Thames Water will pay a £8.5m penalty after failing to meet its target to cut water leakage from its pipes. Ofwat, which regulates the privatised water industry, called the failure “unacceptable” and said the penalty was the maximum possible.

Leaks from Thames Water’s network rose by 5% in the last year, or 35m litres per day. In May, the Guardian revealed that amid fears of a drought and with some water companies asking customers to save water, the vast amount of water that leaks from company pipes every day across England has not fallen for at least four years.

The missed target was revealed in Thames Water’s annual report, which also showed profit before tax fell by 86% last year. In March, Thames Water was hit with a record fine of £20.3m after huge leaks of untreated sewage into the Thames, its tributaries and on to land, a failure the judge called “shocking and disgraceful”.

The increased leakage from Thames Water pipes means 180 litres per day is leaking per property that the company supplies. The £8.5m penalty cannot be passed on to customers and Thames Water said the money would be returned to customers in the form of lower bills from 2020.

“The failure by Thames Water to meet the leakage commitments it has made to its customers is unacceptable,” said Ofwat chief executive Cathryn Ross. Ofwat has also opened an investigation to consider whether enforcement action is needed over and above this automatic penalty.

“Thames Water’s failure sends completely the wrong message to its customers at a time when households are being encouraged to use water more wisely,” said Sir Tony Redmond, London and South East chair for the Consumer Council for Water. “We have repeatedly called on water companies to show more ambition in reducing leakage, which is an issue that really matters to consumers.”

Thames Water’s chief executive Steve Robertson said: “We’re working hard to get back on track after hitting our leakage targets for 10 years in succession, and reducing leakage by a third from its peak in 2004.”

“The reasons for missing it are complex, and the evidence is being examined carefully in order to learn as much as we can,” he said. “But the fact that the target was missed despite significant additional expenditure clearly points to the need to improve both our planning and delivery.”

Thames Water revealed it caused 315 pollution incidents last year, higher than the year before but below its 340 target. In the annual report, Robertson said: “We’re paying a high price both financially and reputationally for major pollution incidents [which led to the £20.3m fine) between 2012 and 2014.”

Robertson, who joined Thames Water in September 2016, was awarded an annual bonus of £54,000 and is paid a basic salary of £700,000 a year.

England is the only nation to have a fully privatised water industry, which has been criticised for making large dividend payments to owners. The Labour party’s recent election manifesto pledged to renationalise the industry, which it called “dysfunctional”.