Britain’s water sector is in a rather odd no-win position where both accountability and investment are clashing with each other, leading to a rather unusual situation where underperformance can still result in higher business water bills.
According to the latest Ofwat Water Company Performance Report and the Environment Agency, England’s water companies received the worst-ever combined scores for their environmental performance in the 2024/25 reporting year.
This typically results in lower bills, as underperformance leads to an overall financial penalty that must be paid back to customers in the form of deducted bills, the biggest of which is a combined £75.2m underperformance charge levied at the crisis-riddled Thames Water.
Only United Utilities (£3.8m) and Severn Trent Water (£30.8m) overperformed, which allows them to add additional payments to bills in order to reward good performance.
Regardless of this, water bills are set to increase. Here are the reasons why, as well as the implications and potential consequences of such a bizarre situation.
Why Does Failure Cost More?
The fundamental issue in the enforcement system is that it is a relatively blunt instrument that either gives or takes away money from water companies, who either implicitly or explicitly pass the fines on to customers.
Some elements of this are being fixed, such as bans on unfair bonuses and unapproved shareholder dividends, faster financial penalties and more robust enforcement, but the failings of this previous system will take time and money to fix.
This is why companies, particularly the stricken Thames Water, have requested higher bill increases in order to fund vast infrastructure improvements, but allowing companies that have failed in their service obligations to receive more money from customers is somewhat bad optics.
The compromise is to allow a degree of bill increases but also to continue to fine and charge companies that underperform, which still leads to a net increase in water bills, but also does not satisfy the companies that have claimed higher bills are the only way to stay in business.
This is also why Ofwat’s interpretation of the results, which at a combined 19 stars out of 36 is the lowest since the system was first set up in 2011, is rather charitably explained as the result of stormy weather, improved monitoring due to previous raw sewage controversies and underinvestment.
Even the lone four-star top rating, to Severn Trent Water, was in spite of 260 million litres of sewage being spilt into the River Trent alongside over 62,000 other sewage spills.
Catching A Falling Knife
These reports, as published by the BBC and the Guardian, highlight the catch-22 situation Ofwat, the Environment Agency, the water companies and the UK Government are placed in when it comes to finding a solution within the existing system.
The problems caused by decades of chronic underfunding cannot be fixed quickly, and financially punitive measures without legal mandates are likely to delay infrastructure improvements, with fines passed to consumers in the form of increased bills.
The hope is that the existing reforms will show some clear results that match the statements made by the industry body Water UK and Thames Water. Whilst it has been made clear in the Cunliffe Report that there are no easy fixes, some green shoots are absolutely necessary to justify significantly increased prices.
Amidst a more general cost of living crisis, where rent, mortgage payments, food, heating and tax bills are all increasing, an increase in water rates would have been difficult to justify at the best of times, but without any sign of improvement or change, it would be completely unacceptable.
Could There Be Bigger Changes?
Ultimately, anything below a substantial root-and-branch reform will at this point be more akin to shuffling the deckchairs on a sinking ship, particularly since regulatory change is just one of several issues with the water sector.
Several major providers are facing financial issues, with by far the most serious being those suffered by Thames Water, the UK’s biggest private water company that is at present staring bankruptcy in the face.
Facing £20bn of debt, further penalties that offset any potential money earned through increased fines and a creditor plan that would require England’s water regulators to give them leeway to avoid complying with regulations until 2040.
This proposal, itself a compromise from the ludicrous idea that Thames should not pay any water fines at all, is not likely to be accepted, which leaves a special administration regime (SAR) as the only alternative.
This itself could open the floodgates not only for this specific form of nationalisation, but also for the potential to bring the entire sector into public hands again as a way to more centrally control costs.
