The price of decisive action is costly, but the cost of doing nothing could be even more. This is the reality of the business water sector in the UK in the latter part of 2025.
The publication of figures by the Department for Environment, Food and Rural Affairs (Defra) that suggest that the total cost of nationalising the water sector would be £100bn has provoked a tremendous amount of discussion and debate that such a headline figure would be expected to invoke.
At the same time, Thames Water, the centrepiece of the crisis within the UK water sector, has, according to The Guardian, attempted to negotiate a deal that would see the company receive lower targets and fewer punitive measures for missing these targets to reflect the perilous state the company is in.
Meanwhile, data that reveals that £193bn has been paid out to shareholders of private utilities, £88bn of which involves the water sector alone, has complicated discussions surrounding the water sector and the extent to which rising water bills have provided value for money for customers.
To explain the complex decisions the water sector will need to make at a high level, it is important to explore the cost of leniency against the cost of ownership.
The Devil You Know
Thames Water is once again in the process of trying to court buyers, and the consortium of creditors that is leading the negotiations at this point is London & Valley Water, which is pushing for a change to the Ofwat Final Determinations that dictate how much Thames can charge and what it can be spent on.
Unlike other potential investors, who planned to buy on the assumption that Thames could convince Ofcom to significantly increase their already substantial price increases on customers, London & Valley Water wants to have less restrictive penalties, performance targets and targets for infrastructure improvements.
Given a cabinet reshuffle that has seen the Environment Secretary moved and the resignation of Ofwat’s Chief Executive, Thames has set a self-imposed deadline of the End of October before it refers the issue to the Competition and Markets Authority to try and arbitrate a better deal.
Their argument is that the current targets are unmeetable for them and could lead to a death spiral that makes the company uninvestible, but the counterargument is that the proposal lacks detail and is still considered to be too greedy on the part of investors.
The offer of 20 per cent write-down “haircuts” at a time when the company is set to run out of money by the end of the year is nowhere near enough, and there is a lack of transparency regarding the whole process. This is somewhat ironic given the claim that L&VW are supposedly committed to transparency.
What is even worse than this is the precedent it sets, which would create the impression of Ofwat once again putting the market ahead of the millions of people it serves and allow other water companies to attempt the exact same tactic, all to simply delay the seemingly inevitable.
The Great Unknown
The government is looking for a market-based solution, and has done its utmost to avoid considering the most popular alternative in nationalisation, most recently in the form of its £100bn estimated cost to do it.
This figure has been strongly criticised by experts cited by New Civil Engineer due to its reliance on Regulatory Capital Value (RCV), a figure used to calculate dividends that relies on the value of the sector in 1989, before adding inflation and the value of investment.
It is a relatively inflated figure that assumes that the purchase price will match this figure, and there are no factors such as debt or chronic underperformance that might lower its value.
For example, Thames Water has been valued by RCV at £21bn, almost the amount of debt it is laden with, but a £4bn asking price was too much for KKR.
As well as this, it fails to take into account the significant savings that could be implemented through a more centralised national system. Greenwich University noted that nationalisation would save UK households £3bn a year, whilst also noting that the cost to do so is less than half what Defra is claiming.
Other examples of special administration regimes (SAR), a form of nationalisation, such as in the wake of Bulb Energy’s collapse, found that the government made money on the deal to repackage, refinance and sell Bulb to Octopus Energy, according to Kent Online.
The financial case against nationalisation does not appear to be as strong as has been claimed, and similarly, the case for pursuing a “market-led solution” is driven as much by dogma as by economics.
