Water companies in Wales have welcomed an announcement from Ofwat around their investment programmes.
Ofwat’s 2024 Price Review (PR24) final determinations will see a quadrupling of new investment in Wales and England over the next five years. It says this will provide companies with the funding needed to transform performance, ensure supplies for future generations and to deliver cleaner rivers and seas.
Welsh Water said it was “keen to deliver” against long term objectives to improve performance, adapt networks to better cope with high volumes of rainwater in sewers, and do more to protect rivers and seas.
Hafren Dyfrdwy – which serves 87,000 water and 22,000 waste customers in Powys, Wrexham, and parts of Flintshire, Denbighshire and Montgomeryshire – said it would deliver “record levels of investment” to improve its water and waste network and boost its environmental performance after Ofwat approved its £262 million plans for the next five years.
Bills will rise to help finance the investment programme. Ofwat said that bills in Wales and England will increase by an average of £31 per year (36%) before inflation between now and 2030.
For Welsh Water, the average bill will increase by 42% from £455 in 2024/25 to £645 in 2029/30.
Hafren Dyfrdwy’s average bill will also increase by 42% from £392 in 2024/25 to £557 in 2029/30.
A spokesperson for Welsh Water said:
“Ofwat’s announcement today responds to our submission for record investment over the next five years in order to deliver significant improvements to the services we provide.
“We welcome the fact that Ofwat has responded to the representations that we made after Draft Determination to allow more of what we had requested in our business plan, recognising that there are some very challenging performance targets including reducing leakage and spills from storm overflows.
“The Final Determination would see customer bills increase notably ahead of inflation. Any price increases are never welcomed, and we have always sought to keep these to a minimum, however, bill increases have not kept up with inflation over the past 15 years. Whilst Ofwat has challenged us hard on our plans and on efficiency, we – like the rest of the sector – would not be able to finance the needed increase in investment in a sustainable manner without increasing bills. We will ensure, however, that we continue to provide the most financial support we can to customers who struggle with their bills.”
Hafren Dyfrdwy’s Managing Director, James Jesic, welcomed Ofwat’s backing and said:
“Ofwat’s final decision will enable us to deliver record levels of investment to meet the growing expectations of our customers, to increase our resilience to climate change and to tackle key priorities such as supply interruptions and spills.”
Hafren Dyfrdwy said it would be more than doubling the number of people it helps financially and by 2030 it expects to be helping more than 7,000 customers with paying their bill.
David Black, Ofwat Chief Executive, said:
“Today marks a significant moment. It provides water companies with an opportunity to regain customers’ trust by using this £104 billion upgrade to turn around their environmental record and improve services to customers.
“Water companies now need to rise to this challenge. Customers will rightly expect them to show they can deliver significant improvement over time to justify the increase in bills. Alongside the step up in investment, we need to see a transformation in companies’ culture and performance. We will monitor and hold companies to account on their investment programmes and improvements.
“We recognise it is a difficult time for many, and we are acutely aware of the impact that bill increases will have for some customers. That is why it is vital that companies are stepping up their support for customers who struggle to pay.”
Ofwat’s role is to scrutinise the cost of proposals in company business plans to make sure all investment is good value for money, and then to hold companies to account for that investment.
The body sets an allowed return that provides a reasonable return for the risks that investors face for their investment. There are opportunities for investors to earn enhanced returns where companies deliver great levels of service to customers and the environment, and the incentive mechanisms ensure investor returns are lower than the allowed return where performance is poor.
In setting the rate of return, Ofwat has to also take account of current market conditions including recent increases in the cost of finance. It said this had seen the allowed return for the sector increase to 4.03% compared with 3.72% at draft determinations.
This reflects a cost of equity of 5.1% and debt of 3.15%, underpinned by a gearing ratio of 55%, Ofwat said. This will allow investors in an efficiently-run company to earn a reasonable return on their investment, it added.
In addition, Ofwat forecasts that companies will need to raise levels of finance that significantly exceed the levels raised in any previous regulatory period. Companies have forecast a need for around £7 billion of new equity but Ofwat said it considered that the equity financing requirement was likely to be higher than this. It used a figure of £12.7 billion when assessing the financeability of company plans.
