England and Wales reinforces this disparity in the ability to invest in innovation. The companies best placed to achieve their outcome delivery incentives typically will be those most able to invest in innovation. With performance measured relative to self year-on-year, the companies with the most to invest in successful outcomes will accrue even more funding for further innovation, with their customers seeing better, cheaper service and greater speed-to-value.

While smaller companies may have the advantage of being nimbler and better-suited to adopting new technologies from start-up companies — with less proof of scalability — they are taking on greater risk than those able to afford proven heritage brands.

With no incentive to share innovation across the sector, this propensity to variable speed innovation will grow. This risk of a postal code lottery in customer experience is likely to be exacerbated by the cost of investing in leading-edge, data and artificial intelligence-driven technologies.

Seemingly cognizant of this and recognizing that part of the solution lies in some form of sector-wide mechanism to foster and share innovation, Ofwat — the water industry’s economic regulator for England and Wales — ran a consultation in 2019 on its own proposals to drive “transformational innovation” in the sector. The proposals centered upon:

  • A collectively funded innovation competition during AMP7*
  • Rewarding the successful roll-out of innovative solutions at the end of AMP7 as part of PR24**
  • Creating a company-led innovation in water center of excellence
  • Proposals on ways to make better use of data

Ofwat opted for the innovation competition, collectively-funded by the water companies, to provide up to £200m of additional funding for innovation during AMP7 (2020-25). When designing the competition, the regulator will try to address the concerns of smaller water companies that a lack of resources, compared to their larger counterparts, may hamper access.

Entrance to the competition is restricted solely to the water companies. Although Ofwat hopes for collaborative bids — with water companies, the supply chain and other stakeholders working together — there remains the challenge of how to access quickly and fairly the innovation capabilities of the supply community. The competition’s structure, in effect, means innovation coming from the supply chain will be largely dictated by the procurement choices of each water company.

As the innovation initiatives described previously show, water companies typically look to the supply chain to develop innovative technologies and ways of working. The utilities have shown a willingness to trial and adopt innovation borne of the supply chain; but not to expose customers, owners and shareholders to the financial risks inherent in undertaking large-scale research and development of their own.

Consequently, to succeed, any initiative to create “transformational innovation” needs to facilitate supply chain involvement at a sector-wide level. As Ofwat’s consultation document noted, “Supply chain companies report facing slow commercial deployment, and often having to trial their new technologies independently on each incumbent water company.” Finding a viable alternative is vital to speed-up the nurturing of innovation from good idea to something with the potential to offer tangible value for customers, shareholders and owners.

Adjunct to this is the tendency from many water companies to want to own the intellectual property rights (IPR) for all supply-chain derived innovations they adopt. This acts as a disincentive to suppliers because they do not get a sustainable return on their investment in innovations. This serves as a barrier to the supply chain making a sector-wide contribution to transformational innovation as there is a propensity for the wealthiest companies to monopolize the best ideas, which risks contributing to the development of a postal code lottery for the best water services. The journey from a great idea to the ultimate cost and service benefit to the customer has many barriers; and the chances of that idea becoming real and making it to a customer, let alone all customers, reduces at each hurdle.

Data will be at the core of genuinely transformational innovation.

To mitigate against the risk of a two-tier provision of water services data needs to be fully accessible to all, with the returns on investment mainly residing with the ability to turn data into information. Currently, the trend is toward seeing how data can be monetized. We need to move to a position where the wisdom and insights which data informs are valued, rather than the data itself.

To enable this change, could water companies and the supply chain create and have access to a central open data resource? This will help foster a sector-wide innovative culture by making the building block of digital innovation — data — available to all. The role that open data must play in driving innovation is acknowledged in Ofwat’s innovation competition plans, “There will be an ‘open by default’ approach to data and learning …”

In contrast to IPR, when it comes to data, water companies are starting to show a much greater willingness to share. Yorkshire Water is setting a precedent with an open data initiative partnership with the Open Data Institute, using Datamill North as a data repository. The company is considering giving independent data scientists access to data streams including water consumption, water resources, leakage and bio resources.

A two-tier, postal code lottery, for water services is in no ones’ interest; especially at a time when our industry is facing more intense scrutiny than ever before. There is no silver bullet, but the fact the regulator has put forward concrete proposals to foster innovation is a welcome step. As we move toward Industry 4.0 — and the role of data, artificial intelligence, and machine learning underpin everything we do — embracing open data now and creating an industry that encourages and enables innovation from all, will help us future-proof world-class quality and consistency of service for all. 

* AMP7 is the seventh five-year asset management period (AMP) to be delivered by water companies in England and Wales since privatization in 1989; AMP7 runs from 2020 to 2025.
** PR24 is the regulatory price review (PR) of water company funding, due in 2024, which will set revenues and requirements for AMP8 (2025-2030).

About the Author

Mark Kaney is Black & Veatch’s asset management director for Europe. He has more than 20 years of experience in the utilities industry. Prior to joining Black & Veatch, Kaney held senior asset management positions in both asset-owning and consultancy organizations, and served as head of digital development. He is actively involved with the Institute of Asset Management, where he is as an endorsed assessor and with a seat on the IAM Council and British Water, serves as the International Business Mentor for Europe.

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