Average water bills are set to rise 36% - water sector regulator Ofwat has this morning announced that it has approved a £104 billion investment programme by the water companies. 

Customers will see their average bill increase by £157 (36%) over the next five years. The average bill increase in 2025-26 will be £86 (20%), excluding inflation, with smaller percentage increases in each of the next four years.

Ofwat is emphasising that companies have also not been allowed to charge customers for work that has already been funded, such as investment to bring storm overflows into compliance with their existing permits.

The 2024 Price Review (PR24) final determinations will see a quadrupling of new investment over the next five years. Nearly 90% of this will go to meet new requirements set out by the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate.

To help finance this customer bills in England and Wales will increase by an average of £31 per year (36%) before inflation between now and 2030. Ofwat said this annual average increase compares with a £39 increase requested by companies in August 2024 (44%).

According to the regulator, this will provide companies with the funding needed to transform performance, ensure supplies for future generations and to deliver cleaner rivers and seas.

Ofwat explained that its role as economic regulator is to ensure customers benefit from new investment, so they are not charged twice for work companies should have already carried out and that they only pay the efficient costs of new investment.

David Black, Ofwat Chief Executive, said:

"Today marks a significant moment. It provides water companies with an opportunity to regain customers’ trust by using this £104bn upgrade to turn around their environmental record and improve services to customers.

“Water companies now need to rise to this challenge, customers will rightly expect them to show they can deliver significant improvement over time to justify the increase in bills. Alongside the step up in investment, we need to see a transformation in companies' culture and performance. We will monitor and hold companies to account on their investment programmes and improvements.

“We recognise it is a difficult time for many, and we are acutely aware of the impact that bill increases will have for some customers. That is why it is vital that companies are stepping up their support for customers who struggle to pay.

“We have robustly examined all funding requests to make sure they provide value for money and deliver real improvements, while ensuring the sector can attract the levels of investment it needs to meet environmental requirements. This has seen us remove £8 billion of unjustified costs compared with companies most recent requests. In addition, our approach to setting a rate of return has saved customers £2.8 billion.”

Key elements of the investment package, which also reflect the UK and Welsh Governments’ stated priorities for the sector, include:

• £12 billion on 2,884 projects reducing spills from storm overflows;
• £6 billion of upgrades to combat nutrient pollution for around 1,000 sites and catchments;
• £3.3 billion on nature-based solutions and increasing biodiversity;
• £2 billion of development funding to unlock £50 billion investment for 30 major projects designed to secure water supplies including nine new reservoirs and nine large-scale water transfer schemes;
• £456 million of extra funding on day-to-day allowances to increase the rate at which water mains are replaced, with 8,445km set to be improved over the next five years.

Ofwat said the increase in investment needs is driven by delivering on the statutory standards and regulatory requirements set out by the Environment Agency (EA), Natural Resources Wales and the Drinking Water Inspectorate. These relate to a range of programmes such as reducing spills from storm overflows, improving wastewater treatment standards and raising further the quality of drinking water.

Ofwat's role as economic regulator is to ensure customers benefit from new investment, so they are not charged twice for work companies should have already carried out and that they only pay the efficient costs of new investment.

The regulator explained that it does not determine the level of environmental investment, which is set out by agencies such as the EA., emphasising:

“Ofwat’s job is to scrutinise the cost of proposals in company business plans to make sure all investment is good value for money, and then to hold companies to account for that investment.

“Ofwat sets an allowed return that provides a reasonable return for the risks that investors face for their investment. There are opportunities for investors to earn enhanced returns where companies deliver great levels of service to customers and the environment, and the incentive mechanisms ensure investor returns are lower than the allowed return where performance is poor.”

To take account of current market conditions including recent increases in the cost of finance, the allowed return for the sector has increased to 4.03% compared with 3.72% at draft determinations.

This reflects a cost of equity of 5.1% and debt of 3.15%, underpinned by a gearing ratio of 55%. This will allow investors in an efficiently-run company to earn a reasonable return on their investment.

Ofwat is also forecasting that companies will need to raise levels of finance that significantly exceed the levels raised in any previous regulatory period. Companies have forecast a need for around £7 billion of new equity.  Ofwat considers that the equity financing requirement is likely to be higher than this and has used a figure of £12.7 billion when assessing the financeability of company plans.

Impact on bills

Ofwat said bills have been set at a level which is fair for current and future customers, with steps taken by companies to increase support for customers who need it, meaning more than a doubling in the proportion of customers that will receive help with their bills from 4% to 9%.

In parallel, Ofwat said it has ensured measures are in place to safeguard customers so money is spent where it needs to be spent. Companies are responsible for delivering their investment programmes, the regulator said, and where companies fail to do so, funding will be subject to a claw back mechanism which will ensure money not spent on investment is returned to customers through lower bills.

Targets have been set for companies across 24 key areas of performance. If the targets are not met, there will be automatic penalties for companies, with money returned to customers through lower bills. But if companies exceed the targets, they will be allowed to increase bills in return for the extra benefit customer