Water companies told to refund £260m to customers.

Water companies in England and Wales have been ordered to reimburse consumers more than £260 million for poor performance.

Economic regulator Ofwat says 40% of that money has already been withdrawn this year, with the rest to be paid out next year. But bills still need to rise sharply through 2030 to fund water system upgrades.

Earlier today, the Environment Agency (EA) gave England's water companies the worst ever aggregate scores in its annual rating system for their environmental performance in 2024, amid a sharp rise in the number of serious pollution incidents.

Industry body Water UK admitted that “some companies' results are not good enough” but pointed to investment since last year.

Thames Water, the UK's largest water company, was fined the most at £75.2 million for its activities in 2024/25.

EA also gave it its lowest rating of one star.

A company spokesman said: “Transforming the Thames is a major program of work that will take time; it will take at least ten years to achieve the required scale of change.”

And Environment Secretary Emma Reynolds admitted: “We are facing a water supply failure that is causing our infrastructure to collapse and wastewater to flow into our rivers.

“We are taking decisive action to correct this, including new powers to ban unfair bonuses and swift financial penalties for environmental offences,” she added.

If companies fail to meet agreed targets in areas such as pollution and leaks, they are forced to pay “ineffective” charges. Essentially, this means that customers receive cheaper bills than they would otherwise.

In the chart below, the amounts of these payments in millions of pounds are shown with negative numbers on the left. Everything is given in 2017-18 prices.

When companies exceed targets, they receive “overperformance payments” and can charge customers more, as shown by the positive numbers on the right. This only applied to United Utilities and Severn Trent Water.

But despite these outstanding payments, customers are facing significant increases in bills.

In April they grew by average 26% in England and Walesafter Ofwat approved the water company's plans for billions of pounds of investment.

And they should grow further until at least 2030 to help modernize water systems and reduce wastewater spills.

Ofwat described the overall results for the 2024/25 season as “mixed”. He acknowledged progress in some areas, such as interior drainage flooding, where sewer water flows into buildings.

But it said “there remain areas where companies and the sector need to do more”, including pollution and supply disruptions for some.

In its report, the Environment Agency (EA) gave England's major water and sewerage companies their worst ever combined environmental performance rating in 2024, since their ratings began in 2011.

In his foreword, EA chairman Alan Lovell wrote: “Many companies tell us how focused they are on improving the environment. But the results are not visible in the data.”

EA's collective rating for the nine companies was 19 stars, up from 25 stars in 2023. No year previously has received less than 22 stars.

EA says its rating criteria have tightened over time, so its ratings “do not mean performance has declined since 2011” and there has been “some improvement” through 2023.

But Mr Lovell said: “This year's results are poor and should send a clear and urgent signal for change.”

EA gave seven companies two stars – “requires improvement” – and Thames one star. Previously, only seven one-star ratings had ever been awarded.

And only Severn Trent received the highest rating of four stars.

It is the latest bad news for Thames Water, which has been mired in financial problems. This reported a loss of £1.65 billion for the year to March.and debt levels rose to £16.8 billion.

“We know we need to continue to improve for our customers, communities and the environment, which is why we have embarked on our biggest ever investment program, delivering the biggest upgrade to our network in 150 years,” a Thames spokesman said.

In July, EA announced that Cases of “severe” pollution from water companies in England increased by 60% in 2024 compared to 2023..

Last year's environmental performance was attributed to three factors: wet and inclement weather, prolonged underinvestment in infrastructure, and increased monitoring and inspections that “exposed more deficiencies.”

In response to today's findings, James Wallace, chief executive of River Action UK, said: “Water companies in England and Wales continue to be ineffective, particularly when dealing with serious pollution incidents, highlighting the failure of the privatized water supply model.

“We urgently need a complete overhaul of this broken system to ensure bill payers receive a fair service and that our rivers are properly protected from pollution.”

Starting in 2027, EA will replace the current ratings with a new system – a scale from one to five, from “unsatisfactory” to “excellent”.

The government says this will provide a more accurate reflection of performance as companies will not be able to achieve the top rating unless they “achieve the highest standards across the board.”

Earlier this year the government said Ofwat would be abolished and replaced by a single regulator.

This followed landmark review of the 'failing' water sector in England and Waleswhich recommended stronger regulation to hold water companies accountable. He warned there would be no quick fixes to improve the health of our rivers or reduce bills.

In response to today's EA report, Mike Keil, chief executive of the Consumer Water Council, said: “Customers are now paying more than ever before through their water bills and they will expect companies to deliver on their promises to cut pollution and help bring rivers, lakes and wildlife habitats back to life.

“If the industry fails to deliver, the damage to public confidence, already at an all-time low, could be irreparable,” he added.