Wales rejects integrated regulation in its Green Paper on water reform

(by Karma Loveday)

The Welsh Government is cutting its own path to water reform, including by rejecting the idea of an integrated regulator for Wales. Instead, in its Green Paper: Shaping the future of water governance in Wales, it proposed creating a Wales-specific combined economic regulator and system planner, that continues to interface with separate environmental and drinking water quality regulators. 

The Green Paper is the Welsh Government’s policy response to the recommendations of the Independent Water Commission (IWC). Unlike the UK Government’s White Paper, its proposals are for consultation (until 7 April), not policy decisions. 

Welsh context

The paper emphasised how Wales’ circumstances differ from those in England: the country is smaller, has devolved priorities, and there is already legislative provision through the Well-being of Future Generations Act 2015, the Environment (Wales) Act 2016 and the Wales Act 2017 for fairness, sustainability and public value. There is also an existing water strategy, in the form of the Water Strategy for Wales, created in 2015.

The Welsh Government characterised reform as a means of reconciling this context with changes that demand a response. It said: “Wales now faces a new reality. Climate and nature emergencies, alongside persistent challenges, demand urgent action. The water system designed for a different time no longer meets the needs of our people, our environment or our economy. We have made good progress, but people across Wales are rightly concerned about sewage discharges, outdated infrastructure and the condition of water in their communities. We cannot stand still. It is time for fundamental reset.”

Strategic direction

Instead of creating a strategic vision, the Green Paper made the case for refreshing the 2015 Water Strategy for Wales and reviewing how Welsh ministers set and communicate strategic direction for the water industry. It recognised that the existing frameworks “do not yet provide sufficient long-term focus, milestones or cross-sector alignment.”

There was strong emphasis on whole system thinking: “We will take a holistic approach to planning and regulation, considering the whole water environment rather than focusing solely on the industry. Improvements will require changes in how we use land and action across a whole range of sectors. Wales faces challenges including resilience to flooding and drought, decarbonising the sector, reversing biodiversity loss and upgrading ageing infrastructure while keeping services affordable. By working collaboratively across government, industry and communities, we will turn these challenges into opportunities for innovation and resilience.”

Regulation 

The Welsh Government noted the IWC’s preference for a new economic regulatory function for water in Wales to be embedded within environmental regulator Natural Resources Wales (NRW). But it preferred the Commission’s alternative idea, that a small, freestanding body as in Scotland might be considered. According to the Green Paper: “We do not intend to create a single ‘water regulator’ for Wales. We have already brought together environmental regulation, natural resource management and linked functions in NRW. We value NRW’s integrated remit and the requirement to consider the sustainable management of natural resources, working across land, water and marine environments. We do not wish to undermine this either by stripping out water functions or by adding an additional responsibility, such as economic regulation.”

Nonetheless: “A new, stand-alone economic regulator for Wales would mark a significant shift in how economic regulation will be delivered. It reflects the need for a body that is fully aligned with Welsh priorities, values and devolved responsibilities.”

The paper went on to say: “This new regulator will be designed from first principles to reflect the Well-being of Future Generations Act, the Environment (Wales) Act 2016, the proposed Environment Principles Bill, and the broader ambitions of Welsh water reform. It will not simply replicate Ofwat’s model. Instead, it will develop a distinctive Welsh approach to economic regulation, prioritising stability, public value, affordability, resilience, and long-term outcomes for Wales.”

The preference for consultation is that the economic regulator will also house a National System Planner for Wales. “This will support alignment of decisions for river basins, coasts and aquifers so they pull in one strategic direction and reflect Welsh priorities. Catchment programmes will integrate company investment, NRW regulation and local measures, targeting the biggest ecological gains first. We propose to consult on a minimum environmental transparency standard and explore options for publishing public dashboards that combine discharge, river health and enforcement data.”

Meanwhile under the plan, the Drinking Water Inspectorate will continue to cover Wales – subject to its transfer into the integrated regulator in England going well. “It is essential that any changes to the regulatory architecture in England do not undermine the effectiveness or independence of drinking water regulation in Wales,” the paper argued.

There was a strong emphasis on consumer and community engagement in helping to shape future regulation, and acknowledgement of the importance of the economic regulatory regime to investors and credit ratings. “Our approach to economic regulation will be underpinned by an intention to create an investment environment which is stable and predictable,” the document said. The funding model will be based on full cost recovery from the industry, in line with the polluter pays principle. 

Next steps

Throughout, there was clear recognition of the complex choreography that will be needed to navigate water reform effectively, given Wales’ current limited powers, cross border issues and the need to avoid gaps or duplication during transition. As the first step, the Welsh Government will need to seek additional legislative competence from the UK Government to enact its plans.

The Green Paper scoped out the following as a guide to enactment:

• Post consultation, the Welsh Government will publish a summary of responses and next steps. 

• Subject to the agreement of the new government post the May 2026 Senedd election, the Welsh Government will publish a White Paper after the enactment of UK Government primary legislation, setting out detailed proposals for Welsh legislation. This White Paper will provide a comprehensive framework for reform in Wales, including the establishment of new regulators, the allocation of powers and responsibilities, and the mechanisms for delivery and accountability. 

• Again, subject to the agreement of the new government post-election, a Water Bill will be brought forward in the next Senedd term. This will cover economic regulation, drinking water quality, the interests of consumers, environmental oversight and broader public value. 

• Following the enactment of a Water Bill for Wales, the new Welsh economic regulator and system planner will be established. The process is expected to take a minimum of two years, meaning the new body could be in place in the early 2030s. It was noted that “contingency arrangements will be required to ensure effective regulation for PR34”. 

• Ofwat, and any subsequent integrated regulator in England, will provide economic regulation functions for Wales in the interim, subject to policy direction from Welsh ministers. The Welsh Government will issue an initial Strategic Policy Statement to Ofwat in early 2026 and work with Defra to publish a joint transition plan for the water sector in early 2026.

• Alongside legislative reform, the Welsh Government will begin work to refresh the Water Strategy for Wales.