Calmer waters? The UK Government reveals its plan to reform the water sector

On 20 January 2026, the Secretary of State for Environment, Food and Rural Affairs published the UK Government’s long-anticipated White Paper on water sector reforms: ‘A New Vision for Water’. The measures proposed are aimed at safeguarding the security of England’s water supply, protecting the environment and recalibrating regulation of the sector. 

Unveiled against a backdrop of controversy surrounding industry standards and the performance of regulators, the proposals follow almost six months after publication of the Independent Water Commission’s (the Water Commission) recommendations.

The White Paper aims to set out a series of reforms designed to provide greater regulatory certainty, predictability, and transparency for customers, investors and water companies. In particular, the White Paper tasks itself with transforming the sector to become a more attractive and reliable investment prospect for longer-term investors. 

We outline below the key takeaways from the White Paper of particular interest to companies and their investors:

1. Recalibrating water regulation

The government aims to restore public and investor trust in the water sector by creating a more robust and transparent regulatory framework. Key changes include:

• A new, integrated single regulator for water: As recommended by the Water Commission, the Government proposes to establish a new, integrated regulator by combining the functions of Ofwat, the Drinking Water Inspectorate, and the water-related functions of the Environment Agency and Natural England. This "powerful new regulator" will provide an integrated view of both economic and environmental performance, overseen by a chair-designate. The existing agencies will retain their full powers until the new regulator is established, with senior leadership from the four existing regulators seeking to improve collaboration ahead of the establishment of the new regulator.
   
• The new regulator will also:
  • Adopt a supervisory approach to regulation: Moving away from industry-wide benchmarking and economic modelling, the new regulator will adopt a supervisory approach to better account for company-specific risks and capabilities, including by establishing teams with company-specific expertise.
  • Embed ‘constrained discretion’: Balancing rule-based decision-making to incorporate flexibility. This new approach is intended to empower the new regulator with greater flexibility to improve outcomes for people, the environment, and economic growth, within clearly defined legislative constraints.
  • Introduce a Chief Engineer position to ensure engineering expertise is central to the new regulator.
  • Be in place for PR29? The White Paper does not mention the “bridging” price control or extension of PR24 recommended by the Water Commission, and instead outlines the ambition to implement reform in the next price review, with a transition plan setting out a planning framework and assumptions for the next price review expected to be published in the coming months.
     
• Oversight of ownership and governance: The Government aims to create a regulatory system that supports long-term business models and prevents "inappropriate financial engineering" by investors. Key changes include:
  • A transparent process to assess whether changes to ownership models, for example to a “not-for-profit” model, should proceed, and ensure customer interests are properly reflected in the decision.
  • The White Paper refers to the Government’s proposed amendments to the National Security and Investment Act (NSIA) regime to include the water sector within the sectors subject to mandatory notification. Practically, this will mean that any transactions resulting in significant changes to the ownership of water companies will be subject to a mandatory and suspensory notification, requiring approval from the Secretary of State prior to closing. The Government response to the NSIA consultation will outline the approach.
  • The White Paper is silent, though, on the Water Commission’s recommendation that the new regulator should have additional powers to block material changes to the ultimate controller(s) of water companies.
     
• Performance Improvement Regime (PIR): A PIR will be introduced for poorly performing companies to prevent them from falling into a "cycle of decline". In line with the Water Commission’s recommendations, contingency Special Administration Regime (SAR) plans will also be required, at least for companies at higher risk of failure and potentially for all water companies. These plans would set out how these companies would ensure that any special administrator, once appointed, would be able to maintain delivery of critical services and facilitate restructuring or a sale if SAR is triggered.
   
• Improved culture and leadership: Building on existing measures like the executive accountability measures recently introduced by the Water (Special Measures) Act 2025, the Government is considering a new regime for senior accountability to embed stronger ownership and accountability within the sector.

2. Ensuring investors receive a ‘fair bet’

Recognising the need for substantial investment (at least £290 billion by 2050) to upgrade water and sewerage infrastructure, the White Paper introduces measures which aim to reset the balance of risk and return, and ultimately making the sector more attractive to longer-term investors.

• Long-term planning: Signalling a move away from short-termism, the Government will retain the current five-year cycle for price controls but introduce a 5/10/25-year planning approach. This provides short-term funding certainty for the first five years, more indicative commitments for the following five, and high-level funding needs over a 25-year horizon. 

  As part of this longer-term approach, the new regulator will also be tasked with improving the creditworthiness of the industry, so that it can provide long-term investors with the lower risk environment that they seek. 

• Rationalized incentives: The incentives framework, which has become increasingly complex and concerning to investors in recent years, will be simplified and rationalised to reduce regulatory complexity and volatility in investor returns.
   
• Financial resilience: The regulator will work with companies and investors to ensure companies maintain manageable debt levels and remain financially resilient.
   
• Creating more opportunities for investment and competition in the sector, including by:
  • Building on the success of the Thames Tideway Tunnel by amending the 2013 Specified Infrastructure Projects Regulations (SIPR) to enable a wider range of projects to qualify and expanding the scope to all types of water infrastructure.
  • Further exploring how green bonds can support greater investment in the sector.
     
• Ensuring a consistent regulatory approach across regulated sectors, including by:
  • Aligning with other regulated sectors, including in how these regulators set the cost of capital.
  • Replacing the current system of redetermination of price control decisions by the Competition and Markets Authority (CMA) with a more focused appeals process similar to that in the energy sector.
  • Amid proposed changes to the CMA’s decision-making panel, the Government separately announced on 20 January 2026 that it will review the panel’s role in relation to CMA regulatory appeals, including water.

3. Changes to the price control process, and third-party statutory obligations

• A series of changes to the price control process for upcoming price reviews, including PR29, including:
  • Clearly defining and ringfencing capital maintenance expenditure so that it can only be spent on maintaining assets. For all future price reviews, companies will receive separate allowances for capital maintenance, operating expenditure, and enhancement capital expenditure.
  • Abolishing the Quality and Ambition Assessment to ensure companies are not incentivised to bid for less investment than they need.
     
• Statutory obligations will be imposed on third parties contracted to build and operate assets on behalf of water companies, to allow the new regulator to take enforcement action against any third party operating a water treatment or supply asset, or otherwise acting on behalf of a water company.

Next Steps

The White Paper has been released in advance of an upcoming Water Bill, through which the Government intends to progress an “ambitious, coherent resent of the legislative framework”.

A joint Transition Plan with Wales will be published later this year, providing a roadmap for the transition and clarity on roles and responsibilities. The UK and Welsh Governments will lead this process, working in partnership with existing regulators, companies, investors, and environmental organisations. 

It is likely that the CMA’s PR24 final determination decisions (due to be published by 17 March 2026) will be the last of its kind under the current system, as uncharted waters to PR29 lay ahead.

Please get in touch with the authors, part of our team of UK water regulation specialists, should you want to discuss the White Paper or any related matters in more detail.