Water companies will be forced to return money that is not spent on upgrading their sewerage networks to customers, under new plans being unveiled by the Government, i can reveal.

In his first intervention on Britain’s sewage crisis, Environment Secretary Steve Reed said water companies will no longer be allowed to divert infrastructure funding to pay for bonuses, dividends or salary increases.

It comes ahead of a draft decision by regulator Ofwat on Thursday over how much it will allow bills to increase to tackle to crisis. Firms have proposed increases of up to 72.87 per cent, meaning some customers could be paying up to £726.64 on their annual water bill by 2030.

Mr Reed also revealed plans to double the compensation households receive when their water supply is disrupted and to set up new panels for customers to hold the utility firms to account.

“We will never look the other way while water companies pump sewage into our rivers, lakes and seas,” he said.

“This unacceptable destruction of our waterways should never have been allowed, but change has now begun so it can never happen again.”

Water companies are already forced to return money to customers if they fail to meet separate targets linked to environmental performance and leakages. This is done via deductions to bills in the following year, rather than cash back.

It is understood that it will be up to regulator Ofwat to decide how exactly customers will be refunded if water companies do not spend their allocated infrastructure funding. Ofwat is the sector’s independent economic regulator but takes policy direction from ministers within the Department for Environment, Food and Rural Affairs.

Campaigners are likely to welcome the early intervention from Labour during the party’s first week in power.

However, it remains unclear when the Government plans to set in motion some of the other manifesto proposals to clean up waterways, including prosecutions for water bosses and automatic fines for firms.

Labour is also yet to commit to all the policies outlined in i’s manifesto to Save Britain’s Rivers and waterways. These include increased funding for the Environment Agency and farmers so they can reduce agricultural pollution; plus a “green duty” on Ofwat to put more emphasis on the environment when making decisions over water firms’ business plans.

On Thursday afternoon, Mr Reed will hold a meeting with water company chief executives to set out his plans for the sector, which has faced intense scrutiny for the dumping of sewage into Britain’s rivers.

The meeting will take place on the same day that Ofwat publishes its highly anticipated decision on water companies’ business plans for the next five years.

The draft decision will set out how much water companies will be allowed to increase customer bills to pay for the upgrades needed to reduce sewage pollution.

Firms have proposed rises of between 13.6 and 72.87 per cent over the five-year period. This means households would be paying up to £726.64 per year for water by 2030.

Ofwat is expected to allow water firms to increase bills, and only by slightly less than they are demanding.

What Ofwat’s decision means for the water industry

On Thursday morning, regulator Ofwat will publish its draft decision on whether to approve the business plans submitted by water companies. 

These plans set out how much firms propose to spend on their infrastructure from 2025 to 2030, and how much they plan to increase bills to fund it.

In response to public outrage over sewage spills, water companies have proposed a record investment of £96bn in their infrastructure over the five-year period. 

Ofwat’s draft decision will be the first indication of how much the regulator will allow bills to rise to meet targets on sewage spills. The companies will respond to the decision and a final ruling will be made by the regulator in December, with the new bills to kick in April next year. 

Campaign groups have expressed fury at the prospect of huge bill hikes and say Ofwat should force companies and their investors to pay for upgrades.

But Ofwat faces a standoff with investors over the bill rises. In March, Thames Water’s investors pulled the plug on £500m of emergency funding as it argued the regulator was making the firm “uninvestable”. 

Water companies have proposed the following bill hikes to pay for infrastructure investments over the five-year period:

• Southern Water: 72.87% increase to £726.64 by 2029/30
• Wessex Water: 35.73% increase to £690 by 2029/30
• Thames Water: 43.96% increase to £627 by 2029/30
• Dŵr Cymru: 29.06% increase to £602 by 2029/30
• South West Water: 19.97% increase to £596.04 by 2029/30
• Anglian Water: 16.75% increase to £573.06 by 2029/30
• Yorkshire Water: 32.27% increase to £569.40 by 2029/30
• Hafren Dyfrdwy: 41.21% increase to £560 by 2029/30
• United Utilities: 25.21% increase to £554 by 2029/30
• Severn Trent Water: 35.70% increase to £546 by 2029/30
• Northumbrian Water: 13.60% increase to £471.47 by 2029/30

Mr Reed has outlined four policies the Government would introduce “to clean up the water industry to cut sewage pollution, protect customers and attract investment to upgrade its crumbling infrastructure”.

This includes plans to write to Ofwat to ask them to make sure funding for infrastructure investment is ringfenced and cannot be spent on bonuses, dividends or salary increases. This will include infrastructure investments to prevent sewage spills, among other things.

Any promised infrastructure funding that is not spent on upgrades should be refunded to customers, he said.

Last year, 11 of the 16 water companies in England and Wales were forced to give money back to customers. However, water bills have continued to rise despite firms being penalised

For example in the 2023/24 financial year, bills increased by an average of 7.5 per cent despite water companies being penalised for missing targets.

Firms have been heavily criticised in the past for failing to spend money on their infrastructure, while paying large dividends to their investors.

In its most recent performance report for the sector, Ofwat found water companies had failed to spend £587m set aside for improving their assets between 2020 to 2023.

Meanwhile, those in England paid £2.5bn in dividends in the two financial years since 2021, analysis by the Financial Times found.

Alongside ringfencing infrastructure spending, the Government will consult on doubling the amount of compensation customers will receive when their basic water services are affected.

Depending on the circumstances, customers are typically entitled to £20 in compensation if their water supply is disrupted for 24 hours, followed by £10 for each additional day.

Ministers will also look to expand the circumstances under which customers receive compensation to include “Boil Water Notices”, which are issued when there are contamination concerns over drinking water in a region.

The move is likely in response to the recent parasite outbreak in Devon that saw more than 100 people reporting a diarrhoea-type illness and around 16,000 homes and businesses being ordered to boil their water, with some homes affected for almost two months. South West Water was forced to pay out around £3.5m to affected customers.

Mr Reed will also order water companies to change their governing rules to make the interests of customers and the environment a primary objective.

New customer panels will be introduced with the power to summon board members and hold water executives to account, the Secretary of State said.

However, he stressed that change will “take time” to improve Britain’s waterways, and said the Government will outline further steps over “the coming weeks and months”.

It’s currently unclear when Labour will set in motion the other policies in its manifesto, including bringing criminal charges against water executives that break the law, and introducing automatic and severe fines for polluting firms.

It is possible that more detail will be provided in the King’s Speech, which is scheduled for next week.

While Labour’s proposals are likely to be welcomed by campaigners, the Government is yet to commit to some of the other changes groups have been calling for.

During the general election campaign, i published a manifesto, backed by over 20 leading environmental groups, that set out five key pledges the new Government must commit to to Save Britain’s Rivers.

While Labour has committed to some of these policies, it is yet to commit to wider changes, including more drastic reform of the regulatory system and a boost in funding for the Environment Agency, which polices sewage spills.

It is also unclear how farmers will be funded to help them manage their land in a nature-friendly manner.

How Labour’s manifesto compares to i’s

1. RIVER HEALTH: 77% rivers in good health by 2027

What i says: Within its first six months in power, the Government must publish a roadmap on how the UK is going to achieve its legal target of 77 per cent of rivers being in good ecological health by 2027. This must include increased funding for the Environment Agency.

What Labour says: Its manifesto contains no mention of the legal target or of increased funding for the Environment Agency.

2. SEWAGE: Sewage spills will not damage high-priority areas – including bathing spots and nature sites – by 2030

What i says: Untreated sewage should not be causing damage to high-priority sites (bathing spots, protected nature sites, National Parks and chalk streams) by 2030. Water companies who fail to meet this target will be prosecuted.

What Labour says: It has said it will pursue criminal charges against the executives of water companies responsible for persistent pollution, but currently has no plans to toughen sewage spill targets beyond what has been set by the previous government. Water firms will be forced to amend their governing rules to make the interests of customers and the environment a primary objective.

3. WATCHDOG: Regulators will stop water companies destroying the environment in pursuit of profit

What i says: The Government must publish a plan to reform the regulation of water companies, including tougher powers for Ofwat to restrict dividends and bonuses for underperforming water companies. A “green duty” will be placed on Ofwat, which will force the regulator to place greater emphasis on the environment when making decisions over companies’ business plans.  

What Labour says: The party will give regulators new powers to block the payment of bonuses and bring criminal charges against executives who pollute waterways, and will impose automatic and severe fines for wrongdoing. Ofwat will be asked to ensure customers are refunded if infrastructure money is not spent, so that it cannot be diverted to pay for bonuses or dividends. Labour has not committed to a “green duty” for Ofwat.

4. BATHING: Create 100 clean bathing spots in rivers by 2030
What i says: 100 clean bathing spots must be created in England by the end of the parliament, and the Environment Agency must start monitoring water quality throughout the year at these sites.

What Labour says: The party has made no reference to bathing spots in its manifesto.

5. FARMING: Farmers must be funded to improve water quality, and face enforcement action if they damage the environment

What i says: Within its first year in power, the Government should strengthen its Environmental Land Management scheme so farmers are given more grants, support and advice to undertake activities that will improve water quality. 

What Labour says: It says it will ensure “environment land management schemes work for farmers and nature”, but is yet to provide more detail on what that will entail. There is no mention of the agricultural budget in Labour’s manifesto.

The Government has not yet indicated how it plans to deal with Thames Water, which warned on Tuesday that it would run out of money in May next year if it does not receive a new cash injection from investors.

A source close to Mr Reed said on Wednesday that it was “a matter for the independent regulator [Ofwat] to work with Thames to ensure it is financially stable”.

The company’s investors have refused to pump more money into the firm as they argue a tougher regulatory environment has made the company “uninvestable”.

Ofwat has confirmed it is investigating the six figure bonuses paid to executives at Thames Water last year to determine whether they complied with tougher new rules on the pay for bosses of firms that missed environmental targets.

Some will be disappointed that the new Labour Government is not using the crisis as a reason to renationalise water firms, but the Chancellor Rachel Reeves has previously made clear this option is not on the table.

A number of Labour MPs and unions, including GMB and Unison, have called for water companies to be renationalised. The Green Party, which achieved its best-ever performance in last week’s election, included a plan in its manifesto to take water companies back into public ownership.