Every five years in England and Wales, a price review is conducted by the water regulator, Ofwat, to determine the allowed levels of investment and operating costs for the wholesale water companies for the next review period, and the level of household and non-household charges required to deliver that investment. The PR24 price review, which covers the 2025-2030 period, is nearing a conclusion.
While there is still a lot of uncertainty over what the final investment levels and associated impact on customers will be, we do know that prices are going to increase, and quite significantly for many customers. We recognise that these increases come at a time when many businesses are already facing increased cost pressures, which is why we want to help our customers to prepare for the forthcoming changes and work with them to identify opportunities to reduce the amount of water they use, so that they only pay for the water they need.
What happens during a price review?
The regional wholesale water companies have a statutory responsibility to ensure that there is a secure supply of water to meet demand within their region for at least the next 25 years. As part of the price review process, each water company submits its proposed business plan to the regulator, which includes proposals on the level of investment they think is required to deliver safe and reliable water and wastewater services. These plans are then scrutinised by Ofwat to ensure they meet environmental improvement targets; address key challenges; and deliver value for money for customers. Following this assessment, Ofwat publishes its draft determinations.
Although the draft determinations, which were published in July 2024, include provision for the largest investment programme since privatisation (£88billion over the 5-year period), the amounts allowed were significantly less (£16billion lower) than the wholesale water companies asked for, so there are now ongoing discussions between the wholesalers and the regulator to negotiate a final position.
The scale of the investment, and the increased cost of financing it, means bills will rise, with the draft determinations forecasting an average increase of 27% (excluding inflation) for non-household customers over the 5-year period.
Following a period of consultation, where the water companies will try to persuade Ofwat to modify its position, the final determinations will be published. This is currently planned for 19 December 2024, but with a caveat that publication may be delayed until January 2025.
The indicative price increases noted above are likely to change when the final determinations are published, with further increases a very real possibility.
But what does this mean for customer charges for 2025/26?
Each water wholesaler in England has now published their indicative wholesale charges for 2025/26 (see wholesaler websites at business-stream.co.uk/price-increase-support) to provide retailers with an expectation of what the upcoming price increases might look like within their region.
Based on our initial assessment of the wholesalers’ indicative charges documents, the overall increase in water charges for 2025/26 will range from 0.5% to 40%[1], depending on the region, and between 3.5% and 32% for waste. In many cases, wholesalers have included strong caveats that the actual increases are likely to be even higher following the final determination.
There are also huge discrepancies between regions. Southern Water, for example, is currently proposing an average increase of 31% for combined water and waste water services within the first year to match their planned profile of asset investment. And we’re anticipating an increase of up to 50% for Southern Water customers impacted by the unwinding of the large user tariff, which historically enabled large-water users to pay less for their water. While we support the decision to remove this tariff to encourage businesses to use less water, this will be a huge increase for impacted businesses to absorb.
As a retailer, we do understand the predicament that wholesale companies are in, and that prices need to increase to help address the current challenges impacting the sector; however, we also recognise the significant impact this will have on many of our customers.
We are urging wholesale water companies to consider the impact of these increases on businesses that are operating in what is already a challenging economic environment. We’ve written to wholesalers asking them to avoid bill spikes by phasing the price rises evenly across the five-year price review period, with annual price increases capped at no more than 10%. And we would also like to see additional provisions put in place for those customers likely to be most impacted.
What can business customers do?
While nothing has been confirmed yet, the reality is that substantial investment will be needed to address the current water infrastructure challenges; manage the impact of climate change; address water scarcity concerns; reduce pollution; and improve service levels, and we are anticipating customer charges will increase as a result. To help mitigate this impact, we’d recommend that businesses consider what they can do to reduce their water costs – and we’re here to help with that.
There is scope for customers to reduce costs by lowering their consumption. The average business in the UK uses around 30% more water than it needs to – suggesting that there’s a real opportunity for businesses to reduce their water use and reap the benefits of doing so. In addition to softening the blow of increased wholesale prices and reducing both water and energy costs, it is also environmentally responsible and can help support companies’ sustainability targets and environmental stewardship programmes.
We can help customers to understand their water use by installing water tracking devices, such as Automatic-Meter Readings (AMRs) and using sophisticated data analytics to help identify opportunities to make savings. And we can deliver savings by working with our customers to detect and address any consumption spikes and by installing the right technologies to reduce water use.
Water efficiency isn’t a new concept, but it’s never been more needed. It’s an effective solution to lessening the impact of the forthcoming price increases while also helping to address one of the biggest environmental challenges we’re facing. We would encourage all of our customers to take action before the new prices come into effect. We’re here to help and will continue to do everything we can to support our customers.
[1] Up to 50% for some customers in the Southern Water region who are impacted by the continued unwinding of the Large User Tariff