Summary

Water is one of earth’s most precious resources. It is essential for human life, agriculture, and industry. But water is not always treated with the care and importance it deserves, including in the UK.

The Environment Agency’s annual water and sewerage company performance assessment for 2021, published in July 2022, found that the environmental performance of water companies was at its lowest ever level and most companies’ performance was declining.1 The Environment Agency told us that unless change is made, in 20 years the UK will not have enough water to match demand.2

Water companies, which supply our water and maintain associated infrastructure for water and sewage, must improve their practices dramatically to prevent further damage to the environment and secure future supply.

Since the privatisation of the water industry in England and Wales in 1989, there have been some improvements in the sector, such as the supply of good quality drinking water, investment in wastewater treatment, and protecting homes from sewer flooding. Nevertheless, pressures on the sewage network have increased substantially over time due to a combination of population growth, property development and climate change. Levels of investment have not risen to match these demands. The result is a network unable to cope, and which relies on releasing polluted water into the environment.

Nor has investment kept pace with the demands of future water supply needs, leaving us lacking appropriate plans and infrastructure to deal with future demand, and the loss of billions of litres of water to leakage every day.

Ofwat and the Environment Agency must go further to hold water companies to account for pollution.

It appears that it has often been individuals and organisations that have brought pollution issues and the abuse of storm overflow permits to public attention.

Ofwat and the Environment Agency only began penalising and prosecuting water companies for causing environmental damage in recent years, after monitoring of storm overflows and wastewater treatment sites was rolled out. The Environment Agency told us that it has not had the necessary funding or data access to take sufficient enforcement action against water companies. With widespread monitoring and data now in place, the Government must ensure that the Environment Agency has adequate funding to monitor and enforce environmental offences by water companies. Greater transparency is also needed and the regulators should explain how and when they will ensure open data on environmental performance is provided consistently by all water companies as a matter of priority.

Requiring water companies to disclose information to the same standard as publicly listed companies has the potential to improve their governance and increase scrutiny of their financial arrangements. Water company executives and board members should not receive large bonuses while their companies continue to fail the environment. Executives and board members should face greater individual accountability and sanctions for egregious environmental crimes, including being barred from working in the sector again.

Ofwat has failed to ensure companies invest sufficiently in water infrastructure, choosing to keep bills low at the expense of investment. Greater investment in the water industry is now urgently needed, accompanied by a single social tariff to protect vulnerable customers from bill increases.

Ofwat is responsible for setting the prices consumers pay for water and ensuring companies meet the conditions of their licenses and statutory obligations. This includes a requirement on water companies to provide and maintain sewers, to deal with the contents of those sewers, and to certify to Ofwat that they have the resources to do so.

The five-year Price Review process is appropriate for iterative improvements to underlying assets but long-term investment in environmental improvements and increasing water supply has remained low. Ofwat should find ways to increase investment outside the Price Review process and consider the important role that third-party competition could play in reducing costs, as it did with the Thames Tideway tunnel project.

We heard that the investment needed to update fully the water and sewerage systems could run into tens or hundreds of billions of pounds over multiple decades. The Secretary of State told the Committee that public money was not available for this. Therefore necessary upgrade investment will be financed by water companies, as they are primarily responsible for adequately maintaining their water and sewage networks, and/or specialist infrastructure investors.

Customer bills will likely increase, which by 2025 will have been flat or falling for 15 years in real terms. The Government should legislate to introduce a single social tariff in time for its inclusion in the next Price Review, in order to protect vulnerable customers from bill increases.

Cheaper, more innovative solutions to reduce water pollution should also be investigated, including the potential of nature-based solutions, such as the use of uncropped arable land for storing water. A move to outcomes-based regulation could support such innovation. The enactment of Schedule 3 of the Flood and Water Management Act 2010 and the subsequent requirement for new developments to have sustainable drainage systems could also provide a significantly lower cost way to reduce pressure on the sewage system.

The Government has historically failed to engage sufficiently with the sector and its regulators. The Government and regulators including Ofwat and the Environment Agency have not approached the key issues facing the sector in a joined-up way, including reducing water pollution and securing future supply. The Government’s advice to Ofwat has not given clear guidance on how it should balance and prioritise its duties, even though it provides such guidance to other regulators. Putting right the problems in the infrastructure of the water and sewerage systems after decades of under-investment is urgent but it must be understood that this is going to take a decade or more. It is also going to require more effective coordination and proactivity on the part of the Government, regulators and water companies.

Ofwat is required to balance statutory duties that can be contradictory—for example, protecting the short-term interests of consumers by keeping bills low while also ensuring enough strategic investment is made to secure future supply. Ofwat has tended to focus on keeping bills low. Further clarity is needed to empower Ofwat to take the strategic decisions necessary to address long-term issues and to ensure accountability to Parliament.

The Government must do more to support Ofwat and the Environment Agency in reaching their targets on pollution reduction and future supply. For example, the Government’s Storm Overflows Discharge Reduction Plan lacks bite. Proper monitoring of the Plan’s progress is required. As part of its Plan, the Government should consider banning the sale of wet wipes that are not rapidly biodegradable.

The draft National Policy Statement for Water Resources Infrastructure should be designated to facilitate the building of much-needed infrastructure such as reservoirs. The Government must also set out clear policies and expectations, allowing regulators and water companies to work together to support consumers to make water-friendly decisions. The Government has set an ambitious target to reduce water demand but little progress has been seen in this area. Tools such as mandatory water metering could aid this effort as only about half of households currently have one.

We therefore call on the Government to publish a National Water Strategy, which should address these issues in a holistic way and facilitate a joined-up approach. The Strategy should set clear expectations in relation to the quality of the water environment and the resilience of water supplies, giving regulators clear benchmarks to work towards.