Keen swimmers passing St Mary’s Bay in Kent could be forgiven for being tempted by a late September dip in its glistening waters. They would be wise to think twice, however. The beauty spot has earned the dubious honour of being named Britain’s most polluted beach, and in February the Environment Agency warned against swimming there for a year due to high levels of faecal matter. St Mary’s is now an emblem for a sewage-spewing water industry which has been repeatedly fined and justifiably vilified.
Against this backdrop, England and Wales’s 16 water suppliers will submit their business plans on Monday to the regulator, Ofwat, to cover 2025-30, or “asset management period 8” (AMP8). This twice-a-decade “price review” sees the regulator determine what costs companies can recover from customers to carry out investments such as repairing pipes and improving sewage plants, and also detail planned efforts to reduce water wastage and lay out hoped-for returns to investors. Ofwat is expected to publish a first update next spring, with a formal draft response in May or June and a final decision in December.
The review comes at a tense time given the spotlight on the companies, their well-paid bosses and dividend-hungry owners, and the under-fire regulators. In May, suppliers in England apologised to customers and announced £10bn in infrastructure upgrades to complete the biggest modernisation of sewers “since the Victorian era”.
The timeline for these upgrades, and how quickly consumer bills will rise to pay for them, will be key in assessing the business plans. RBC Europe analyst Alexander Wheeler said he expected a 75% uplift in combined future investment and day-to-day spending compared with previous price review periods.
In the next period, some customers could face increases in bills of almost 50%. “There is a view that customers are now more understanding of future bill rises. In assessing proposed bill rises, the regulator will look at whether companies have openly and meaningfully engaged with customers, while also assessing what customers are getting for the additional bill increase,” said Wheeler.
Before the next period begins, companies have been ordered to return £114m to customers through lower bills next year, but most people’s water bills will rise anyway because of high inflation.
The National Infrastructure Commission has calculated that more than £20bn of investment in new infrastructure alongside leak reduction is needed over the next 30 years. Even if water companies show a sudden desire to get on with upgrades, two of the biggest political stories of last month may give a clue to looming hurdles: the spiralling cost of HS2 and Rishi Sunak’s U-turn on green policies.
Colm Gibson, managing director at consultancy Berkeley Research Group, said companies would need to show their plans can be delivered amid competition for a small pool of skilled workers, such as engineers.
“Adding a significant programme to ameliorate storm overflows to the other investments, while the nation is also trying to deliver energy grid enhancements, renewable energy generation and major rail upgrades, would stretch the UK’s existing civil engineering supply chain significantly,” he said. Embattled Thames Water has already cited the need to prioritise certain projects amid these pressures.
Gibson added: “It will be interesting to see whether the government’s recent net zero announcement has had any impact on when companies are planning to convert their vehicle fleets to fully electric.” Companies will also set out their spending on everything from improving water quality to rolling out smart water meters.
In 2019, after the last price review, four suppliers asked the Competition and Markets Authority to redetermine their price controls. The watchdog allowed a smaller reduction in household bills than Ofwat had proposed.
Ofwat’s marking scheme will also be closely watched. It will allow a greater return on earnings for “outstanding” plans, while penalties will be handed out for “inadequate” proposals. Anticipated dividends and equity injections will be in focus, alongside implied debt levels in an industry saddled with debt and battling high interest rates.
Ofwat sources said levels of dividends would be closely scrutinised, but balanced with an acknowledgment that owners want to see a return on their investments. The regulator also plans to introduce powers to claw back executive pay and block dividends before 2025.
However, Feargal Sharkey, the water campaigner and former singer in the Undertones, is sceptical as to whether the submissions will make any difference. “I want to see a real plan for the water industry – properly funded, which manages investments, prevents the over-extraction of chalk streams and stops sewage being dumped,” he said.
“Ofwat looks like a child with their nose pressed against the sweetshop window, unable to be pragmatic or show any kind of leadership. I only expect more of the same over the next five years.”
