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Many of those who have sunk capital into the UK water sector have ended up soaked through. Thames Water has long skirted with collapse. Debt-laden South East Water has suffered outages, while listed utility Pennon’s stock has halved over the past five years. Insurer Assured Guaranty has stopped covering new financing for UK water and sewage companies.
Yet for investors willing to hold their noses, this might be the time to take the plunge — as Swedish investor EQT did this week with Yorkshire Water. There are signs that the regulatory regime, responsible for much of the current mess, is slowly being cleaned up.
In the past, Ofwat’s focus on keeping household bills low left water utilities without enough money to pay for the rising cost of maintaining and improving an ageing network. And if performance targets set by the regulator were missed, the companies were fined, draining cash even faster. Southern Water and Thames Water have been among those most frequently chastised. It hasn’t helped, either, that some utilities’ backers raised debt to pay dividends.
One first positive step has already been taken. Ofwat has approved bill increases of 36 per cent from April 2025 to 2030, and doubled the total amount that water companies are allowed to invest this regulatory period. That sets the stage for some growth in water utilities’ enterprise value.
If companies were to deploy the full £104bn investment allowance, the sector’s “regulated capital value”, or RCV — the infrastructure that drives returns — could grow by roughly 32 per cent in real terms by the end of the decade, says Ofwat. That’s an annual real growth rate of 5.8 per cent, much better than the near 0 per cent real RCV growth the regulator expected at the start of the 2020-2025 period, as Bernstein analysts highlight. That has helped lift listed utilities’ share prices over the past months.
There is more to do. The rise in bills is smaller than it looks: industry body Water UK points out that, adjusting for inflation, charges are only about 5 per cent higher than in 2010. The doubled investment allowance, too, comes off a very low base. Sir Jon Cunliffe, chair of the Independent Water Commission, suggested in 2025 that applying the approach used by Scotland’s regulator would show the need for much more. Returns remain another obstacle. Ofwat’s allowed return on equity is 5.1 per cent. Thames Water argues it needs closer to 5.7 per cent to attract investors.
Yet despite the remaining holes, the regulatory environment is becoming more functional. And Cunliffe’s broader review, which recommends doing away with Ofwat in favour of a toothier super-regulator has been backed by ministers. Companies hope that it will lead to further reforms before the next price review in 2029.
Despite the recent price bump, valuations are still relatively low. Both Severn Trent and United Utilities have more than halved over the past three years, when their price is measured as a multiple of their expected earnings. At these levels, investors may discover that UK water can once again produce respectable income streams.