UK Water sector: A deluge of developments

The blog below is an extract from Slaughter and May’s UK Energy and Infrastructure: What’s to come in 2025 publication. For information regarding other sector developments, please click here. 

Amidst intense scrutiny of its financial stability, 2025 is shaping up to be transformative for the UK water sector as it navigates both a rapidly evolving regulatory landscape and the need for “unprecedented levels of investment”.

Water companies will be looking to launch long-awaited infrastructure projects and upgrades now that Ofwat has delivered its final Price Review 2024 (PR24) determinations, providing the sector with a £104bn funding package for the five years to 2030. However, this is 7% less than operators had requested. Companies wishing to challenge their PR24 determinations must do so by 18 February and can expect the appeal process to take approximately 12 months (see our update here).

Accountability for environmental and financial performance is expected to remain a key concern in 2025, reflected in developing legislation and case law, updates to compensation rules, and the likely hardening of Ofwat and Environment Agency approaches to enforcement and penalties for infringements. The impact of recent court decisions may be tested, for example in relation to private nuisance claims and the application of the “polluter pays” principle (see Manchester Ship Canal Company v United Utilities Water [2024] UKSC 22). Stakeholders will also be monitoring the progress of the Water (Special Measures) Bill, which amends the special administration regime for water companies and introduces new governance and remuneration measures. These include bans on bonuses for water executives linked to pollution incidents, and new powers to prosecute responsible executives and directors. Royal Assent is anticipated in the first half of 2025 with further detailed consultations likely to follow.

More profound fundamental sector reforms are possible once the Independent Water Commission has completed its review of how the industry is regulated and made its recommendations to government, expected in Q2 2025. Tasked with seeking solutions to “inherited systemic failures” that will also attract investment and strengthen the financial resilience of water companies, this landmark review is potentially the most significant since privatisation in 1989, although the government has ruled out nationalisation of water companies as too slow and costly. Describing it as a “root and branch review,” the Secretary of State for Environment Steve Reed has noted that “it will be for the Commission to look at how we get to an effective and appropriate model of regulation, including the roles of regulators.” Some commentators have suggested this could include replacing or restructuring Ofwat.

With a delicate balance to be struck between regulatory rigour and ensuring the water industry remains attractive to private capital, it remains to be seen whether the PR24 settlement and broader efforts to “reset” the sector will reassure investors and provide operators with the necessary clarity to embark on infrastructure projects.

For information regarding other UK sector developments, please click here.