Households and businesses across England and Wales are expected to see water bills cut by £25 a year from 2020 to 2025.
Water regulator Ofwat said it will set the cost of capital across the sector at a record low of 2.4% – it expects this to have a direct effect on the bills paid by households and businesses.
It added this reduction of 1.3% from its last price review five years ago will see companies passing savings from lower financing costs on to their customers.
It aims to reduce the gap between actual financing costs and regulated prices, which companies can use to maximise profits.
Ofwat also said water companies will have to come up with new ways to identify and help vulnerable customers, as well as take stronger action on tackling leaking pipes, as part of an industry goal to see annual savings of 170 billion litres of water across the UK.
Ofwat Chief Executive, Cathryn Ross, said: “We’ve said many times already that this will be a tough price review for companies.”
“We will cut the financing costs they can recover from customers and with this lower guaranteed return, they will need to more efficient and innovative than ever before.”