In late 2017 Ofwat, the industry regulator for England and Wales, said it would require water companies to put innovation at the heart of their business plans for 2020 to 2025. In launching its 2019 price review, Ofwat said it expected companies not only to make technological advances, but also to develop a culture of innovation with every process geared to that end, customers engaged as active participants, and companies collaborating within and outside of their sector.
“Without innovating, companies will not and cannot deliver enough of what matters to customers and the environment or play a leading part in helping the sector face a range of significant challenges,” the regulator said, in a nod to climate change, population growth and other demands on the industry.
As a carrot, Ofwat promised an additional financial benefit to those companies it judged to have the most innovative business plans. In short, this was not so much a nudge as a powerful elbow in the industry’s side.
Fast-track trio
In its initial January 2019 assessment of the business plans subsequently submitted by the 18 companies under its purview, Ofwat said three – South West Water, United Utilities and Severn Trent Water – had produced overall high-quality plans. Accordingly, it put them on a ‘fast track’ for early draft determinations of their price, service and incentive package for 2020-25, a financial benefit and a boost to their reputation.
Innovation was just one of a host of criteria by which Ofwat came to its decision. But, in light of its judgment, it’s instructive to take a closer look at the approach to innovation taken by one of the fast-track trio, United Utilities (UU), which provides water and wastewater services in northwest England.
In the section of UU’s price review submission to Ofwat devoted to innovation, three drivers stand out: making greater use of markets, harnessing new technologies and thinking beyond the boundaries of the water industry.
Making greater use of markets
UU says it has identified £359m of cost savings by market-testing its entire cost base against best procurement practice and by re-examining the product or service it is buying.
The company is also making broader use of markets – as demanded by Ofwat – through initiatives ranging from nutrient trading to debt collection. In the same vein, UU has come to regard its energy assets as a virtual power plant, allowing it to provide its wholesale business with power at an acceptable price while selling surplus energy to the National Grid. By next year, it aims to be able to supply 50MW of power from multiple sites, enough to save having to turn on a power plant.
New Technologies
Apart from seeking to deploy ground-breaking processes to improve water quality and reduce leakage, UU’s innovation strategy focuses heavily on digital technologies emerging around artificial intelligence. The application of advanced analytics, increasing volumes of customer data and connected smart meters all have the potential not only to improve reliability and efficiency but to change the very way residential water retailers operate, the company reckons.
For example, UU already uses robotic automation for some high volume/low value tasks such as preparing maintenance scheduling reports. The robot takes 32 minutes to perform with complete accuracy what it took eight people a combined 12 hours of work a day. The technology will be applied to other business processes, saving UU more than 18,000 hours of (human) work a year.
And UU is using sniffer dogs – as well as satellites - to detect water leaks. The firm expects the dogs to reduce leakage by 1.3Ml a day.
Communicating with customers
Some of UU’s innovations are also focused on changing the way that it communicates with its customers and enabling them to become more active in the way that choices are made. UU has pioneered innovative customer research in the water sector, including using behavioural economics to improve the cognitive validity of its more traditional research and designing the first immersive research in the sector. UU is continuing to use insights from behavioural economics to help it make good on the commitments in its business plan. Frontier Economics partnered with UU on its PR19 Behavioural Economics Programme and continues to advise the team.
Conclusion
By putting innovation in all its forms at the heart of its price review process, Ofwat has challenged firms to examine every aspect of their operations to make water supplies more resilient, improve customer service and keep bills affordable. Harnessing new technologies to deliver higher levels of customer service and a greater recourse to markets are among the most promising channels to spur innovation.
