Households are set to see £240 million taken off their water bills by 2030 because of poor supplier performance, regulator Ofwat has announced.

The water watchdog said it was proposing to hit a raft of firms across the sector with penalties for not meeting targets on environmental and customer service in the 2025-26 financial year, which will be returned to households and businesses through their bills.

The total net bill reduction under the draft plans is £240 million by 2029-30, with £107 million being returned through customer bills in 2027-28.

But the cuts to bills are likely to be offset for many customers by recent plans announced by Ofwat to allow water companies to hike annual tariffs by an extra £3.4 billion – on top of the 36% average rise agreed over the five years to 2030.

Yorkshire Water and Thames Water will see the largest amount of underperformance payments taken off bills in April 2027 under Ofwat’s provisional plans, at £75 million and £46 million respectively.

Some firms will see outperformance payments, however, with the largest applying to Severn Trent and Northumbrian Water.

Ofwat stressed that changes to bills are “affected by a range of factors and the effect will vary by company and customer type”.

It will make its final decision on so-called outcome delivery incentive payments by December 15, which will take effect on bills from April 1 next year.

The regulator sets performance commitments for each company, with service levels that companies are expected to achieve over the five years to 2030.

Each commitment on performance has an outcome delivery incentive that has financial impacts for companies if they outperform or underperform against those targets.

Prime Minister Andy Burnham unveiled plans late last month for new laws to pave the way for public ownership of failing water firms, and vowed a 10-year path to a “very different water system” in the UK.

In his speech at the Labour Party conference, Mr Burnham said Environment Secretary Dame Angela Eagle would present a “strengthened Water Bill to Parliament”.

It raised the spectre of a possible temporary nationalisation of debt-laden Thames Water as the Government looks to decide on a £10 billion rescue takeover put forward by lenders for the UK’s biggest water supplier.

The announcement came after Mr Burnham said customers “cannot be treated as a blank cheque” after Ofwat announced plans in August to allow yet more bill increases on top of those already agreed.

The water industry continues to come under fire over sewage spills, supply failures and executive pay with calls growing for many firms to be brought back into public ownership.