Ofwat to relax retail price caps

(by Karma Loveday)

Source: Ofwat

Customers using between 5Ml and 50Ml of water a year will be taken out of price caps altogether, under proposals out from Ofwat for consultation until 14 August. This amounts to a significant relaxation of its Retail Exit Code (REC) price protections, which has been called for by retailers since the market has matured.

The plan entails shrinking the current ‘Group 2’ customer boundary, from those consuming 0.5Ml-50Ml annually (hotels, farms, supermarkets etc), to contain only the smaller users in that group: 0.5Ml-5Ml users. Those consuming over 5Ml will join an expanded Group 3 (currently 50Ml+ consumers, which are typically the likes of manufacturers, large breweries and power plants), where no caps are applied.

Ofwat estimated that around 20,000 business customers would, for the first time since market opening, no longer be subject to explicit REC price cap protections and “may therefore need to actively engage with retailers to secure the most favourable terms.” It stressed: “It is important that these customers are aware of the changes proposed here if implemented and potential impacts. We therefore stress our expectation… that retailers proactively engage with customers likely to be affected, be clear and transparent about any changes, and deliver competitive outcomes.”

Those remaining in Group 2 will continue to be protected by the current form of cap (wholesale charge plus allowed gross margin). This is currently 8% in respect of clean water services and 10% for wastewater services. Under the consultation, the gross margin element would be increased and harmonised to a single rate of 13%. Ofwat said this implied, on average, a before-inflation increase in bills of around 4%.

Prices will rise too for the market’s smallest customers: those in Group 1 who consume less than 0.5Ml a year – typically the likes of small shops or offices. Again the current form of cap for that group will be retained (wholesale charge + allowed costs for service, meter reading and bad debt + an allowed margin) but each element beyond the wholesale charge would be increased as shown in the chart. On average, customers will see a before-inflation increase of around 4.5%, or around £29 on an average annual bill of around £650, in 2027/28.

The regulator also proposed two key revisions for the REC’s non-price protections: 

• Transferring these to the Customer Protection Code of Practice to improve clarity and accessibility.

• Updating the ‘no worse off’ condition (where any unilateral change should leave customers no worse off) to be benchmarked agains the current scheme of terms and conditions, rather than the customer’s circumstances at market opening – given this is now nine years ago. The condition will also now apply only to Group 1 customers, not others. 

Ofwat explained that it had based its proposals on updated cost to serve assessments; its market monitoring and engagement work; and responses to its July and October 2025 consultations. The philosophy is to “focus regulatory protections on customers who need them most, while reducing explicit regulation for customers where competition instead can be expected to provide protections as well as benefits.”