Water companies have been ordered to return £158m to customers via lower bills next year after missing key targets on issues like pollution.

The industry regulator Ofwat announced the rebate following its annual review of water and wastewater companies’ performance in England and Wales.

Chief executive David Black warned companies that “money alone” would not solve the issue and there needed to be a change in culture.

Industry body Water UK have been approached for a comment.

Ofwat assesses the performance of the 17 largest water and wastewater companies in England and Wales each year against key targets, for issues such as sewer flooding, supply interruptions and water leaks.

For the second year in a row, no company achieved the top rating, although four companies did show an improvement from last year.

“Companies must implement actions now to improve performance… and not wait till government or regulators ask them to act,” David Black said.

For the worst performing companies, failure to meet the targets means they will now have to collectively return £157.6m to customers on their bills for 2025-2026.

Thames Water will have to make the largest repayment to customers of £56.8m, despite improving its overall performance from last year.

However, this is only expected to amount to a reduction of a few pounds on bills and will be dwarfed by the expected long-term increase of £94 per household over the next five years, which Ofwat is currently proposing.

This price rise is still being negotiated with water companies, who argue that even higher bills are needed if they are to afford the infrastructure improvements required to tackle some of the issues raised in this performance report.

One of the key targets for companies is to reduce pollution incidents, which were meant to fall by 30% between 2020 and 2025.

Companies had so far achieved a 15% reduction over the last few years. But that improvement has been almost wiped out by the significantly higher number of incidents last year.

The industry has said that although this performance was unacceptable, the record levels were due to heavy rain and increased data collection.

But Ofwat CEO David Black said: “This year’s performance report is stark evidence that money alone will not bring the sustained improvements that customers rightly expect.

“It is clear that companies need to change and that has to start with addressing issues of culture and leadership. Too often we hear that weather, third parties or external factors are blamed for shortcomings.”

Public dissatisfaction with the industry has risen in recent years particularly in relation to pollution.

For the last three years Ofwat has been investigating the nine wastewater companies for failing to adequately invest in their infrastructure, which it suspects could have led to excessive sewage spills. In August, the outcome for the first tranche of companies was announced – the regulator is seeking fines of £47m for Yorkshire Water, £17m for Northumbrian Water and £104m for Thames Water.

Despite ongoing issues with sewage spills, companies did make some progress on tackling internal sewer flooding incidents and water leakage.

Ofwat estimates that currently about a fifth of all water put into the network in England and Wales is lost via leaks. This is an important area for the industry because many areas of England already regularly experience water shortages and climate change is expected to exacerbate this issue. The Environment Agency estimates that the country will need an additional 5 billion litres of water a day by 2050 to support the economy and environment.

Some companies were praised in the report for their efforts to tackle this and other issues, including Severn Trent, which Ofwat said had managed to cut sewage spills by delivering improvements at 467 sites.

Severn Trent, SES Water, Northumbrian Water, and United Utilities exceeded their targets and therefore will be able to charge customers more next year, as part of a scheme to incentivise the industry.

Following the release of the report, the Department for Environment, Food and Rural Affairs said the environment secretary would be writing to the Chairs and CEOs of every water company laying out the performance improvements that he expects them to make in the coming year.