Household water bills in England and Wales are to be cut by an average of £50 over the next five years, under proposals set out by the water regulator.

Ofwat has also ordered water companies, which have had a series of serious pollution incidents, to step up their spending by investing an extra £12bn to keep pipes, pumps and plants in better working order. This includes £4.6bn to prevent sewage spills, restore habitats and protect species such as eels, and takes their total investment to £49bn between April 2020 and April 2025.

In its latest price review, Ofwat said the average household bill of £400 a year would fall by £50, or 12%, by 2025. The reductions range from £7 for customers of Hafren Dyfrdwy in Wales to £110 for Northumbrian Water, based on 2017-18 prices.

At Thames Water, the UK’s largest water and wastewater company with 15 million customers, bills will fall by 10% to £344 a year.

The Ofwat chief executive, Rachel Fletcher, said: “These are seriously stretching goals for the sector but we know they can be achieved.”

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Ofwat said firms would have to cut pollution incidents by more than a third, reduce supply interruptions by almost two-thirds, help 1.5m customers who are struggling to pay and cut leakage by 17% by 2025 – to save enough water equivalent to the needs of Manchester, Leeds, Leicester and Cardiff.

Companies must encourage customers to use up to 13% less water per person by 2025, in part through installing smart water meters, which can also help uncover leaks in pipes. This will cut average water use to 131 litres per person per day.

It follows big fines for water companies over water leaks and sewage spills. Southern Water faces prosecution by the Environment Agency after Ofwat imposed a record £126m penalty over sewage leaks into rivers and beaches in southern England.

Ofwat warned that the worst performers would face higher penalties if they failed to catch up.

Anne Dacey, the Environment Agency’s deputy director for water, said: “Water companies are custodians of the environment. We expect them to deliver on the promised £4.6bn investment to protect and enhance rivers and beaches, as well as redouble their efforts to reduce pollution, protect more properties from sewer flooding and increase resilience to drought.”

She said the agency would review the finer detail before challenging the companies on any further changes needed.

Tony Smith, chief executive of the Consumer Council for Water, welcomed the Ofwat announcement but said: “Not everyone will see their bills fall when you add inflation.

“Only about half of the 3m households who struggle to afford their water bills will receive financial assistance under these plans, so more companies should use their own profits to boost this support and not rely on the goodwill of other customers to fund these schemes.”

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The regulator said five companies, including Thames Water, would double the number of customers they provide with financial support through social tariffs and WaterSure, which is aimed at customers with a water meter and allows them to have their bills capped.

Four companies have pledged to partly fund their social tariff schemes using shareholder money.

Labour reiterated that it would bring water companies back into public ownership if it was elected. The shadow water minister, Luke Pollard, said: “Over the last decade water companies have made billions in profits but bills have gone up and far too much water still leaks from pipes every day.”

Only three out of 17 water companies in England and Wales have had their plans approved for the next five years – Severn Trent, South West Water and United Utilities. Companies will have to respond to the regulator and Ofwat will publish its final package of measures on 11 December.