The UK water sector: affordability and environmental performance

The challenge now is disciplined execution at scale

Similar to the water infrastructure sector globally, the UK water sector is undergoing a major transformation driven by the dual imperatives of environmental performance and customer affordability. Water networks, like the UK companies, are regulated because they are classic natural monopolies which means that households don’t choose where they get their water from.

For our regulated UK holdings, United Utilities (UU) and Severn Trent (SVT),¹ the priorities of network performance and affordability are inseparable from financial incentives and from the evolving regulatory and political landscape. We believe both water companies are well positioned to invest and to meet the challenges facing the sector over the medium and long term. Indeed, the sector’s ability to overhaul its poor environmental track record will determine not only regulatory compliance but also its social licence to operate, which has been severely tested in recent years among politicians, regulators and customers alike.

UK water company regulation has historically been underpinned by relatively reliable regulatory fundamentals, designed to incentivise investment, support operating performance and provide inflation protection for investors.

Environmental performance – beyond minimal compliance

Environmental performance remains the most visible and contentious ESG issue for UK water companies. Persistent sewage pollution incidents, storm overflow discharges and nutrient loading have attracted intense scrutiny from politicians, regulators, customers and activists in recent years. By 2025, it is clear that materially higher levels of investment are required to address these issues and to put the sector on a more sustainable footing.

United Utilities’ historic underinvestment in sensitive catchments such as Lake Windermere exemplifies the challenge. United Utilities acknowledges this underinvestment and is responding with a £13bn AMP8 (2025-30)² programme including targeted upgrades to wastewater treatment works and phosphorus removal technologies, alongside company-wide targets for sewer overflow reductions.

Towards the end of 2025, we met with United Utilities to discuss its historic underinvestment and the ecological and human impact of persistent discharges in and around Lake Windermere. The company accepted these criticisms and outlined its £200m AMP8 investment plan for the catchment including upgrades to ten wastewater treatment works and measures to reduce storm overflow spills to fewer than ten annually. As part of this, the United Utilities has also committed to greater transparency including real-time monitoring of combined sewer overflows and public access to data.

While Severn Trent has maintained its industry‑leading four‑star Environmental Performance Assessment (EPA) rating for six consecutive years, this performance should be viewed in the context of sector‑wide challenges and an increasingly demanding regulatory environment that is raising the bar on standards while requiring demonstrable capital discipline. The company has committed £400m to pollution reduction and £500m to PFAS mitigation and raw water quality in order to meet new regulatory requirements. Although planned reductions in storm overflows of around 13 in 2025 are ahead of the current AMP target, these improvements are at an early stage and will require sustained investment and operational focus to translate into durable, long‑term environmental outcomes.

Affordability: balancing bills and environmental outcomes

Affordability remains a critical social dimension for the water sector given cost of living challenges across the UK. Regulatory determinations have historically prioritised bill stability to the detriment of environmental investment. This tension has contributed to decades of underinvestment now manifesting in environmental degradation and reputational damage.

AMP8 marks a structural shift whereby capital programmes are significantly larger yet companies must still manage customer affordability alongside much more stringent environmental obligations. United Utilities and Severn Trent are attempting to achieve this balance through efficiency programmes. For instance, Severn Trent is targeting £500m capital efficiencies across procurement and technology, while United Utilities is leveraging early supply chain mobilisation to mitigate cost escalation.

In the case of Severn Trent, average combined household water and wastewater bills are forecast to increase from £444 per annum currently to £518 per annum by FY30. Reflecting the real regulatory framework and inflation pass‑through, these bill levels are expressed in FY23 prices. Any increase is challenging in the context of ongoing cost of living pressures on customers. However, Severn Trent is seeking to align higher bills with increased investment, associated improvements in network performance and an expansion of its social tariff to support vulnerable households. For the median household in the region, water bills are expected to rise from 1.2% of disposable income currently to around 1.3% by 2030.³

The regulatory framework increasingly recognises this balance. Ofwat, the UK water regulator, has made the system more practical by adjusting the way utilities earn bonuses for reducing pollution and meeting performance targets. The goal is to encourage better environmental results without pushing customer bills too high. On top of that, tax rules like full expensing and faster capital allowances help companies manage big spending projects by improving cash flow during periods of heavy investment.

Financial incentives: linking environmental and social outcomes to returns

The link between environmental performance and financial incentives has never been stronger. Outcome Delivery Incentives (ODIs) now represent material value drivers rewarding companies for achieving pollution reduction leakage control and customer service targets. Severn Trent has upgraded its ODI guidance to at least £40m for FY26 with around 90% of measures on or ahead of schedule. AMP8 has a simpler system for rewarding good performance and a bigger budget for improvements. This means water companies can earn financial bonuses when they make lasting fixes, like upgrading infrastructure to stop pollution, rather than quick temporary solutions. In other words, doing the right thing for the environment also helps deliver better returns for investors.

Regulatory returns also embed ESG considerations. Severn Trent’s first‑half FY26 nominal return of 13% reflects ODI outperformance, financing efficiencies and its “outstanding” Environmental Performance Assessment (EPA) status. United Utilities anticipates similar upside through resource adequacy reopeners and emerging contaminant allowances, such as PFAS, which create optionality beyond its current plan. Collectively, these mechanisms incentivise companies to exceed baseline compliance while accelerating progress on environmental commitments.

Stakeholder relations: rebuilding trust and social licence

Addressing environmental performance is central to repairing fractured relationships with politicians, regulators, customers and activists. Public confidence has been eroded by high-profile incidents and perceived opacity. United Utilities’ cultural shift from withholding data to real-time disclosure of combined sewer overflow activity is one example of the sector’s move towards transparency.

Political dynamics amplify these pressures. The Cunliffe Review and forthcoming final paper on UK water sector reform will shape regulatory priorities through 2026 and beyond. While environmental protections are unlikely to be diluted, downgrading them seems politically untenable at this point in time. While reform always carries execution risk, we believe companies with strong regulatory relationships and delivery credibility such as United Utilities and Severn Trent are well positioned to navigate this uncertainty. We will therefore watch these companies closely as they execute on their AMP8 capital plans and attempt to rebuild relationships with their key stakeholders on which they depend on.

1  Companies mentioned are for illustrative purposes only and are not a recommendation to buy or sell any particular security.
2  AMP8 is the current five-year investment and regulatory period for the UK water industry, running from 2025 to 2030.
3  Severn Trent PR24 Investor Summary (Dec 2024).

Disclaimer
This information was prepared and issued by Maple-Brown Abbott Ltd ABN 73 001 208 564, Australian Financial Service Licence No. 237296 (’MBAL’). This information must not be reproduced or transmitted in any form without the prior written consent of MBAL. This information does not constitute investment advice or an investment recommendation of any kind and should not be relied upon as such. This information is general information only and it does not have regard to any person’s investment objectives, financial situation or needs. Before making any investment decision, you should seek independent investment, legal, tax, accounting or other professional advice as appropriate, and obtain the relevant Product Disclosure Statement and Target Market Determination for any financial product you are considering. This information does not constitute an offer or solicitation by anyone in any jurisdiction. This information is not an advertisement and is not directed at any person in any jurisdiction where the publication or availability of the information is prohibited or restricted by law. Past performance is not a reliable indicator of future performance. Any comments about investments are not a recommendation to buy, sell or hold. Any views expressed on individual stocks or other investments, or any forecasts or estimates, are point in time views and may be based on certain assumptions and qualifications not set out in part or in full in this information. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other MBAL communications, strategies or funds. Information derived from sources is believed to be accurate, however such information has not been independently verified and may be subject to assumptions and qualifications compiled by the relevant source and this information does not purport to provide a complete description of all or any such assumptions and qualifications. To the extent permitted by law, neither MBAL, nor any of its related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained herein, or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this information. Neither MBAL, nor any of its related parties, directors or employees, make any representation or give any guarantee as to the return of capital, performance, any specific rate of return, or the taxation consequences of, any investment. This information is current at 13 January 2026 and is subject to change at any time without notice. You can access MBAL’s Financial Services Guide here for further information about any financial services or products which MBAL may provide. © 2026 Maple-Brown Abbott Limited.