No water, no growth: tackling inefficient business water demand

Water is not typically thought of as a constraint on economic growth in England. Yet that is precisely what it is becoming. Commercial growth and new developments are being turned away because there is insufficient water to serve them. Some water companies are already exercising their powers to refuse or cap new non-household connections in areas where local resources are under pressure: Essex and Suffolk Water have imposed a moratorium on new or increased non-domestic connections in the Hartismere water resource zone until 2033; Cambridge Water has stated it cannot facilitate supply requests exceeding 20 cubic metres per day for non-domestic purposes until 2032; and Anglian Water is limiting non-domestic requests to 20 cubic metres per day due to constraints on its own abstraction licences.¹ For a government that has staked its domestic programme on a mission for growth, this is a direct threat to its central political objective.

The underlying supply–demand arithmetic is stark. Without intervention, England faces a projected shortfall of approximately 5,000m litres per day by 2050.² The response to date has focused predominantly on enabling new supply—with plans for construction of new reservoirs and strategic transfers—and on the demand side, attention has been mostly limited to leakage reduction through regulatory targets. The UK government’s planned introduction of mandatory white goods efficiency labelling, the efficiency savings of which form a critical part of industry water resource assumptions, was expected in 2025 but is delayed until Autumn 2026.³

The Independent Water Commission (IWC) was unambiguous: managing the demands placed on water is one of the four pillars on which fundamental sector reform must rest, and it must be pursued alongside, not after, measures to expand supply.⁴ The Water White Paper shows the government’s intent to do more to improve incentives for homes and businesses to improve efficiency, as well as promoting reuse and the introduction of Mandatory Water Efficiency Labelling for domestic white goods.⁵

Why non-household demand matters—and why growth is already at risk

Business customers—i.e. non-household (NHH) customers—account for around 30% of England’s total public water supply.⁶ The UK government has set an ambitious target for a 9% reduction in NHH water usage by 2038, and 15% by 2050, from a 2019–20 baseline.⁷ Compared with the focus of the industry on leakage and household consumption, efforts to target inefficient use by this significant part of the public water supply have thus far been limited.

This matters economically as well as environmentally. Every megalitre per day of inefficient consumption by an existing business user is, in principle, a megalitre per day that can be reallocated to efficient use by a new user—for example, a new development, a new industrial facility, or a new employer—that would otherwise be refused.

Tackling inefficient NHH demand is one of the most direct levers for unlocking growth.

The demand management dilemma: why price signals alone are insufficient

For a broad swathe of business users, water is a process input without which operations cannot continue. Moreover, even for large water users, the cost of water is often a relatively small part of the firm’s overall cost base. This creates a fundamental problem for price-based interventions: business water demand is relatively price-inelastic.

This creates a genuine dilemma. If the price signal is to be the primary instrument of demand management, it would need to be set at a level that causes significant short-term economic pain for existing business users before it produces the scale of demand reduction required. Rapid change would require drastic price increases. For sectors already operating on thin margins, or those in which water is an unavoidable process input, the damage to growth could outweigh the benefit in the short-term. Importantly, it would also risk deterring the very business investment that the government is trying to attract, such as industrial clusters and data centre operators.

A more gradual price signal mitigates this, allowing time for companies to adjust, but at the cost of a slower pace of change. This may not be sufficient in itself to meet the timetable that has been set or to facilitate the desired growth in the short run. Thankfully, more can be done than solely increasing prices.

Why hasn’t the nettle already been grasped?

If the pressure on water resources is so stark, why has so little happened to reduce demand by businesses? A recent report for the Retailer Wholesaler Group (RWG) set out, at a high level, some of the reasons.⁸ We offer our take on four of the most significant of these, that when taken together form a set of interlocking institutional failures that have allowed the status quo to persist—and allowed its economic costs to accumulate largely invisibly.

Charging needs reform

Existing tariff structures are based on a cost-to-serve principle that has resulted in lower average unit costs to large users of water who do not rely on more costly smaller distribution networks. This sends a weak signal to business users about the importance of managing consumption, since it reflects only the cost-to-serve and not the full societal cost of water abstracted from the environment. Charging has rightly been highlighted for reform by the IWC⁹ and Ofwat.¹⁰ Rising-block tariffs, in which unit prices increase as consumption rises, are no panacea either. They potentially penalise economically efficient, high-volume water users.

Revenue-neutral charging rules add a further constraint. Wholesale tariff reform is bounded not only by cost-reflectivity principles, but by the distributional consequences of rebalancing charges across customer groups. Under the current constraints, putting cost pressure on large water users reduces pressure on lower-volume users with uncertain effects on overall demand.

The opportunity cost of inefficient water use—the economic value of the growth that is foregone when new connections are refused—is not currently embedded in wholesale pricing. Until it is, the price signal will remain structurally inadequate as a sole instrument.

Businesses have little incentive to change

For many businesses, even some large water users, water costs often represent a small fraction of total operating expenditure. Imagine a factory that relies on water as an input to production. Factory upgrades to improve water efficiency may require a significant shut-down of production. The cost of that shut-down may far outweigh the cost savings from reduced water consumption. There is simply insufficient financial motivation to invest in efficiency measures where the payback period is long and water remains cheap at the margin.

The upshot is a stable but socially suboptimal equilibrium: inefficient water users are content to pay the low price of inefficiency, and limited actions readily available to both companies and regulators reinforce the message that this is acceptable. The economic cost of that inaction—measured in refused connections and blocked development—does not appear on anyone’s balance sheet.

Incentives are split between wholesalers and retailers

The separation of wholesale and retail functions in the England and Wales business water market creates a structural misalignment. Retailers hold the direct commercial relationship with NHH customers, but face no financial consequence from high customer consumption. Wholesalers manage the resource and bear the consequences of supply–demand imbalance, but have no direct customer-facing relationship through which to promote efficiency. The result is that water efficiency falls between two stools, and inefficient water users do not face concerted pressure to change their behaviour.

In theory, retailers are well-placed to offer value-added services for water efficiency, but only where the motivation to improve lies with the business user—i.e. the cost of inefficient use is a concern to the business, either financially or to their green credentials. Where the motivation is external to the business in question, the retailer has neither the means nor the motivation to intervene.

Playing catch-up on smart metering.

Smart metering in water lags significantly behind that of energy, where it is already vital to managing demand across networks. Almost every meaningful demand management intervention depends on accurate, granular consumption data. Smart meters enable real-time monitoring, continuous flow identification, usage pattern analysis, and perhaps even, eventually, dynamic pricing. Until smart metering becomes the norm, the most sophisticated economic instruments for demand management remain unavailable. This barrier is being overcome, but only gradually. In 2025, only around 10% of NHH customers had smart meters, with the industry’s PR24 business plans projecting an additional 800,000 installations by 2030.¹¹ Notably, the areas of greatest water scarcity are ahead. Anglian Water, among others, will complete the full smart metering of their customer base by 2030.¹²

Green shoots of progress

A range of reforms are already underway. The Water White Paper sets out plans to create a new single integrated regulator for England and explicitly acknowledges the link between water security and growth.¹³ Ofwat is proposing tariff reform of either a rising-block model or a fixed charge discount model.¹⁴ Anglian Water, Northumbrian Water, South West Water, Southern Water, United Utilities, Affinity Water, Portsmouth Water and South Staffs Water are all trialling a range of demand management tariffs and engagement throughout AMP9 alongside their smart metering roll-outs.¹⁵ Ofwat will imminently launch its £75m Water Efficiency Campaign that aims to target behaviour change across households and businesses across England and Wales, albeit amid scepticism from some industry experts that such a campaign without meaningful price signals may do little to affect long-term water use.¹⁶

Beyond these examples, a recent report commissioned by RWG identified a range of interventions that could be made, including the potential for a water efficiency levy modelled on the Apprenticeship Levy. It estimates that the combined effect of the interventions it assessed could exceed the government’s target of a 15% reduction by 2050, but only if a suite of complementary interventions is deployed collectively.¹⁷

The role economics and data science can play

Demand management of NHH customers done well should not be a constraint on growth. Increasingly, it is a precondition for it.

The challenge is to turn these green shoots and potential interventions into a coherent package to be implemented by the government, regulators and companies. We believe that three things are necessary to achieve this, with economics and data science working in lockstep.

Clarify the objective and make the growth trade-off explicit

Is the primary goal cost-reflectivity in tariff design, including the cost of addressing water scarcity (as proposed in Ofwat’s current consultation on charges to promote water efficiency)?¹⁸ Environmental protection? Short-term cost protection for existing business users? Long-term growth enablement through water headroom for new entrants? Clearer direction is a key requirement from wider reforms. These objectives are not always aligned and the trade-offs not always clear—without direction and rigorous economic modelling, they will continue to be weighed informally.

Emerging areas of high-demand water usage, such as data centres, offer opportunities for policy interventions before inefficient water use becomes embedded in their operations.¹⁹

Use economics to identify and assess potential interventions

Tariff design, markets for water efficiency credits, and government or charges-led levies are all potential options. Further analysis is needed to determine which of these, and in what combination, are likely to be effective.

Likewise, behavioural economics can help to ensure that interventions land effectively with businesses and can help to move beyond relying mainly on direct costs to companies. Indeed, a package of interventions that combines both pricing measures and behavioural nudges is likely to be needed to encourage lasting change in non-household demand. This could include providing businesses with better information and education on the consequences of their water usage, and nudges on how behaviours could be altered. Such behavioural interventions are particularly important where setting prices to reflect the full social cost of consumption would be inconsistent with the objectives identified in step one.

Use data science to target, quantify and test initiatives

The smart meter roll-out, open market data on consumption patterns, and environmental data on water stress creates a growing analytical resource that has not yet been exploited systematically. These are large, varied and complex datasets, but in combination they contain the insight that can be unlocked through the application of data science to go beyond high-level assumptions and estimation.

The proposed Water Demand Observatory, awaiting a funding decision through the Ofwat Water Efficiency Lab, seeks to establish a national water demand tracker that would see companies sharing data to assess the impact of water efficiency initiatives.²⁰ This would be a welcome boost, significantly opening up data to fuel analytics and insight in addition to what companies can achieve from their own data.

Applied to these datasets, data science can help to identify potentially inefficient water use by analysing continuous flows or segmenting customers to compare consumption patterns across similar businesses. AI could be deployed to spot changes in typical consumption and propose interventions, or to dynamically optimise price signals.

A combination of consumption, economic and spatial datasets could help to understand where opportunities exist across customers and infrastructure for water reuse by identifying potential collection and receiving entities in localised areas, targeted to areas that would unlock the greatest growth opportunity.

Critically, data science could also help to provide insight on the effectiveness of measures introduced, allowing for robust experimentation and refinement of both local interventions, economic understanding and the wider policy trade-offs.

Proceeding with confidence

Addressing inefficient NHH water use is essential to creating the headroom in water resources needed to support growth. Challenging targets have been set, and there are long-standing difficulties in making progress. However, the time is ripe to overcome these impediments through regulatory reform and well-targeted, well-evidenced interventions. A combination of sound economics and insight derived from increasingly abundant data can provide the key to unlocking this potential headroom, allowing the industry to proceed with confidence that the actions being taken now will secure water resources for growth over the long term.

¹ Johnson, A. (2025), ‘Water shortages risk stifling UK growth as restrictions hit businesses’, Alpheus, 16 September.

² Environment Agency (2025), ‘England faces 5 billion litre public water shortage by 2055 without urgent action’, press release, 17 June.

³ The UK Water Report (2026), ‘Buy me love?’ June, p. 4.

4 Independent Water Commission, ‘Independent Water Commission: Final Report’, 21 July.

⁵ Department for Environment Food & Rural Affairs (2026), ‘A new vision for water’, January.

⁶ The UK Water Report (2026), ‘A seat of learning for water efficiency’, April, p. 35.

⁷ Department for Environment, Food & Rural Affairs (2023), ‘Environment Improvement Plan 2023’, 7 February.

⁸ Retailer Wholesaler Group (2025), ‘Incentivising business customers to reduce their water consumption’, report by Baringa for the Strategic Panel, December.

⁹ Independent Water Commission, ‘Independent Water Commission: Final Report’, 21 July.

¹⁰ Ofwat (2025), ‘Promoting water efficiency in wholesale charges for business customers – a consultation’, 27 August.

¹¹ Latest data from MOSL shows one in ten businesses now have a smart water meter’, 4 August.

¹² Anglian Water (2023), ‘October 2023 submission’, October.

¹³ Department for Environment Food & Rural Affairs (2026), ‘A new vision for water’, January.

¹⁴ Ofwat (2025), ‘Promoting water efficiency in wholesale charges for business customers – a consultation’, 27 August.

¹⁵ Ofwat (2024), ‘Summary of water companies’ published plans for household charging trials, Ofwat, January 2024.

¹⁶ The UK Water Report (2026), ‘Buy me love?’, June, p. 6.

¹⁷ Retailer Wholesaler Group (2025), ‘Incentivising business customers to reduce their water consumption’, report by Baringa for the Strategic Panel, December.

¹⁸ Ofwat (2026), ‘Statutory consultation on changing our Wholesale Charging Rules and Charges Scheme Rules to promote greater water efficiency’, June.

¹⁹ Grundfos, ‘Scale and Secure: Powering Europe’s Digital Sovereignty’.

²⁰ The UK Water Report (2026), ‘On the lookout’, June, p. 9.