Water sector regulator Ofwat has published the final methodology for its forthcoming Price Review in 2019 which will set limits on the prices that customers will pay for water between 2020 and 2025.

Ofwat has now set all the water companies its toughest ever leakage reduction target of bringing down leakage by at least another 15% up to 2025 and expects to see further reductions beyond this date.

Ofwat has also published an initial view of the cost of capital – based on market evidence – of 2.4% (in Retail Price Index terms), which would be a record low for a regulated utility.  The reduced cost of capital could result in an average saving per customer of £15-£25 a year from 2020 onwards.

Ofwat’s early view is that the cost of capital is lower than its assumption at the previous Price Review in 2014 where the cost of capital at 3.7% was underpinned by a lower long term RPI assumption of 2.8%. On a nominal basis, the  cost of capital is 1.1% lower than PR14.

The utilities are also being asked to stretch themselves further than ever before to save 170 billion litres of water a year - enough to meet the yearly needs of 3.1 million people.

The regulator is challenging the water companies to deliver more of what matters to customers in the coming decade, by being ever more resilient, efficient and innovative in the services they provide.

Launching the methodology,  Ofwat said water customers across England and Wales could look forward to lower bills, improved services, reduced leakage and more help for the most vulnerable.

Help for vulnerable customers will, for the first time, be an explicit part of a price review and water companies will be required to devise and deliver plans to identify and help customers in vulnerable circumstances; Ofwat will report publicly on these plans.

Ofwat is also challenging water companies to improve the resilience of their services by planning long term and develop smart solutions to address the pressures of a growing population and climate change, starting with addressing leakage.

The water companies must submit their business plans to Ofwat outlining in detail how they will deliver by September 2018.

 Outgoing Ofwat Chief Executive, Cathryn Ross said:

“Today, we unveil our blueprint for how we will push water companies to deliver more for customers through to 2025. The next decade will see profound changes in customers’ expectations and we are pushing the water sector to be at the very forefront of that. The methodology we’ve published today outlines how we will use our price review to get the very best for customers, through higher quality of service and support for those who need it most, all with scope for lower bills.

“ We’ve said many times already that this will be a tough price review for companies. We will cut the financing costs they can recover from customers and, with this lower guaranteed return, they will need to more efficient and innovative than ever before. I’ve no doubt that the sector can step up and meet the challenges we’ve laid before them today”.

The methodology sets out Ofwat’s expectations and requirements for companies preparing their business plans to meet the needs of their customers from 2020 to 2025 and beyond. It also explains how the regulator will assess the plans and if necessary, ensure that companies deliver the step change required by customers.  The assessment will flow through into companies’ price limits, service commitments and the wider incentive framework.

Click here to download the full methodology document