Bills are never popular. They're especially unwelcome when it comes to paying for something that falls from the sky. Unfortunately, as Britain's water systems struggle under financial mismanagement and the pressures of climate change, higher water costs are something consumers are all going to have to swallow.
The plight of Thames Water Ltd., serving 15 million captive consumers in London and southeast England, has brought this issue to the fore. On the hook for just shy of £14 billion (630 billion baht), there are fears it could go bust if it doesn't secure additional investment to service its debts. It's not alone: Questionable financial resilience seems to be a key theme across most of the UK's water companies.
UK water is in a state. Our pipes leak -- Thames Water loses 24% of the H2O it supplies through leakage -- and our rivers and coastal waters end up contaminated with raw sewage far too often. These have been issues for decades but, as the climate crisis strains supplies, more emphasis is being placed on the health of our natural resources. In 2021, the government classified most of southern and central England as being in serious water stress. As global warming brings stronger, wetter storms, infrastructure that might have just been holding on gets tested to breaking point. Billions in investment are needed to ensure expectations are met in a new world.
This isn't just another example of broken Britain. Sweden is suffering from similar problems such as historic underinvestment, rising demand and ageing infrastructure. It needs to spend $967 million a year to meet its 2040 water targets. In 2018, the OECD noted that the additional investment required until 2030 to achieve universal and equitable access to safe and affordable drinking water was about three times the investment levels at the time.
Some of this is down to the difficulty of pricing water appropriately. Potable H2O is a human right, and so prices are kept artificially low. Alex Money, director of the Innovative Infrastructure Investment program at the University of Oxford's Smith School, told me that that causes two problems: inefficient use, as there's no price signal for water's value, and deterred investment as cost-recovery is much harder -- not ideal in a water-scarce world where less waste and more investment are crucial.
UK water companies are guilty of poor financial management and failing to balance investment needs with paying dividends to their shareholders. Part of that falls on Ofwat, the industry regulator.
David Black, Ofwat's chief executive officer, admitted to a House of Lords committee on July 4 that it "should have stepped in" earlier to stop companies from taking on so much debt but denied that it had failed to oversee the industry well, saying companies are responsible for their own financial structures.
But the regulator has failed to ensure companies invest efficiently. Indeed, Water UK, the members group of water and sewage companies, issued an apology in May for sewage spills, pledging £10 billion for a huge sewer-modernisation program.
Average UK water bills are decided in an Ofwat review every five years that seeks to balance investment needs with customer affordability. After bills rose substantially after the industry left government ownership, Ofwat's priority for the past few cycles has been keeping bills low: Water bills have fallen in real terms by more than 15% since 2010, and were again held 1.8% below inflation this year.
That's no longer sustainable, and water companies are expected to ask for increases in October to fund that much-needed investment -- some reports suggest bills could rise by as much as 40%. "There is an urgent need for investment to transform our rivers and seas, radically reduce leakage and protect future water resources," a Water UK spokesperson, who declined to be identified, told me. "It will ultimately be up to Ofwat to determine the appropriate level of customer bills to accommodate needed investment."
Water companies now face a huge public perception problem. Between Thames Water's missteps and polluted public waters, consumers won't necessarily trust that their money is being used responsibly on investing for the future rather than fixing past mistakes or lining shareholders' pockets. The onus is on water companies to deliver visible improvements -- and sooner rather than later. Bloomberg
Lara Williams is a Bloomberg Opinion columnist covering climate change.
