Ofwat says water companies across England and Wales must cut their bills by 12% before 2025.
The regulator has told providers they must cut the average household bill by £50 as part of a price review conducted every five years.
It says returns on invested capital will be capped at a rate of 5.02%, down from the current limit of 6.64%, with the expected reduction in customer bills as a result changing from company to company.
The announcement comes as part of Ofwat’s approval of a £51 billion investment plan for water companies.
The regulator has also demanded leaks are cut by 16%, as part of a £6 billion cost-cutting exercise – this would potentially save enough water to supply every customer in Birmingham, Bristol, Cardiff, Leeds, Liverpool and Sheffield.
The framework comes into effect on 1st April 2020 – it will also identify and help an additional two million customers who need extra support, invest more than £1 billion to protect communities at risk of flooding, reduce waterway pollution by more than a third and provide £450 million to explore new water resources.
It also includes a commitment from water companies to produce zero net carbon emissions by 2030.
Ofwat Chief Executive, Rachel Fletcher, said: “Today we’re firing the starting gun on the transformation of the water industry backed by a major investment programme to deliver new, improved services for customers and the environment and resilience for generations to come. Now water companies need to crack on, turn this into a reality and transform their performance for everyone.
“They will be investing the equivalent of an extra £6 million each and every day to overhaul services, strengthen their infrastructure and improve our natural environment. And at the same time, customers’ bills will fall by an average of £50 before inflation.”