The UK government is calling on Ofwat to work with it to build the evidence base on extending retail competition for water services to individual households in the draft of its latest strategic guidance to the economic water sector regulator for England and Wales.

With the draft out for public consultation until mid-April, the government emphasises a preference for market-based solutions, and states that it aims to take a decision in either this session of Parliament or next on whether to introduce household retail competition.

The Water Act 2014 created powers for the government to publish a statement setting out strategic priorities and objectives for the independent Ofwat to reflect in the way it regulates.

According to the draft, Ofwat should as a priority challenge the water sector to offer the best long-term value for money in securing resilience. With some 12% of customers said to be struggling with their water bills in 2015/16, a further priority for Ofwat is to challenge the sector to do more to identify and meet the needs of customers facing such difficulties.

The government also calls on Ofwat to promote markets as a priority to in order ‘to drive innovation and unlock efficiencies, with the aim of furthering: (i) the long-term resilience of water and wastewater systems and services; and / or (ii) the protection of vulnerable customers’. The retail market for water services to businesses starting this April, meaning companies, charities and public sector bodies can choose their water supplier. In the draft, the government calls on Ofwat to ‘explore the full range of ways in which it can bring competitive pressures to bear in the water market to further these goals,’ adding: ‘We want to see a water industry that works for everyone, not just a subset of customers.’

The draft notes that Ofwat reported last year potential benefits of up to £2.9 billion from extending competition to the household retail market. ‘Further work needs to be done both to ensure that these benefits can be realised, and to understand and mitigate any impacts on vulnerable customers,’ the draft states.

The draft calls on Ofwat to work with the government to build the evidence base further, in order to enable the government to fully understand the case for extending competition to households. ‘Ministers will then take a decision at the end of the Parliament or early in the next one on whether or not to introduce competition in the household retail market,’ the draft states.

The consultation document also highlights a number of key objectives for Ofwat. One is to reduce long-term risk to water supply resilience through measures such as demand management and increased water trading. Ofwat should work with water companies to ensure they assess and where necessary improve the resilience of their systems in response to threats including flooding, infrastructure failures, and physical and cyber security. Ofwat should also encourage the sustainable use of natural capital by water companies, challenge companies to improve support to low income and other vulnerable household customers, and focus on the needs of small businesses.