Ofwat moves to cut bills by 5% – but customers will not see this as they will still rise with inflation

The average household water bills will rise to over £400 a year for the first time next year despite an announcement by the industry regulator that prices will fall by 5% by 2020.

Ofwat, which sets the limits on water charges every years, announced that water bills across the country would be cut by an average 5% before inflation over the next five years, knocking £20 off the average bill over this period.

However, because water companies are allowed to increase their bills in line with inflation (RPI), which currently stands at 2.3%, on an annual basis, householders will not actually receive lower bills over this period.

Instead, by taking inflation into account the average water customer could still see their bill increase by £5 to £401 next April, according to the price comparison website money.co.uk.

“For many people prices are still going to be rising faster than wages and that’s why one in five people are struggling with their water bills,” said Maria Eagle MP, the shadow secretary of state for the environment, food and rural affairs. “Water companies are allowed to add inflation to these prices and for most people that will put their bills up.”

Since the water companies were privatised in 1989, the average annual household water bill has risen from £236.

This year’s price announcement was, for the first time, based on business plans that were submitted after water companies consulted a quarter of a million of their customers across England and Wales.

The result was that water companies had asked for an average 2% reduction in bills in real terms, but Ofwat decided this was not enough.

“This is good news and a victory for most water customers whose views have shaped water pricing more than ever before,” said Tony Smith, the chief executive of the Consumer Council for Water, which represents water and sewerage consumers in England and Wales.

“But customers need to be aware that water companies are allowed to add inflation to bills each year, which means charges are still likely to rise from what they are now. That will hurt some households.”

Customers of Thames Water initially appear to be the biggest winners. The water company was the only one to ask for an increase in bills, of 3%, to pay for the preparatory costs of the Thames Tideway Tunnel project. However, Ofwat decided Thames had overestimated the initial cost and has imposed a 5% reduction in bills over the next five years.

Thames Water’s customers should not start celebrating yet, however, as they will yet have to meet the bulk of the Tideway Tunnel project through their bills and these increases could come as soon as 2016. The Consumer Council for Water estimates the cost of the project over its duration could add as much as £40 to the average bill.

“One in five water customers already tell us their water bill is not affordable so the cost of the Tunnel may yet prove a tipping point for those already struggling to pay,” said Smith.

The biggest price drop over the next five years will be felt by customers of Bristol Water, one of the companies that provides water only rather than water and sewerage services. It had asked for a 1% increase in bills to meet the cost of a new reservoir it wanted to build in the area.

But Ofwat turned the project down and has instead imposed a 21% reduction in bills, which will see the average Bristol Water customer pay £160 before inflation in five years’ time rather than £202 now.

For combined water and sewerage companies, which cover the majority of households in the country, the biggest price drops, according to Ofwat, will be felt by Anglian Water and Wessex Water customers.

Anglian Water customers will see a 10% drop in their bill, shaving £41 before inflation from their £431 bill while Wessex customers will see a 9% reduction from £485 to £442 before inflationary increases.

The regulator also announced additional support for those struggling with water bills. Increased financial support available from water companies for poorer households will see the number benefiting rise from 760,000 customers now to around 1.8 million by 2020, said Ofwat.

• This article was amended on 12 December to correct the use of the phrase “real terms”