Ofwat Approves £104B Upgrade To Accelerate Delivery Of Cleaner Rivers And Seas And Secure Long-Term Drinking Water Supplies For Customers

• Investment set to quadruple – nearly 90% of this will go to meet new requirements set out by the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate
• Almost £12B allocated to cutting spills from storm overflows by 45% by 2030, from 2021 levels – more than £6.5m investment per day over the PR24 period
• £2B development funding to kickstart £50B investment for the biggest programme of water supply projects in decades. In total, 30 major infrastructure projects will build greater resilience to drought by providing enough water to meet the daily needs of around a third of England and Wales’ population
• Bills set to increase by an average of £31 each year over the next five years; a doubling of support for customers in need of a helping hand
• Claw back mechanism to ensure money not spent on investment by companies is returned to customers through lower bills

Substantial, lasting, improvements for customers and the environment are set to be delivered through a £104B upgrade for the water sector, Ofwat announced today (19 December).

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 £104B 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 £8B of unjustified costs compared with companies most recent requests. In addition, our approach to setting a rate of return has saved customers £2.8B.”

The 2024 Price Review (PR24) final determinations will see a quadrupling of new investment over the next five years, providing companies with the funding needed to transform performance, ensure supplies for future generations and to deliver cleaner rivers and seas.

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

• £12B on 2,884 projects reducing spills from storm overflows;
• £6B of upgrades to combat nutrient pollution for around 1,000 sites and catchments;
• £3.3B on nature-based solutions and increasing biodiversity;
• £2B of development funding to unlock £50B investment for 30 major projects designed to secure water supplies including nine new reservoirs and nine large-scale water transfer schemes;
• £456m 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.

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.

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

Final determinations explained

Ofwat’s role
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.

Ofwat does not determine the level of environmental investment, which is set out by agencies such as the EA. 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.

In setting the rate of return, Ofwat has to also take account of current market conditions including recent increases in the cost of finance. This has seen the allowed return for the sector increase 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.

In addition, Ofwat forecasts 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 £7B of new equity; we consider that the equity financing requirement is likely to be higher than this. We have used a figure of £12.7B when assessing the financeability of company plans.

Impact on bills
The average bill increases 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 has removed £8B (7%) of costs from companies’ business plans and reduced the allowed rate of return on investment compared with companies’ requests.

This has led to a reduction in bills for most companies, compared with their most recent proposals; companies proposed bill increases of 44%. For example, in comparison with proposed 2029-30 bills, Southern Water’s bill has been reduced by £126 (16%), Thames Water by £79 (12%), Hafren Dyfrdwy by £73 (12%) and Wessex Water by £44 (7%).

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%.

Safeguarding customers
In parallel, Ofwat 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, 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.

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.

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 customers have received.

Delivering growth
Through securing our future water supply, we will boost the economy by supporting new housing and business development. We will allocate £2B development funding to unlock £50B of investment for the biggest package of water supply projects in decades.

Over the coming decades, nine new reservoirs will be created, including in Lincolnshire, Cambridgeshire and Oxfordshire, to create enough additional capacity to serve the daily needs of 2.5 million households. In total, the 30 major infrastructure projects will provide enough water to meet the daily needs of around a third of England and Wales’ population. This will help us adapt to climate change, build resilience to drought and leave more water in the natural environment.

The Ofwat Innovation Fund, which is being doubled to £400m and the introduction of the £100m Water Efficiency Fund will help address sector-wide challenges. The Innovation Fund will continue to encourage fresh approaches; the Water Efficiency Fund will use a range of water efficiency approaches to stimulate a sustained and measurable reduction in water demand across England and Wales.

1. Water bills

Water and wastewater companies – average bills for 2024-25 and 2029-30

Water-only companies – average bills for 2024-25 and 2029-30

All figures in both tables above are before inflation.

Water companies submitted revised proposals in August 2024. The figures in the table for these submissions incorporate the proposed rate of return on investment which was requested in their proposals.

We propose to apply a delivery mechanism for Southern Water and Thames Water so that customers will not pay until we have greater clarity on the timing and profile of these companies’ plans. If the mechanism is triggered, this would increase average 2029-30 bills by a further £20 and £11, respectively.

Southern Water only provided a forecast bill including the delivery mechanism, so the company’s representation is quoted to that effect.

Some companies have also revised the calculation of their 2024-25 average bill since draft determinations so may be different to numbers seen in previous data tables.

The bills shown for each water-only company do not include the cost of wastewater services. These are provided by the water and wastewater company which serves its area.

2. Companies are able to appeal Ofwat’s decisions by requesting a referral to the Competition and Markets Authority; the deadline for requesting a referral is 18 February 2025.
3. A Sector Summary document provides an overview of the final determinations.
4. A full range of Price Review documents can be viewed on the Ofwat website.
5. Thames Water – Ofwat has also published today for consultation the outcome of its investigation into dividend payments made by Thames Water