Response to Ofwat consultation on the REC protections in the business retail market
15 September 2025
We have recently contributed to Ofwat’s consultation on the Retail Exit Code (REC) protections in the water business retail market in England and Wales. Since competition was introduced in 2017, REC protections have included price caps covering the entire or a very large part of the market.
In our submission, we advocate for the removal of these price caps. While well intended and aimed at protecting customers, we believe they are hindering competition and preventing business customers from reaping the full benefits of a more competitive market.
Background
While some parts of the water supply chain remain a natural monopoly, the business retail market is an activity where competition is feasible and beneficial.
Up to 2017, retail business customers (e.g. non-household) in England and Wales were served by regional monopoly water companies. In 2017, competition was introduced. This led to the creation of the largest competitive water retail market in the world.
Price caps covered the entire market at market opening. In 2020, price caps were removed for the largest customers. They currently apply to roughly 85% of the market in terms of revenues.
Our submission
Ofwat’s consultation has sought views on a wide range of issues relating to REC protections, including whether price caps remain necessary and how they are set.
Our submission focuses on whether price caps remain justified eight years after the market was opened up to competition.
We make two key points:
First, Ofwat’s assessment does not provide a convincing explanation of why competition would not lead to good price outcomes in the business retail market. As a result, it does not establish the economic rationale for why price regulation is still needed.
Second, price caps should be removed for all customer groups.
Price caps raise several risks for competition. Evidence from the UK energy sector highlights how price caps can soften competition, weaken customer engagement and increase average prices. Evidence from the business retail market in the UK water sector suggests that risks to competition seem to have materialised. We observe low discounts, limited savings from engaging and low customer engagement.
Price regulation was arguably justified at market opening over a transition period - as it was in other UK utility retail markets that were opened up to competition in the 1990s. However, while well intended and aimed at protecting customers, it does not seem justified now. Ofwat has not put forward a compelling assessment of why price caps are needed for business customers, and such caps are not in place in other UK utility business retail markets.
This is why, eight years after the introduction of competition, we recommend removing price caps in the business retail market and allowing retailers full flexibility to set prices, subject to competition law.