The government used Boxing Day to take stock of a year of change in England’s water sector. Defra says 93% of designated bathing sites now meet the legal minimum, with the Environment Agency’s 2025 classifications showing 417 of 449 sites at ‘sufficient’ or better and 87% ‘good’ or ‘excellent’-a marginal but important improvement on 2024.

Behind the headline numbers is a more muscular regime. The Water (Special Measures) Act received Royal Assent on 24 February 2025, introducing faster civil penalties, enabling criminal prosecution of executives who obstruct investigations or conceal wrongdoing, and mandating near real‑time publication of sewage discharge data. It also tightens rules on governance and pay.

Those powers have already changed behaviour. From 6 June, six companies were prohibited from paying executive bonuses under new Ofwat rules, and by November the watchdog reported more than £4 million of payouts had been blocked. For investors, that’s a clear signal that remuneration will be tested against environmental, financial and customer outcomes.

Funding is bigger, and tighter. Ministers point to £104 billion of private expenditure for 2025–30-the largest since privatisation-now ringfenced so customer money goes into pipes, treatment works and river clean‑ups rather than dividends or discretionary pay. Ofwat has paired this with a claw‑back guarantee if capex isn’t delivered.

Bills will rise as that programme is delivered. Ofwat’s final PR24 package implies an average increase of about £157 over the period before inflation, with the allowed return set at 4.03%-up from 3.72% at draft stage-while the CMA’s provisional decisions would add roughly a further 3% on average for the companies that appealed. This is the financing spine of the upgrade.

Listed utilities and their creditors will care about two things in 2026: delivery against outperformance targets, and cash coverage of investment. With investment pots ringfenced and the WACC fixed, scope for payout growth narrows unless companies beat operational targets or secure redeterminations. Ofwat has already flagged the need for additional sector equity over AMP8.

Transparency is set to improve. Since 1 January 2025, storm overflow data must be published within an hour of a discharge. The Act extends this duty to emergency overflows, with 50% coverage due by March 2030 and full coverage by April 2035, creating a much richer dataset for communities-and for enforcement.

Regulators are also changing how enforcement is funded. The Environment Agency will recover the full cost of enforcement from water companies via a levy from 1 April 2026, following a 40% discounted first year. While not automatically passed through to bills, companies may seek to address new costs with Ofwat under established processes.

Customers gain some protection on service failures. From 2 July 2025 compensation was uprated for the first time in a generation-up to £2,000 for severe incidents and up to £250 for persistent low pressure-with automatic credits rather than form‑filling. That will not offset all bill pressure, but it changes the calculus when service falls short.

Policy is moving on bathing waters too. November’s statutory changes remove automatic de‑designation after five consecutive ‘poor’ years and allow a more flexible bathing season, while critics warn a new feasibility test could limit river designations. Expect scrutiny of how these rules are applied in 2026.

The bigger structural shift is still to come. In July the government announced plans to abolish Ofwat and create a single, integrated water regulator, drawing in functions from the EA, Natural England and the DWI, following Sir Jon Cunliffe’s Independent Water Commission. A Water White Paper is due in the new year to set out the pathway.

Near‑term, investors should watch three milestones: Ofwat’s end‑year PR24 adjustments published on 10 December; the CMA’s final determinations on appeals; and the White Paper’s shape of the new regulator. Together they will set capital needs, payout headroom and the regulatory tone for AMP8 and beyond.