Regulation is king: lessons clean energy must take from water sector reform

In July 2025 the Independent Water Commission delivered its final report calling for a single, integrated water regulator for England – merging Ofwat, the Drinking Water Inspectorate, and water-environment functions from the Environment Agency and Natural England, with tailored arrangements for Wales.  The aim: restore public trust, enable long-term investment, and deliver environmental outcomes through a clearer, less fragmented regime.

This shake-up in the water sector, with what some would see as quite radical reforms – followed by Ofwat Chief Executive David Black stepping down in August 2025 – is about more than clean rivers and efficient investment in critical infrastructure. It’s a warning bell to what reform might bring if a sector like water fails to deliver what is expected by society and the media. 

Just as the Commission proposes breaking down silos in water regulation, achieving net zero will require integrated oversight, adaptive price controls, and regulators with the commitment, skills, resourcing, and mandate to manage cross-sector, system-wide transitions.

Infrastructure is the circulatory system that keeps society functioning – access to affordable, reliable, and resilient water, energy, transport, communication, and waste services is essential for health, productivity, and growth, for individuals and the UK’s economy. But these systems face mounting pressures, evidence by:

• Environmental performance gaps: in 2023, UK water companies discharged sewage into rivers and seas over 300,000 times, and pollution incidents are on an upward trend.
• Infrastructure bottlenecks: new grid connections for renewable energy projects have faced delays of up to a decade.

These are not abstract issues: the UK’s legally binding target requires national greenhouse gas emissions be reduced to net zero by 2050, and 2030 is the decisive decade. By 2035 the UK must deliver a fully decarbonised power sector, achieve the Sixth Carbon Budget emissions pathway, and meet statutory water sector resilience and leakage targets.      

This is not simply a technical delivery challenge – it is also cultural and attitudinal, taking place in contested spaces where privately operated entities exist to serve public needs. 

When regulatory culture fosters trust, clarity, and partnership, investment and innovation follow. When it lapses into mistrust or overly rigid control, it can stifle initiative and delay essential investment.

This means infrastructure companies, and their owners, must act to decarbonise, adapt, and expand within tight timeframes, and regulators must enable, not hinder this transformation.  

Yet achieving this will require more than better regulation  – it will demand breakthrough thinking from all actors. As Paul Hawken and the UN Global Compact’s Project Breakthrough note, genuine breakthroughs occur when institutions shift from incremental efficiency to transformative outcomes  – aligning governance, investment, and innovation toward shared goals.

Regulators influence company behaviour through the application of regulatory frameworks: the combination of price controls, performance targets, and incentives that set the commercial conditions for investment.

UK infrastructure regulation was shaped by the privatisations of the 1980s and 1990s, anchored in the so-called RPI-X model: prices could only rise by the Retail Price Index minus an efficiency factor (X), incentivising productivity without compromising service quality.

This model, first applied in the privatisation of British Telecom, was built for stable, low-risk sectors, not for infrastructure undergoing climate-driven transformation. The early emphasis was on driving out inefficiency and lowering costs to consumers, with regulators acting as arm’s-length economic ‘referees’ rather than strategic partners in system change.

While this approach delivered cost efficiency, it was premised on utilities as stable, low-risk businesses. 

The RIIO model, introduced in the mid-2010s by Ofgem, linked revenue to incentives, innovation, and specified outputs. In water, periodic price reviews set investment allowances and service targets over five years based on a RIIO type approach.

Regulation through RPI-X and RIIO approaches have had a short-term focus (in the context of very long-lived assets) and the design of UK regulatory cycles – typically five years – can entrench short-term decision-making. Companies naturally plan around these windows, leading to bursts of investment just before the review ends, or risk-averse deferral of innovative projects. 

In energy, grid connection delays and backlog costs are a clear symptom of long-term needs being stifled and subordinated to annual or five-year planning cycle logic. 

While these frameworks were designed to continue to deliver improved efficiency and the delivery of customer centric outcomes, they were not designed for a world with climate change, technological disruption, and the investment levels required by the net zero transition.

The National Audit Office commented on gaps in the conduct of regulation  – such as Ofwat’s limited insight into the condition of water and wastewater assets  – which constrain its ability to ensure adequate investment. Similar concerns could well arise in energy regulation.

Capability is not about capacity. It’s about having the skills, data, and decision-making agility to manage “radical uncertainty”: the reality that future demand, technology costs, and climate impacts cannot be predicted with precision. 

In this environment, rigid rulebooks can create perverse outcomes, while adaptive frameworks can keep the system on track.  

Regulatory offices have expanded significantly in size – with Ofgem staff numbers increasing from 300 in 2001-02 to 1,800 and Ofwat’s staff numbers increasing from 219 to 322 over the same time period.  This has led to a bureaucratization of regulation, and a pursuit of illusory precision to get the ‘right, objective’ answer based on an outdated economic model.

The key to capability is about understanding how companies respond to incentives put in place and building trust that ensures that private companies deliver public outcomes. 

Oxford emeritus professor Colin Mayer is critical of regulatory systems which create a “…conflict between private companies with a primary interest in profit and regulators concerned about the public interest of customers and communities.”

What is required, he states, is the need for ‘purposeful regulation’ that would endeavor to tackle some of the behavioral weaknesses and lack of trust that are clear to see in current regulatory frameworks. He goes on to cite Scotland’s water sector as a place where this is done well.

The Independent Water Commission’s proposal for an integrated regulator is, in effect, a sector-specific ‘uber regulator'. The logic seems to be one of seeking control to cope with the current model of fragmented oversight, which makes it harder to manage systemic risks and optimise investment.

The Cunliffe review cannot be faulted for its comprehensive nature with its 88 extensive recommendations covering a wide range of issues from strategic direction, planning and the legislative framework to detailed regulatory reform, but the nature of the changes is a huge departure from the model of an independent regulator.

There is a real question as to whether changes of this scale can be made to work. It remains to be seen whether merging two underperforming regulators (Ofwat and the Environment Agency) with the Drinking Water Inspectorate can deliver meaningful change, given the risks of added bureaucracy and challenges in securing sufficient expertise.

One also needs to consider the transfer of risk from private companies to the regulator that the review is in essence proposing through its supervisory model. Whether this proves to be an approach that stifles necessary innovation only time will tell.

There are a significant number of recommendations on the legal and policy framework in the Cunliffe review, where parallels with energy can be drawn. 

This begs two questions: 

• Is there a systematic problem with the RIIO type framework itself (that the Cunliffe review seems to be pointing to) or is it simply that Ofwat has not operated it well?
• Either way, could similar changes help the energy sector?

One of the most notable suggestions in the review is for a comprehensive planning framework with the establishment of regional catchment-based system planners and a “light national water systems planning coordination function”.  

There is a clear read across here to the establishment of the National Energy System Operator (NESO) in energy who have responsibility for developing Regional Energy System Plans as well as national plans. This model of course is still in its infancy in energy, but at least proactively seeks to tackle coordination issues.

There are also several recommendations relating to regulatory methodology – an area where the water and network element of energy regulation share very similar RIIO-based regulatory frameworks.  

The review is critical of and provides recommendations in a number of these areas including: 

• ceasing the use of totex as a concept
• removing incentives for good business plans
• placing less reliance on technical econometric modelling for determining costs
• rationalizing the overall number of performance commitments and associated incentives

These changes would be quite a big departure for Ofgem if applied in energy too.

To deliver net zero we have a number of the right systems and tools - such as the NESO - but there is a need to more fully consider whether we have the right regulatory framework in place.

In a welcome move, Ofgem developed a set of regulatory 'archetypes’ which it consulted on before its RIIO-3 price reviews for gas and energy sectors, including traditional ex ante type approaches based on RIIO five yearly price reviews. 

They are nevertheless reluctant to move away from this regulatory approach to a more ‘rate of return’ type approach (its so-called ‘freedom and accountability’ archetype) – and are more inclined towards moving to the ‘plan and deliver’ archetype at least for electricity transmission and distribution.     

Perhaps the time is now right to make a bolder shift to better align the motives and interests of regulators and companies.  

RIIO was introduced following Ofgem’s RIIO@20 review launched in March 2008 – after twenty years of RPI-X regulation – and has now been in place for well over 15 years. So, arguably the time is right for a comprehensive review and reset.

There is much for the Government to consider from the Cunliffe review in relation to the water sector, but we should not fail to read across to what this could mean for the energy sector too.  The real challenge is to develop regulatory institutions, methodologies and a culture that creates ‘purposeful regulation’, and a stable consistent framework for investment.

A regulator ready for the net zero transition would foster Breakthrough delivery, moving beyond incremental improvement to unlock step-change progress in emissions reduction, resilience, and affordability.

It would:

• Integrate climate mandates into core objectives, not as a further add-on
• Adopt adaptive cycles: rolling price controls that adjust for technology and demand shifts
• Embed systems thinking, coordinating across energy, water, waste, and digital infrastructure
• Ensure sufficient supervisory oversight focusing on asset health, long-term resilience, and investment delivery
• Close skills gaps and build fluency in climate science, engineering economics, and behavioral insights
• Foster trust-based relationships: shifting from a “permissions” model to more of a “partnership” with industry
• Enable public legitimacy using transparency and citizen engagement to sustain trust.

Regulation should be seen as “critical infrastructure” in its own right: an enabler of capital flow, innovation, and resilience. 

Without an adaptive, trusted regulator, the physical infrastructure needed for net zero simply won’t materialize.

The Independent Water Commission’s report is more than a ‘blueprint’ for the water sector: it’s a signal to all UK infrastructure regulators that significant reform could occur if public policy issues are not adequately addressed.

For investors, stable and climate-aligned regulatory frameworks are the foundation for unlocking the billions needed to upgrade and decarbonise the UK’s infrastructure. 

For society, they are the guarantee that services remain affordable, resilient, and equitable. 

And for the global economy, the UK’s position as a financial and regulatory leader means its example can shape how capital flows to climate-critical infrastructure worldwide.

But capability now means more than technical competence: it demands broader ability to mobilise rapid, system-wide progress toward net zero while maintaining legitimacy and trust. 

The decisive years to 2030 will determine whether the UK can deliver affordable, enduring, investable infrastructure fit for a low-carbon economy.  Investing in regulatory capability is investing in this delivery.     

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