Water shares rise as regulator prepares record £88bn funding round

Shares in London-listed water companies soared on Thursday after regulator Ofwat proposed a record £88 billion in “upgrades” funded by higher bills for customers.

The funding package was announced at a time when the sector is in an existential crisis, with water companies facing the threat of renationalisation while dealing with billions of pounds of debt, crumbling infrastructure and a raft of environmental and regulatory failings.

The crisis has seen Thames Water, which is struggling with a £15bn debt mountain, warn it only has enough liquidity to fund its operations for another 11 months, while South East Water has also turned to investors for an emergency injection.

Severn Trent And United Utilities led the FTSE 100 on Thursday afternoon, rising 4.6 and 4.1 percent respectively, while South West Water owner Pennon Group saw its shares rise 9.7 percent to top the FTSE 250 index.

All three groups were happy with the proposals, but none of them appear to have received as much funding as they had hoped for in their business plans.

Aarin Chiekrie, analyst at Hargreaves Lansdown, said: ‘Like a sports team drafting a new player, the water regulator (Ofwat) has set out how much water companies can increase consumers’ water bills between 2025 and 2030.

‘Ofwat has proposed an average annual increase of £19 per year for the next five years, a third less than the increases of around £29 per year that water companies have requested.

“These increases are necessary to pay for infrastructure improvements, repair broken pipes and provide investors with a financial return as a reward for their funding of the company.”

Pennon, which last year handed boss Susan Davy an £860,000 pay package over a parasite contamination scandal, saw Ofwat recognise South West Water’s business plan as a “world-leading plan”.

The plan for the company Sutton and East Surrey Water, which was acquired in January, was judged to be ‘generally good’.

South West Water customers will see their bills rise by an average of £64 to £561 by 2029-30. The company wanted customers’ average annual bills to rise to £596.04 by 2030.

Pennon shares also received a boost from the announcement of new finance director Laura Flowerdew, who was previously finance director at Bristol Water.

Severn Trent, which last year paid boss Liv Garfield £3.2m despite rising sewage spills, has had its business plan rated ‘excellent’

Severn customers will see their bills rise by an average of £93 to £496 by 2030. The company wanted bills to rise to £518 by 2030.

The group also received a boost from a trading update, which said it had made a “strong start” to the year and was on track to meet its 2024 financial targets.

United Utilities said Ofwat’s proposals were “an important step in the regulatory framework aimed at enabling the delivery of crucial investment needed to improve the health of the river, strengthen our network and deliver better services to customers, communities and the environment”.

The group’s customers’ bills will rise by an average of £94 a year by 2030, to £536. United Utilities wanted its bills to rise to £556.14.

All three companies will have the opportunity to formally respond to the proposals by 28 August, with Ofwat expected to publish its final decision on 19 December.

On Thursday, ministers will hold emergency meetings with water companies to discuss the future of the sector.

Executives from Thames Water, South East Water and Severn Trent are among those summoned to meet Environment Secretary Steve Reed.

Mark Crouch, an analyst at eToro, said: “A marked lack of investment in the country’s water infrastructure has become almost disposable in recent years, with water companies accused of putting profits ahead of safety and quality, while enjoying a kind of monopoly due to the lack of competition.

‘Calls are growing louder for the new Labour government to nationalise the water companies. And while that prospect seems unlikely, it will hopefully provide a powerful incentive for businesses to get their act together.’

Hargreaves Lansdown’s Chiekrie added: ‘The new Labour government will want to avoid nationalisation but will still need to intervene as it is such a vital part of the country’s infrastructure.

“It is likely that contingency plans are being worked on to create a special government department to run the business should the financial sector be taken out.”