Background to the report

Water is essential for human health, the environment and the economy. A shortfall of nearly 5 billion litres of water per day is expected by 2050, based on current usage rates. This is more than a third of the 14 billion litres currently used daily.

Jump to downloads

In England and Wales, the supply of clean drinking water to homes is predominantly managed by 16 companies, of which 11 also supply wastewater services. The work they do, and the amount they charge the public for their services, is overseen by regulators who are responsible for protecting the interests of the public and the environment.

In 2023 the government published the Environmental Improvement Plan, which sets out targets for the sector. The ability of the regulatory framework to ensure the sector both delivers value for money and attracts the investment needed is crucial to the sector’s success.

The Department for Environment, Food & Rural Affairs (Defra) is the government department with policy responsibility for the water sector, and there are three regulators who oversee the companies. The Water Services Regulation Authority (Ofwat) is responsible for ensuring the plans are funded appropriately, and set an expected rate of return to investors commensurate with the risk.

Ofwat sets the sector’s funding envelope for every company every five years through the price review (PR) process. The Environment Agency (EA) regulates for the impact on rivers and other water bodies and oversees seven long-term plans and planning frameworks that water companies produce and work to. The Drinking Water Inspectorate (DWI) regulates for drinking water quality and sufficiency.

Scope of the report

This report examines the effectiveness of the regulatory regime in delivering long-term objectives, incentivising operational performance improvements, and attracting the investment needed to meet the government’s specified outcomes.

This report covers the following:

  • Part One sets out the challenges the sector and the regulators currently face to improve performance and consumer trust.
  • Part Two assesses how the regulatory framework identifies, plans for and delivers long-term objectives.
  • Part Three assesses how the regulatory framework incentivises the operational and financial performance of water companies in the short term and consequences for how attractive the sector is to investors.

Video summary

Sarah Pearcey, Senior Audit Manager, summarises our findings.

Conclusions

Defra and the water sector’s regulators have not encouraged water companies to spend what they need to deliver the performance expected. The sector now faces significant environmental and supply challenges.

To meet these challenges, it will need to attract investment and spend at a rate not seen before. The regulators must understand the scale of the challenge in terms of cost and deliverability and the condition of assets across the sector, ensure the sector raises the investment needed and meets government outcomes, and achieve value for money for bill payers.

The regulators have taken steps to incentivise companies to improve their performance and align investor and customer interests, but both consumer trust and the financial resilience of the sector have declined. The regulatory framework has contributed to worsening investor perception of the sector. Both consumers and investors must have trust that money is being well spent, and that returns are predictable and appropriate. Defra and the regulators must work to achieve this for the long term.

Downloads

Publication details

Press release

View press release (25 Apr 2025)

Latest reports