Ofwat is warning average customer water bills could reach over £1,000 by 2050, before inflation - and around £2,000 including the expected impact of inflation.

The warning comes in Ofwat’s response to the independent commission on the water sector regulatory system – the government’s water inquiry led by Sir Jon Cunliffe. The response is accompanied by a detailed 111 page annex.

In addition to significant bill increases, Ofwat also warned that a growing population, climate change and heightened concerns about the impact of abstraction on river health could result in a shortfall of 5 billion litres of water a day by 2050 with an increased risk of water scarcity, particularly in the East and South East.

The regulator explained that around an estimated £270 billion needs to be invested over the next 25 years, alongside £50 billion on 30 new major projects, to address the shortfall and achieve environmental objectives, which will ultimately have to be paid for by customers.

The submission states:

“Significant investment is needed to provide for these new sources of water, as well as to improve river water quality standards, to help meet net zero and for other improvements to the network. This is reflected in the steep increase in enhancement capital expenditure …..

“The additional investment could mean average bills reach over £1,000 by 2050, before inflation (and around £2,000 including expected impact of inflation).”

According to Ofwat, public trust has been significantly undermined by the sector's failure to reduce the amount of sewage spills into rivers and seas along with concerns about excessive dividends and executive pay.

“This has also led to falling confidence in the adequacy of the planning and regulatory framework for the sector, and in its regulators' ability to hold companies to account to comply with their obligations. Accordingly, if confidence is to be restored, not only must company performance be transformed but the planning and regulatory framework also needs to be reset.”

Ofwat told the commission that it was strengthening the regulation of asset management to ensure companies are making the right decisions for the long term, and not allowing assets to deteriorate in pursuit of short-term gains.

The response sets out the regulator’s view of the need for changes that deliver three key outcomes:

Reform of the strategic planning framework so that it enables investment at the right place and at the right time, considering affordability, deliverability and investability.

The current planning arrangements feature parallel processes, which lack effective strategic guidance, ownership and oversight. This has contributed to slow responses to critical challenges, such as reducing discharges from storm overflows and enabling major new water resources, and created the risk of favouring more expensive, and less environmentally friendly, solutions.

Ofwat is proposing a new holistic, strategic planning function for government and regulators to more effectively and collaboratively enable better optioneering and decision making in developing coherent long-term strategic investment plans for the sector. The regulator suggests that this could build on learning in the energy sector with the National Grid Electricity System Operator (NESO) and give the water sector a "guiding mind" to better plan its development.

Streamline the regulatory landscape so that it is less complex, more predictable and easier for all stakeholders to understand and engage with

The current framework creates both overlapping responsibilities and potential for gaps in the oversight of company performance and effective enforcement of environmental obligations. According to Ofwat the review creates an opportunity to better establish clear responsibilities and defined roles – the regulator proposes a package of changes that realign responsibilities across regulators and improve co-ordination across Government, regulators and companies.

Strengthen economic regulation to drive more effective outcomes

Ofwat says it welcomes the government's proposed reform of regulation for major projects in the water sector and that a competitive model has a proven track record of delivery, enabling the construction of the £5 billion Thames Tideway Super Sewer.

The regulator also wants to see further reforms to streamline appeals to price controls and to strengthen its powers with respect to company financial resilience.

Other proposals include creation of new Strategic Water and Wastewater Planning Unit

Other proposals include the creation of a Strategic Water and Wastewater Planning Unit (SWWPU) to improve planning in England in the form a collaboration across regulators which could provide advice to a Defra chaired steering group including CEOs from regulators. The steering group could consider high level goals for the water sector and provide recommendations to the Secretary of State.

The regulator suggests this could be streamlined to align with the framework used in the energy sector, which would also better enable the CMA to take a consistent approach to setting the cost of capital, increasing regulatory predictability and improving investor confidence.

In addition, a clear, comprehensive and stable framework for strategic planning would also reduce the tendency by companies - and as a result, the supply chain - to focus on five-year periods, which Ofwat sees as more effective than changes to the price control period

Ofwat told the Commision:

“We have not, to date, found compelling arguments to changing. We have consistently concluded that, for our core price control, five years offers a balance between the lead times for investment and ability to forecast ongoing costs.”

However, the regulator thinks the price review appeals framework needs to change, saying the current appeals framework dates from 1989 and requires onerous costly and lengthy redeterminations by the Competition and Markets Authority.

Construction supply chain capacity and deliverability

In response to the Commission’s call for views on how to take account of the capacity of construction supply chains in the various investment planning processes, the regulator goes into some detail in the Annex, saying the step change in investment for PR24 has put supply chains under pressure.

“By planning in silos and without considering deliverability until after plans have been approved, the sector has produced plans which make delivery even harder than it needs to be,” the submission says.

Ofwat agrees that deliverability should be considered as part of the investment planning process, including the need for coordination so that large infrastructure can be phased, for example to avoid multiple projects starting simultaneously.

The regulator also points out that it has asked government to include major water sector construction projects in the National Infrastructure and Construction Pipeline to help the supply chain prepare for the future.

According to Ofwat, a refreshed National Infrastructure and Construction Pipeline would help supply chains and government by providing a credible forward view of upcoming infrastructure projects and programmes.

Click here to download Ofwat's main submission to the Independent Water Commission's call for evidence

Click here to download Ofwat's  detailed annex addressing each area outlined in the call for evidence