Our use of cookies Ofwat vs Ofgem: Comparing the approach of utility regulators
Ofwat and Ofgem are independent economic regulators for the water and energy markets in Britain. Both regulators aim to protect consumers, ensure fair pricing, promote efficient and reliable services, and encourage long-term investment in infrastructure.
Despite the alignment in their goals, Ofgem and Ofwat have taken notably divergent approaches in several areas that impact consumers and the environment. This article discusses the differences in their approaches in the following four areas:
- Market structure
- Permitted infrastructure development
- Competitive market for suppliers
- Supplier price controls
Market structure
The table below summarises the structure of the British water and energy markets, highlighting how competition and price controls operate in each part of the market.
| Market | Water | Electricity | Gas |
|---|---|---|---|
| Regulator | Ofwat | Ofgem | Ofgem |
| Generators/ Producers | N/A: Water sourced directly by regional companies through abstraction from natural sources. | Competitive Market: Numerous private companies generate electricity, including renewables, nuclear, and gas power stations. | Competitive Market: Numerous private companies produce and import gas from interconnectors and LNG shipments. |
| Infrastructure Owners | Price controlled private companies: Regional water companies (e.g., Thames Water) own and operate local water networks. | Price controlled private companies: National Grid owns and operates transmission; distribution networks owned by regional companies. | Price controlled private companies: National Grid Gas operates transmission; regional companies own gas distribution networks. |
| Domestic Suppliers | No competition: Regional water companies are sole suppliers for households. | Controlled Competitive Market: Many retail suppliers offer choice for consumers; price cap on default tariffs. | Controlled Competitive Market: Many retail suppliers offer choice for consumers; price cap on default tariffs. |
| Non-domestic suppliers | Controlled Competitive Market: Non-households can choose suppliers licensed by Ofwat. Price caps on default tariffs. | Competitive Market: Many retail suppliers offer choice for businesses. No price caps. | Competitive Market: Many retail suppliers offer choice for businesses. No price caps. |
Regulation of infrastructure ownership
Water and energy infrastructure in Britain is owned and operated by private companies.
Ofwat and Ofgem take the same approach of directly regulating the prices for using infrastructure, as the companies operating these are natural monopolies—consumers have no choice but to use local water pipes and power cables.
The prices for using Britain’s electricity, gas, and water infrastructure are determined annually, based on the cost of operating and maintaining the infrastructure while providing funds for necessary investment.
A notable divergence arises in how much each regulator has permitted price increases to fund infrastructure investment. We’ll explore this further in our section on permitted infrastructure investment.
Regulation of supplier competition
Both the water and energy markets contain elements of competitive markets for suppliers, enabling consumers to choose who they pay for their utilities.
By allowing multiple suppliers to compete, regulators aim to create a dynamic in which companies strive to offer better deals, improve customer service, and innovate with new products.
The degree of competition is where the approach to each market differs. Ofwat provides no choice for the household water market and enforces strict price controls for the non-domestic water market.
In contrast, Ofgem has introduced competition for both domestic and non-domestic elements of the energy market, regulating prices only in the domestic market through the energy price cap.
We’ll discuss the approach and consequences of supplier price controls below.
Permitted infrastructure development
Both Ofgem and Ofwat play a crucial role in approving new infrastructure investments as part of their price control processes. When setting price limits, both regulators assess proposed infrastructure projects that companies claim are necessary to maintain, upgrade, or expand their networks.
These investments are evaluated based on their necessity, cost-efficiency, and alignment with long-term goals like decarbonisation, balanced against the need to keep bills low for consumers.
Ofwat’s permitted infrastructure investment
Ofwat approves infrastructure investment through a structured process known as the Price Review, which occurs every five years.
Ofwat has recently come under criticism for severely restricting investment in the water industry. Since privatisation in 1989, only one new potable water reservoir has been built, despite a rising population and increasing water scarcity.
The rising rates of sewage dumping into rivers is also a direct consequence of underinvestment in sewage treatment plant capacity.
Ofwat is expected to permit significantly higher investment in the 2025–30 period to fund ten new reservoirs and eliminate sewage spills. This increased investment will be funded by price rises for both households and businesses during the five-year period.
Ofgem’s permitted infrastructure investment
Like Ofwat, Ofgem sets price controls over a multi-year period during which energy companies can recover costs for infrastructure investments necessary to maintain and improve the network.
Ofgem has consistently approved investment to enhance the national grid. The national electricity grid has undergone major developments to support the transition to a low-carbon energy system.
Projects such as the Eastern Green Link—a substantial subsea cable connecting Scotland to northern England—have been approved to distribute offshore wind power from areas in Scotland with abundant resources to high-demand regions in the South East.
Competitive market for suppliers
Ofgem and Ofwat take distinct approaches to competitive markets for suppliers, with the former fully embracing the competitive market, while Ofwat has taken a more cautious approach.
Ofgem oversees a fully competitive retail market where both households and businesses can choose from a wide range of electricity and gas suppliers. This competitive approach was introduced to promote consumer choice, drive down prices, and encourage innovation in customer service and product offerings.
Ofgem’s latest retail market report shows there are 21 active licensed energy suppliers in the market, including successful challengers like Octopus Energy, which has effectively disrupted the market.
In contrast, Ofwat’s approach to competition is limited to non-household water customers, such as businesses, charities, and public sector organisations.
Household customers remain tied to their regional water provider due to the high costs and logistical challenges of introducing competition in water supply.
In the non-household water market, only a handful of new suppliers have entered since deregulation, and incumbent retailers still control over 90% of the market. The limited engagement in the market is widely attributed to the strict price controls applied by Ofwat.
Supplier price controls
At AquaSwitch, we specialise in offering business water comparison and business energy comparison services. We help business owners compare the prices offered by competing suppliers.
Ofgem and Ofwat take a very different approach to price controls for business customers that has a significant impact on the savings available from switching suppliers.
Ofwat water price cap
Ofwat imposes a default business water price cap which applies if businesses have not switched supplier since deregulation of the water market.
The imposed cap means that default business water rates are only approximately 10% more expensive than the most competitive rates available in the market.
The limited savings provide only limited incentives for small businesses to change business water supplier.
The result is incredibly low engagement in the open water market. The latest state of the market report from Ofwat shows that only 3.4% of SPIDs changed supplier last year.
Ofgem price cap
Ofgem takes a different approach by providing a price cap only to the domestic portion of the market, and only at the specific direction of Theresa May’s Conservative government in 2018.
Business energy suppliers and commercial gas suppliers are not bound by any price cap on out-of-contract rates. The result is extremely unfavourable default rates for businesses that have come to the end of fixed tariffs.
Businesses on default energy tariff rates can typically save 45% on their business electricity prices and commercial gas rates.
This has led to a highly engaged commercial energy market, where switching rates are high, and new suppliers frequently enter the market to offer innovative energy products.
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