On Thursday, Ofwat, the industry regulator, will announce its “final determination” on how much water bills will rise over the next five years.
At the same time, Thames Water, the largest water company in Britain, is hoping to secure a £3bn bridging loan to avoid running out of cash in the spring.
The rise in water bills is the latest chapter in the story of Britain’s fully privatised water system, which has faced significant challenges over recent years.
To understand the causes behind the looming price hikes and the financial strain on water companies, it’s important to look back at the origins of the sector’s privatisation in 1989.
1. The Origins of Privatisation: A £7bn Windfall for the Treasury
In 1989, Margaret Thatcher’s government sold off ten state-owned water and sewage companies in England and Wales, raising £7bn for the Treasury.
The idea behind privatisation was that the private sector could raise the billions needed to modernise the country’s Victorian-era sewage and water systems, without burdening the taxpayer.
However, this led to a steady accumulation of debt, with water companies now facing a combined £70bn of net debt.
2. Growing Debt and Rising Costs
While water companies have made substantial investments in infrastructure, including efforts to reduce leakage and improve water quality, the challenges remain.
The UK has not built a new reservoir since 1992, and public expectations around water quality have risen. In 2023 alone, the industry reported more than 460,000 sewage outflows, prompting significant public outrage.
Companies have spent billions improving infrastructure, but it has not been enough to address the growing demands of climate change, population growth, and sewage control.
3. Water Industry Profits: Dividends Amidst Crisis
While the industry has invested billions into improvements, shareholders have reaped substantial rewards.
According to Ofwat, water companies have paid out £83bn in dividends over the years. These payouts have raised concerns, especially in the face of public frustration over sewage discharge and water quality.
The industry insists that dividends are necessary for investor confidence, but recent scandals have put the justification for these payouts under scrutiny.
4. A Rising Cost of Capital: Water Debt Becomes More Expensive
For years, water companies benefited from cheap borrowing costs, but that has changed. Following the global inflation spike in 2022, the cost of borrowing for water companies has surged, particularly for struggling firms like Thames Water.
In July 2023, the cost of water company bonds overtook that of other UK corporate bonds. With borrowing costs rising, companies are under increased financial strain, leading them to request even higher customer bills to cover the costs of infrastructure investment.
5. The Impact on Water Bills: A Looming 40% Increase
As water companies face higher costs for borrowing and infrastructure investment, they are pushing for significant hikes in customer bills.
In July, Ofwat indicated that bills could rise by an average of 21% to fund £88bn of spending, but the industry is now asking for a 40% increase to cover £107bn in investment.
This would represent the largest bill hike since privatisation. With many companies already struggling financially, this increase is inevitable unless regulatory changes are made to address the sector’s financial instability.
What This Means for Consumers
The combination of rising debt, higher borrowing costs, and necessary infrastructure investments means water bills are set to rise.
Although the exact amount will depend on where you live, water bills could increase by as much as 40% in the coming years.
Unlike other privatised utilities, you cannot switch providers, so consumers have no choice but to bear the rising costs.
