Price review to spur major investment in water infrastructure

On Thursday, Ofwat outlined its final determinations from the 2024 price review (PR24). The determinations specify what water companies are expected to invest in between now and 2030 and apply controls on the customer price increases they can apply to fund those projects.

Ofwat said its determinations align with strategic priorities set by the UK government, which require it to focus on protecting and enhancing the environment, delivering a resilient water sector, serving and protecting customers, and using markets to deliver for customers.

The final determinations are specific to each water company operating in different areas of England and Wales. As part of the process for setting pricing controls, the companies had submitted proposed business plans for Ofwat approval. Those plans requested the largest ever total expenditure for operating costs and capital investment across the sector, to meet targets set by the government and regulators.

For water and wastewater companies, Ofwat has now sanctioned an average 36% increase in customer bills in 2029-30 relative to 2024-25 averages, which is below the 44% average increase that the companies sought but significantly above the 21% average originally proposed by Ofwat. For water-only companies, a 22% average increase has been endorsed by Ofwat, down from the 29% average increase sought.

Overall, Ofwat said the determinations approve a £104 billion upgrade of water and wastewater infrastructure, to deliver “cleaner rivers and seas and secure long-term drinking water supplies for customers”. The projects will deliver on environmental and other regulatory requirements set by the Environment Agency, Natural Resources Wales and the Drinking Water Inspectorate and include 30 major infrastructure projects to build greater resilience to drought risk.

Gordon McCreath, water industry expert at Pinsent Masons, said: “The addition to the list of new priority water resources projects, known as strategic resource projects, is to be welcomed but requires overall commitment across government and regulators to see these projects delivered.”

Robbie Owen, an infrastructure and planning law expert at Pinsent Masons, said a recent report published by the Environment Agency provides important context for PR24.

The Environment Agency said that climate change and population growth are putting increased strain on water resources and expressed doubts about the resilience of water supplies in some areas of England in light of the increased risk of drought.

The report said: “The scale of the challenge we face increases with time and, by 2050, we are looking at a shortfall of nearly five billion litres of water per day between the sustainable water supplies available and the expected demand. This is more than a third of the 14 billion litres of water currently put into public water supply.”

In a recent consultation held by the UK government on reforms to the National Planning Policy Framework (NPPF) in England, an overwhelming 94% of respondents expressed support for planning reforms to improve the current water infrastructure provisions in the Planning Act 2008. The government has pledged to consider how that can be achieved and said a further targeted consultation may be needed before draft legislation is brought forward.

Further changes could also come to better define when water projects qualify as ‘critical national priority’ (CNP) status – with CNP infrastructure status, there is a presumption that most environmental impacts are unlikely, in all but the most exceptional cases, to outweigh the urgent need for that infrastructure.

Owen said: ”Whilst this outcome of PR24 will bring some further welcome certainty to water companies, the scale of the task ahead that is facing them is immense – as the Environment Agency’s report makes clear. They now need to convert the infrastructure projects set out in their water resources management plans into consent applications and take them through the planning regime over the next regulatory control period, at a time of political, customer and community hostility, ongoing planning reform, developing national infrastructure strategy and competition for resources with other infrastructure sectors. They will need every support, co-operation and encouragement possible if we are to see all of this infrastructure investment delivered efficiently and effectively, and on a scale not seen since the 1960s and 70s”. 

A focus of Ofwat’s final determinations and the NPPF reforms is also on addressing the problems of sewage being discharged into rivers or the sea at times of storms or flooding.

McCreath said that while much of the government and regulators’ attention on this issue to-date has amounted to strengthening enforcement powers, companies must now be given time, following PR24, to get on with investing in infrastructure improvements, rather than deal with “yet more backwards-facing enforcement action and finger-pointing among their multiple regulators”. That will also be key to attracting the global investment that the industry requires, in addition to funding from customers, to achieve the required environmental improvements.

“The regulatory reform expected to come out of the Independent Water Commission chaired by Sir John Cunliffe in 2025 will be key to enabling that, while still holding water companies to account via proportionate and pragmatic regulation,” he said.

Water companies that are unhappy with Ofwat’s final determination – and some face a much greater difference between their requested increase and the one granted than the average - can refer the matter to the Competition and Markets Authority (CMA), the UK’s lead competition authority. The deadline for requesting a referral is 18 February 2025.

Under the CMA appeal process, the CMA is required to appoint an independent ‘special reference group’ to conduct a redetermination of the price controls. The group must promote the interests of consumers, consider the long-term resilience of water infrastructure, and ensure the financeability of the water companies.  Water companies are likely to be more open to an appeal than in previous years, having seen the success of the companies that resolved to challenge the previous PR19 review.

The CMA appeals process follows a statutory timetable which lasts a year, during which the water companies submit their grounds for redetermination and present to the group. Ofwat then responds to the water companies and presents to the group, following which the water companies reply to Ofwat's response. There are also third-party hearings and submissions, followed by main party hearings and submissions. After approximately six months, the CMA publishes a provisional determination. The CMA gives its final determination after 12 months.

David Black, Ofwat chief executive, said: “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.”