Moody’s has issued a stark warning that Britain’s privatised water companies may find it difficult to raise the billions of pounds needed by 2030 unless the regulator allows significant increases in household water bills.
In a report released on Tuesday, the credit rating agency pointed to “diminishing investor confidence,” highlighting the financial strain on water companies ahead of a key regulatory decision on bill increases, expected by the end of 2024. The warning comes after Moody’s downgraded Thames Water in July, pushing the utility into a breach of its operating licence.
The companies are grappling with weak operational performance and stringent regulatory targets, which Moody’s says could hinder their ability to attract new equity investment. The sector is already under heavy regulatory, financial, and political pressure, with UK Chancellor Rachel Reeves acknowledging on Monday that more investment is needed and admitting that water bills are likely to rise.
Water companies have proposed raising household water charges by around 40% over the next five years, but Ofwat, the sector regulator, has suggested a rise of only about 20%. A final decision from Ofwat is due in December, though it could be delayed into the new year. Moody’s noted that Ofwat’s final determinations tend to be less severe than its initial proposals, but warned that growing public and political pressure is adding to the industry’s risks and eroding investor confidence.
Despite the negative outlook for the sector, Moody’s said it could revise its view to stable if Ofwat’s final decision supports the investment needs of water companies. Many of these companies are preparing to appeal to the Competition and Markets Authority if the final ruling does not sufficiently balance the risks and returns.
According to Barclays analyst Dominic Nash, the industry will need to raise about £10 billion in new equity by 2030 to maintain services, reduce debt, and finance critical infrastructure upgrades. Thames Water alone will need more than £3 billion, while other companies like Anglian Water, Southern Water, Yorkshire Water, and Northumbrian Water also require significant investments.
On Tuesday, Water UK, the industry lobby group, expressed concerns that the sector might fail to secure the necessary equity funding for its proposed five-year investment plan. A report by consultancy Oxera, commissioned by Water UK, surveyed around 30 investors and accused Ofwat of expecting water companies to raise equity at the expense of future customers.
The warning comes as Thames Water, the UK’s largest regional water company, faces a financial crisis, needing at least £1 billion in cash by Christmas to avoid collapse. Its current investors, including sovereign wealth funds from China and Abu Dhabi, as well as pension funds Omers and USS, have refused to inject additional capital, declaring the industry “uninvestable.”
In response to the growing concerns, Ofwat has appointed LEK Consulting to independently monitor Thames Water’s financial situation until it regains its investment-grade status. The regulator acknowledged the diverse feedback it has received from various stakeholders, including water companies, customers, environmental groups, and investors, on its proposed measures.
