Affordability of water and sewerage charges: Outlook for water poverty in Scotland

The authors are grateful to staff at Scottish Water, the Water Industry Commission for Scotland (WICS), the Scottish Government and the Independent Customer Group for helpful discussion and comment on previous versions of this research.

The authors also wish to express their thanks to Professor Ashwin Kumar at Manchester Metropolitan University, who provided invaluable advice on and support of the underlying modelling that informed this work.

Background

Scottish Water provides water and wastewater services to around 2.6 million dwellings in Scotland[i].

Charges levied on households fund Scottish Water to deliver these services. The average charge per household was £410 in 2023/24, generating revenues for Scottish Water of just over £1bn. The specific charge faced by any household is determined by the council tax band that the property falls within, plus various discounts, reductions and exemptions.

Determining the appropriate level and structure of water charges is about balancing two competing considerations.

• On the one hand, ensuring sufficient income is raised from customer charges to adequately fund existing services and invest in the infrastructure required for the future.
• On the other hand, ensuring that these customer charges don’t unfairly burden consumers in general, and those least able to pay in particular.

These issues and trade-offs will be at the heart of the forthcoming Strategic Review of Charges, the process which determines the trajectory for customer charges during the 6-year period from 2027-2028 to 2032-2033.

This report aims to inform that debate by examining the affordability of water and sewerage charges in Scotland in the recent past and considering the outlook for coming years. It also considers some of the options for enhancing the affordability of water charges, examining the impact of these on bill affordability and on revenues from charges.

Evolution of charges

During the 2021-2027 plan period, Scottish Water is permitted to increase domestic water charges by up to a maximum of two percentage points above the CPI rate of inflation (CPI+2%) on average each year.

Charges were increased by CPI+2% in 2021-2022. They were then increased by less than CPI+2% in both 2022-2023 and 2023-2024, before increasing by 8.8%, almost double the CPI rate of 4.6%, in 2024-2025.

The result is that the water charge is around the same level – in inflation-adjusted terms – in 2024-2025 as it was in 2021-2022. However, charges in 2024-2025 are around 7% below where they would have been had a CPI+2% pathway been followed in each year, equivalent to around £50 for the typical household.

Measuring water affordability

This report considers water affordability by examining trends in a widely-recognised measure of ‘water poverty’. This measure deems that households spending more than 3% of disposable income on water and sewerage services are in ‘water poverty’, and households spending more than 5% of disposable income are in ‘severe water poverty’.

Limitations of these measures include that they ignore other aspects of households financial wellbeing, such as debt and assets, and income volatility and uncertainty. Nonetheless, the water poverty measures used in this report remain the most pragmatically useful, given the availability of data, and they allow for comparisons to be made across time for different types of customer.

Recent trends in water poverty

We estimate that around 10.6 per cent (275,000) households in Scotland are in water poverty in 2024-2025. Within this group, 120,000 households are deemed as being in severe water poverty (4.6% of all households).

These estimated water poverty rates are broadly in line with the decade preceding the cost-of-living crisis. Between 2011-2011 and 2021-2022, the water poverty rate was consistently between 11-12%, while the severe water poverty rate was consistently around 4-5%.

The water poverty rate is estimated to have been slightly lower in 2022-2023 and 2023-2024. This reflects the fact that Scottish Ministers and Scottish Water agreed not to increase water charges by the possible CPI+2% in recognition of the pressure on households, such that the water charge increased more slowly than household incomes, partly because of temporary boosts to social security payments associated with the cost-of-living crisis.

Illustrating trade-offs

Our analysis also shows what may have happened to water poverty rates if the water charge had increased by CPI+2% in each year of this SRC period, (i.e. a 6.2% increase in charges in 2022-2023 and a 13.1% increase in 2023/24, rather than the actual increases of 4.2% and 5% respectively).

• We estimate that the 3% water poverty rate would have been around 1.5 percentage points higher by 2023-2024 had this scenario occurred, implying an additional 38,000 households in water poverty.
• However, the flipside is that higher charges would also have generated additional revenues for Scottish Water. We estimate that Scottish Water revenues would be almost £100m higher in each year from 2023-2024 onwards had this alternative charging scenario been followed.
• This illustrates the challenges in trading off, on the one hand, the requirement to raise revenues from customer charges to fund investment in the water network, and on the other hand, the imperative of ensuring that water charges are affordable to current consumers.

Characteristics of households in water poverty

The most significant risk factor for water poverty is having low income. Amongst the ten per cent lowest income households, seven in ten are in water poverty. This falls to two in ten amongst households in the second lowest income decile.

Virtually no household in the top half of the income distribution spends more than 3% of its income on water and sewerage.

Of the 275,000 households in Scotland in water poverty, nearly all are also in low income poverty. Only 25,000 households are in water poverty but not in low income poverty.

Other household characteristics are less directly correlated to water poverty, but include:

• Council tax band: water poverty rates are higher in council tax bands E, F, and G than in A, B, C and D. This reflects wide variation in household income within each band, combined with the fact that charges are systematically higher in higher banded properties.
• Family type: Water poverty rates are lower amongst pensioner households than working age households. But water poverty is fairly ubiquitous across household composition.
• Housing tenure: Water poverty rates have tended to be higher amongst households in the private and social rented sector than owner occupiers. There is some evidence that increases in mortgage rates in 2022-2023 and 2023-2024 has narrowed this gap in water poverty rates by tenure.

Our analysis suggests that only around one third of households in water poverty are in receipt of the Water Charges Reduction Scheme (WCRS), the scheme which provides bill reductions to low income households. On the other hand, a majority of WCRS-recipient households are not in water poverty. This mismatch between water poverty and receipt of the WCRS demonstrates the challenges in targeting bill support when the financial circumstances of households can never be known with certainty.

Modelling the impacts of policy change

We model the impact of various potential policies to enhance water affordability. We model the impact of these changes in 2024-2025 because there is greater certainty about the parameters, but the findings will be generalisable to future years.

• The increase in the Water Charges Reduction Scheme (WCRS) from 25% to 35% - which was implemented in 2021-2022 – is estimated to have brought an additional 185,000 households into the scheme. The water poverty rate is around 0.3 percentage points lower (equivalent to 8,000 households) as a result.
• Increasing the WCRS to 50% would reduce water poverty by a further 0.5 percentage points (13,000 households) at a cost of around £22m. All WCRS recipient households would benefit financially from this change; its impacts are thus broader than indicated by the poverty analysis alone.
• These costs of increasing the WCRS would tend to be funded by higher charges on customers more generally. Increasing the WCRS from 35% to 50%, at a cost of £22m, would imply an additional £8 annually on all bills.
• The key reason why increases in the WCRS don’t have more of an impact on the poverty rate is that there is some misalignment between households in water poverty and households in receipt of Council Tax Reduction (which is the condition for WCRS receipt).
• Halving the Single Person status discount would reduce spending on this discount by around £40m, potentially freeing up resources that could be allocated to supporting households facing the most acute affordability challenges. Single Person households in receipt of WCRS would be insulated from the effects of reducing the Single Person discount. But Single Person households not in receipt of the WCRS would be exposed to the effects of any increase in charges. The water poverty rate would increase by just over half a percentage point, equivalent to around 13,500 households.

Conclusions

The current Strategic Review of Charges (SRC) has recently commenced and will consider the outlook for charging during the 2027-2032 period. There is likely to be a significant need to support growth in investment to maintain service levels and invest for the future, particularly given the challenges of adapting to climate change.

This is likely to lead to a need for above-inflationary increases in the water charge. It is therefore important that improvements to affordability mechanisms are robustly considered alongside the SRC process.

The Scottish Government has made clear that it does not intend to fundamentally revisit the structure of water charges and the affordability mechanisms in advance of the 2027-2033 charging period.

However, in light of the likely increases in charges during this period, it is vital that low-income consumers are protected from the impacts of those charges. Whilst the WCRS is not perfect – in the sense that not all consumers in water poverty receive it – it will remain the most effective tool available to the government to support low-income consumers with their bills.

Consumer Scotland therefore recommends that the level of discount provided through the WCRS is increased from 35% to 50% in April 2027, and maintained at that level throughout the duration of the 2027-2032 period. This is likely to represent a relatively cost-effective way of helping to keep bills affordable for many households in the short term, particularly if it coincides with efforts to raise the take-up of Council Tax Reduction. This policy change would reduce the number of households in water poverty, and improve the affordability of bills for some low-income households who are not technically in water poverty.

However, an increase in the WCRS would not benefit all households in water poverty, since a large number of those households are not in receipt of it. Because of this, Consumer Scotland also recommends to the Scottish Government that there is a case for scoping the potential for introducing an additional  ‘by-application’ mechanism to offer reductions in charges for customers who fall through the gaps of existing affordability support mechanisms. This would only be practical if an appropriate mechanism for delivering such a by-application scheme could be designed and administered for costs that are commensurate with the expected level of take-up. It would be a temporary measure until better a targeted structure of affordability support could be introduced in the longer-term.

Progressing these recommendations would act to provide meaningful support and additional protection for those who may struggle to afford their water and sewerage charges in the upcoming charging period, while the sector explores more comprehensive reform to the structure of water charges in the coming years.

Scottish Water provides water and wastewater services to around 2.6 million dwellings in Scotland. The annual charge paid by households for these services is determined by the council tax band that the property falls within, with various discounts, reductions and exemptions also available to certain households.

Charges levied on these households for waste and wastewater services (after reductions and deductions) totalled just over £1bn in 2023-2024, equivalent to an average charge per household of £410.

Determining the appropriate level and structure of water charges is about balancing two competing considerations. On the one hand, ensuring sufficient income is raised from customer charges to adequately fund existing services and invest in the infrastructure required to address the challenges of climate change and ageing infrastructure. On the other hand, ensuring that these customer charges don’t unfairly burden consumers in general, and those least able to pay in particular.

Getting this trade-off between these considerations ‘right’ is partly about determining the overall level of consumer charges and how these are increased over time. But it is also about how those charges are shared across customers via the tariff structure, and how various discounts and reductions are targeted.

The trade-off is particularly challenging at present. Household finances are continuing to recover from the cost-of-living crisis and long period of income stagnation that preceded it. At the same time, there is a need for significant investment in the water network, both to sustain and enhance service quality whilst mitigating the impacts of climate change.

These issues and trade-offs will be at the heart of the forthcoming Strategic Review of Charges, the process which determines the trajectory for customer charges during the 6-year period from 2027-2028 to 2032-2033.

This report aims to both inform the context for the upcoming Strategic Review of Charges, and support future discussions on the basis of charging, by examining the affordability of water and sewerage charges in Scotland in the recent past and considering the outlook for coming years. It considers how the affordability of water bills have evolved over time, and which type of consumers are most likely to face affordability challenges. It also considers some of the options for enhancing the affordability of water charges, examining the impact of these on bill affordability and on revenues from charges.

In theory at least, there are a wide range of options for reform of the approach to water charging. In the extreme, these options could include moving away from the current approach to levying charges on the basis of council tax band, perhaps to a system of metering. In practice however, Scottish Ministers have indicated that the current approach to charging – with local authorities billing and collecting charges for unmetered households on the basis of council tax band – will broadly remain in place throughout the 2027-2033 period, with the prospect of more fundamental reform in the longer term.[ii]

In this context, this report sets out options for changes to affordability mechanisms that could work practically within the existing tariff structure. The report recognises that, whilst the current charging system is imperfect, it will likely remain in place, broadly in its current form, until at least 2033. Whilst there is some appetite for more fundamental reform, fundamental change would require an extensive period of analysis, deliberation and consultation.[iii]

The report argues that there are practical steps that can be taken within the existing tariff system to better protect those at risk of water poverty, notwithstanding the more fundamental reforms that may take place in the longer term.

The framework for water charging policy

The determination of water charges in Scotland is framed by a six year plan period. The current charging framework covers the period from April 2021 to March 2027.

During the two years prior to the commencement of a six-year plan period, a Strategic Review of Charges (SRC) is undertaken involving government, regulators, Scottish Water and customer representation to determine the basis for water charging during the six-year plan period itself. This culminates in an agreed tariff structure for water charges, and leaves some discretion for Scottish Water to determine annual increases in charges, within an overall financial envelope set by the regulator.

During the SRC, Scottish Ministers set out objectives for Scottish Water, and a Statement of Charging Principles. The objectives for 2021-2027 cover aspirations in relation to standards of service, asset maintenance, supporting economic growth, addressing issues relating to climate change, flooding and the environment, amongst others[iv].

The Statement of Charging Principles 2021-2027[v] establishes five principles that Ministers expect Scottish Water and WICS to follow, when determining charges. These principles are set-out in Box 2.1. In addition, the Statement of Charging principles establishes in legislation the tariff structure to be applied over the six-year plan period, i.e. the ratio of charges applied to different council tax bands, as well as the design of reductions and discounts).

Defining the affordability of water and sewerage services

The extent to which water charges are affordable depends on the level of the water charge faced by any household relative to the disposable income of that household.

In the UK, households that spend more than 3% of their disposable income on water and sewerage charges are deemed to be in ‘water poverty’. Households which spend more than 5% of their income on water and sewerage charges are deemed to be in ‘severe water poverty’.

The use of the three per cent water poverty threshold in England and Wales can be traced back to at least 1999, when it was used as a measure of water affordability on the grounds that it represented twice the median spend by households on water charges as a percentage of disposable income[x].

The 3% and 5% water poverty definitions have been used extensively to assess the affordability of water and sewerage charges in England and Wales[xi], and in Scotland in the past[xii]. These measures have also been applied in a wide variety of countries and contexts outside the UK[xiii].

In these analyses, household income is measured net of direct taxes (income tax, national insurance contributions and council tax), and includes income from pensions, and from social security payments (both means tested and non means tested). It is measured after housing costs, which means that households’ spending on rent and mortgage interest payments are deducted. Household income is also equivalised, which means it is adjusted to take account of household size[xiv].

The strength of the 3% and 5% poverty measures is that they explicitly take account of households’ financial means, placing the water charge in that context. They allow for comparisons across time, places and consumer groups.

But no measure of water affordability or poverty is perfect. The extent to which water charges are affordable for a household is likely to depend on other measures of financial wellbeing beyond income, including for example financial wealth, and the nature of any debt owed. In principle, data on debt and assets could be included in a water poverty definition if good data existed on it.

The extent to which water charges create financial distress for individual households might also reflect households’ perceptions of the security of their income or their living situation more generally. In this sense, whilst statistically based definitions and measures of water affordability are useful in quantifying the scale of affordability issues for different groups over time, they don’t necessarily reflect the lived experience for those who face affordability challenges.

A further limitation of the 3% and 5% measures is that the extent to which water charges create affordability challenges might depend on the level of household income as well as the percentage of that income that is spent on water charges. For example, a household with an income of £30,000 spending £900 on water charges might not face the same level of affordability challenge as a household with an income of £10,000 spending £300 on water charges. In chapter 4 we introduce an alternative water poverty measure that takes into account income level as well as the percentage spent on water charges.

Despite these caveats, the income based definitions of water affordability, and the 3% and 5% definitions of water poverty, are useful in understanding the extent to which water charges create affordability issues for different groups of consumers over time.

Measuring water poverty

To monitor trends in water poverty we use the ‘households below average income’ (HBAI) dataset. The HBAI is derived from the Family Resources Survey (FRS), an annual survey of households’ income.

The FRS is overseen by the Department of Work and Pensions. The survey is designed to be representative of households in each nation and region of the UK. Each year, around 3,000 households in Scotland are surveyed, ascertaining a range of information on each household including demographic and socio-economic characteristics, and information on the level of income from different sources.

The latest HBAI/FRS survey results available to us related to the 2022-2023 financial year.

To estimate water affordability in years after this, we use the IPPR Tax-Benefit model to create uprated iterations of the 2022-2023 data for subsequent years.[xv] In practice this means uprating the 2022-2023 data in line with latest statistics, where these have been published, on growth in earnings, pension income, social security payments and other forms of income, and incorporating known changes in tax policy and housing costs.

Where outturn data on these growth parameters has not yet been published, forecasts made by the Office for Budget Responsibility (OBR) and the Scottish Fiscal Commission (SFC) are used in the modelling to project the 2022-2023 data forward into 2023-2024 and subsequent years. For this forecasting, we draw on the latest available OBR and SFC forecasts, which date from March 2024 and December 2023 respectively.

These uprated iterations of the 2022-2023 HBAI data are combined with estimates of households’ water charges in 2023-2024 and beyond. For 2023-2024 and 2024-2025, we of course know what these water charges will be (for each household in the dataset, we can calculate that households water bill because we know their council tax band, its eligibility for status discounts and reductions). For years beyond 2024-2025, we generally assume that water charges increase at CPI+2% unless stated otherwise.

This chapter examines trends in measures of water poverty in the past, and forecasts water poverty over the next few years. It then goes on to examine water poverty rates amongst different consumer groups.

Water poverty rates over time

Chart 3.1 shows the evolution of the 3% and 5% definitions of water poverty in Scotland since 2002/3.

• Over the period until 2022-2023 these poverty rates are derived from published (outturn) HBAI statistics.
• From 2023-2024 until 2026-2027, these are forecasts. The core forecast (shown by a solid line) is an estimate of water poverty rates based on the ‘actual’ level of the water charge in 2023-2024 and 2024-2025, and under an assumption that the charge grows at CPI+2% in 2025-2026 and 2026-2027. This latter assumption is arguably somewhat conservative, since water charges could increase by more than CPI+2% in the final two years to make up for lower increases in some previous years of the strategic review period.
• A counterfactual scenario (shown by a dashed line) illustrates how water poverty rates would have evolved had they increased at CPI+2% in all years of the SRC period (this being the maximum average annual increase allowed over the 2021-2022 – 2026-2027 period). In practice this means an assumption that water charges increased by 6.2% and 13.1% in 2022-2023 and 2023-2024 respectively, rather than the 4.2% and 5% actually observed.

Water poverty prior to the cost-of-living crisis

The proportion of households in 3% water poverty declined somewhat in the mid noughties, largely reflecting relatively robust household income growth relative to the water charge. Between 2007-2008 and 2021-2022, the proportion of households in 3% water poverty remained essentially unchanged at around 12%. This means that around 310,000 households were in water poverty in 2021-2022.

The proportion of households in 5% water poverty remained largely unchanged at around 5% between 2002-2003 and 2021-2022 (individual years see some variation around 5%, but there is no statistically meaningful divergence from 5%).

It might be asked why the 3% poverty rate declined somewhat in the mid-noughties but the 5% poverty rate did not. The most likely explanation for this is that, whilst household income growth in the mid-noughties was generally fairly robust relative to the water charge, this was not so obviously the case for the lowest income decile of households, whose incomes grew less robustly[xvi].

In Chapter 3 we noted that one potential criticism of the water poverty measure is that it considers only the proportion of income spent on water charges, regardless of the level of household income. Box 3.1 considers an alternative definition of water poverty, one that takes into account the extent to which a household has low income, as well as simply the proportion of its income that it spends on water and sewerage. The key takeaway is that whilst this results in slightly fewer households deemed to be in water poverty compared to the standard 3% measure, it doesn’t change conclusions as to the long term trend in water poverty.

Water poverty during the cost-of-living crisis

The outturn HBAI data for 2022-2023 suggests that the 3% water poverty rate declined to under 10% in that year – the lowest rate of water poverty since the establishment of Scottish Water.

The extent of this drop in water poverty may reflect a degree of annual volatility that inevitably occurs in any survey like this. But the fact that there is some decline in water poverty is not in itself a surprise, as it reflects:

• A real terms fall in the water charge; the increase in water charge of 4.2% was somewhat lower than the increase in earnings (and the National Minimum Wage increased by 6.7% in April 2022).
• A series of ‘cost-of-living payments’ to families in receipt of means tested and disability related social security benefits which acted to boost the incomes of some households. Consumer Scotland’s analysis indicates that, of the 1.5 percentage point fall in the water poverty rate in 2022-2023, around 0.6 percentage points can be attributed to the temporary social security top-ups.

The 5% poverty rate did not fall as significantly in 2022-2023 as the 3% poverty rate. This seems to reflect in part the distribution of households with respect to the water charge as a percentage of income[xvii].

Water poverty in 2024-2025 and beyond

Our forecasts suggest that in 2024-2025, the water poverty rate will return to its level in 2021-2022. This reflects the 8.8% increase in water charge, and, to a slightly lesser extent, the removal of the temporary cost-of-living social security top-ups.

In subsequent years, and assuming that the water charge increases at CPI+2%, our forecasts suggest modest increases in the water poverty and severe water poverty rates. In both cases, water poverty remains in line with past levels (severe water poverty) or slightly lower than past levels (in the case of the 3% water poverty rate).

As noted above, the assumption that increases in the water charge increase at CPI+2% is arguably conservative. Scottish Water is permitted to increase charges by CPI+2% each year on average over the six year charge period. Technically speaking, given that charges increased by less than CPI+2% in two of the first four years of the charge period, Scottish Water has scope to increase charges by substantially more than CPI+2% in each of the remaining two years. If this occurred, water poverty rates would increase by more than set out in Chart 3.1.

What might have happened?

The analysis in Chart 3.1 also indicates what is likely to have happened to water poverty rates if the water charge had increased by CPI+2% in each year of this SRC period. Notably this would imply a 6.2% increase in charges in 2022-2023 and a 13.1% increase in 2023-2024.

Our analysis suggests that the 3% water poverty rate would have been around 1.5 percentage points higher by 2023-2024 had this scenario occurred, implying an additional 38,000 households in water poverty. The severe water poverty rate would have been around 0.3 percentage points higher, implying an additional 10,000 households in severe water poverty.

Of course whilst higher charges would have meant higher water poverty, the flipside is that higher charges would also have generated additional revenues for Scottish Water; and these additional revenues may to an extent have benefited future consumers through higher investment today.

Our analysis suggests that Scottish Water revenues would have been over £100 million higher in 2023-2024 under a scenario where charges had increased at CPI+2% in 2022-2023 and 2023-2024. Some of this difference would also be baked into future years, so that Scottish Water revenues would also be higher (by around £90 million per year) throughout the subsequent three years of the SRC period.

There was no absolute requirement on Scottish Water to increase charges by CPI+2% each year – this is a maximum average annual increase over the six year charging period, 2021-2022 to 2026-2027. And there is nothing to say that, having increased charges by less than CPI+2% in recent years, Scottish Water can’t increase charges in subsequent years by more than CPI+2% to ‘make up the difference’.

Nonetheless, this illustrates the challenges in trading off, on the one hand, the requirement to raise revenues from customer charges to fund investment in the water network, and on the other hand, the imperative of ensuring that water charges are affordable to current consumers.

This chapter examines the impact of various potential changes to water discounts and discounts on water poverty and Scottish Water revenues. The options are modelled in 2024-2025 for illustrative purposes, but the general size of the results should be broadly transferable to future years.

The impact of varying the WCRS

One option for increasing the affordability of water charges is to increase the generosity of the Water Charges Reduction Scheme. But what impact would increases in the WCRS have on consumers, and at what cost?

Table 5.1 provides a summary of the impact of changing the amount allocated through the WCRS.

To provide context, it shows that a WCRS set at 25% (as was the case until 2021/2022) would result in a 3 percent water poverty rate some 0.3 percentage points higher than with the WCRS at 35%. This means that around 8,000 fewer households are in water poverty because the WCRS is at 35% compared to what would be the case if the WCRS were set at 25%.

What about the impact of further increases in the WCRS? Increasing the WCRS to 50% would reduce water poverty by 0.5 percentage points; increasing the WCRS to 100% would reduce water poverty by more than a full percentage point compared to the WCRS at 35% (equivalent to 25,000 fewer households in water poverty).

Recall that our policy modelling is undertaken for 2024-2025. In broad terms, the scale of the modelled impacts on water poverty in 2024-2025 should be transferable to future years. We would anticipate that, the faster that future charges rise above inflation, the larger the likely impact of a given policy scenario on water poverty rates.

It is important to remember that the impact of changing the WCRS is broader than simply what is indicated by the poverty line analysis. When the WCRS is increased, all households in receipt of the WCRS benefit from the support, and all recipient households should find therefore that the affordability of their water charge should become more manageable.

Increasing the WCRS from 25% to 35% brought an additional 185,000 households into the scheme. Why did the number of recipient households increase despite the fact that eligibility criteria have not changed? The explanation is that, when the WCRS was 25%, single person households, who already received a 25% bill reduction, could not benefit from the WCRS. Once the WCRS increases to 35%, single person households become receive an additional ten percentage points of bill reduction through the WCRS.[xx]

Increasing the WCRS from 35% to 50% or 100% doesn’t materially change the number of recipient households[xxi], but it does increase the average amount of bill support by recipient household. The average amount of annual bill support for recipient households through the WCRS would increase to £130 and £290 if the WCRS was 50% or 100% respectively.

There is clearly a cost to increasing the WCRS. Our analysis suggests that increasing the WCRS from 25% to 35% implicitly cost around £14m. Increasing it from 35% to 50% would cost £22m. Increasing it to 100% would cost a further £71m.

These increased costs of the WCRS would tend to be funded by higher charges on customers more generally. Increasing the WCRS from 35% to 50%, at a cost of £22m, would imply an additional £8 annually on all bills, somewhere between 1.5-2% of a typical bill.

This report has used two measures of water poverty to examine the affordability of water and sewerage charges. These measures consider the proportion of households’ disposable income that is spent on water and sewerage charges.

No single measure of water affordability is ever likely to be perfect. Limitations of the water poverty measures include the fact that it ignores other aspects of households financial wellbeing, such as debt and assets, and income volatility and uncertainty. Nonetheless, the water poverty measures used in this report remain the most pragmatically useful, given the availability of data; and they allow for comparisons to be made across time for different types of customer.

We find that water charges became more affordable – water poverty rates declined – during the cost of living crisis. This result, whilst perhaps surprising, reflects the below inflationary increase in the charge, combined with temporary cost of living support delivered to households in receipt of means tested benefits.

The improvement in water affordability is unlikely to last, and water poverty looks likely to return to its historic norm in 2024-2025 and 2025-2026.

There is inevitably a trade-off between the affordability of charges and the revenues raised through those charges. The lower than permitted increase in charges in 2022-2023 and 2023-2024 helped achieve a 1.5 percentage point reduction in water poverty. But this has meant lower revenues, to the tune of around almost £100m per year, for Scottish Water. The effect of this lower revenue on investment, and hence future consumers, is as yet unclear.

The current Strategic Review of Charges has recently commenced and will consider the outlook for charging during the 2027-2033 period. There is likely to be a strong need to support growth in investment to maintain service levels and invest for the future, particularly given the challenges of adapting to climate change.

This is likely to lead to a need for above-inflationary increases in the water charge. It is therefore important that improvements to affordability mechanisms are robustly considered alongside the SRC process.

The Scottish Government has made clear that it does not intend to fundamentally revisit the structure of water charges and the affordability mechanisms in advance of the 2027-2032 charging period.

However, in light of the likely increases in charges during this period, it is vital that low-income consumers are protected from the impacts of those charges. Whilst the WCRS is not perfect – in the sense that not all consumers in water poverty receive it – it will remain the most effective tool available to the government to support low-income consumers with their bills.

Consumer Scotland therefore recommends that the level of discount provided through the WCRS is increased from 35% to 50% in April 2027, and maintained at that level throughout the duration of the 2027-2032 period. This is likely to represent a relatively cost-effective way of helping to keep bills affordable for many households in the short term, particularly if it coincides with efforts to raise the take-up of Council Tax Reduction. The policy would reduce the number of households in water poverty, and improve the affordability of bills for some low-income households who are not technically in water poverty.

However, an increase in the WCRS would not benefit all households in water poverty, since a large number of those households are not in receipt of it. Because of this, Consumer Scotland also recommends that there is a case for scoping the potential for introducing an additional ‘by-application’ mechanism to offer reductions in charges for customers who fall through the gaps of existing affordability support mechanisms. This would only be practical if an appropriate mechanism for delivering such a by-application scheme could be designed and administered for costs that are commensurate with the expected level of take-up. It would be a temporary measure until better a targeted structure of affordability support could be introduced in the longer-term.

In the longer term, policy needs to move towards a fairer charging system with better targeted affordability policy. In the context of the 2027-2033 charging period however, fundamental reform is unlikely to be practically deliverable. Therefore, improvements to affordability policy must be pragmatically workable within the context of the existing system. An increase in the WCRS supplemented by a ‘by-application’ safety net are examples of such pragmatic solutions that are worthy of consideration.

[i] Scottish-Water-Annual-Report-2024.pdf (scottishwater.co.uk)

[ii] In Annex C of the commissioning letter for the Strategic Review of Charges 2027-2033, provided to WICS by Scottish Ministers, it is set out that the “the collection arrangements and tariff structure applying to unmetered household charges in 2021-2027 should continue for the 2027-2033 period”. In the same annex, Ministers set out that: “The charging policies contained within this document will be reviewed by the Scottish Government, in consultation with water industry stakeholders, to ensure that they continue to meet the Government’s overall policy priorities and to inform water industry policy for the period beyond 31 March 2033.”

[iii] Moving to a different basis for charging would be a significant change in policy. Respondents to the Scottish Government’s recent consultation on water policy indicated a level of dissatisfaction with the current system, with approx. 53% of respondents (259 of 431 responses) disagreeing that “Council Tax Bands is the fairest way to charge for services used by households”. Although it was not the main focus of the research, Consumer Scotland’s deliberative research on climate change and adaptation within the water sector also explored the issue of billing (and particularly as an alternative used in other jurisdictions, the prospect of metering). The research agency Ipsos who managed the deliberative process noted that, alongside Combined Sewer Overflows, the introduction of water metering was one policy topic where “participants held widely differing views from one another, did not feel able to reach consensus and called for more information and evidence to be provided, reflecting the contentiousness and complexity of the issues.”

[iv] Scottish Water: directions 2020 - gov.scot (www.gov.scot)

[v] Water services - charging principles: 2021 to 2027 - gov.scot (www.gov.scot)

[vi] See Annex A of Water services - charging principles: 2021 to 2027 - gov.scot (www.gov.scot) for details of the calculation

[vii] Consumer Scotland (2023) Action required to protect low income water consumers from debt | Consumer Scotland

[viii] Water Sector Vision - Scottish Water

[ix] WICS (2020) Final Determination 2021-2027 2021-27 Final Determination.pdf (wics.scot)

[x] Department of the Environment, Transport and the Regions, (1999)

[xi] For examples of this approach, see Bradshaw and Huby (2013) for application to England and Wales Water poverty in England and Wales in: Journal of Poverty and Social Justice Volume 21 Issue 2 (2013) (bristoluniversitypressdigital.com), and more recently Consumer Council for Water

 (2021). Independent Review of Water Affordability. Consumer Council for Water, Birmingham, UK.

[xii] See Fraser of Allander Institute (2019) and Fraser of Allander Institute (2020)

[xiii] Sylvester et al. (2023) Water poverty in England and Wales in: Journal of Poverty and Social Justice Volume 21 Issue 2 (2013) (bristoluniversitypressdigital.com)

[xiv] Equivalisation is a standard methodology that adjusts household income to account for the different financial resource requirements of different household types. Equivalisation recognises that, for example, a household of two adults and two children requires a higher income than a household with two adults to maintain an equivalent standard of living. In this analysis, household income is equivalised using the OECD equivalence scale. 

[xv] The IPPR Tax-Benefit model is a static microsimulation model. It uses FRS and HBAI data to simulate the effects of tax and benefit policy changes on different households. It is used extensively by a number of the UK’s most prominent public policy think tanks and academic research institutes.

[xvi] For evidence of this see pp. 33-35 of Health Inequalities in Scotland: Trends in the socio-economic determinants of health in Scotland | FAI (fraserofallander.org)

[xvii] A large number of households spend around 3 per cent of income on water and sewerage, so small movements in the water charge relative to income can move them from one side of the poverty line to another. In contrast, some of the households who spend more than 5 percent of income on water and sewerage spend noticeably more than 5% of income on water and sewerage; so relatively large movements in water charges don’t necessarily affect which side of the poverty line these households are on.

[xviii] See FAI (2018) The affordability of water and sewerage charges in Scotland | FAI (fraserofallander.org)

[xix] Bank of England Financial Stability Report, June 2024 Financial Stability Report - June 2024 | Bank of England

[xx] The increase in WCRS from 25% to 35% does not result in an increase in the overall average WCRS per household because single person households are eligible for a maximum of bill reduction of 10% through the WCRS over and above their Single Person discount.

[xxi] There are small increases in the number of WCRS recipients as the WCRS increases. This relates to the way that the WCRS for Single Person households who receive less than a 100% Council Tax Reduction. To illustrate, imagine a single person household which receives a 70% council tax reduction. If the WCRS is 35%, this household does not receive any WCRS reduction on its water bill, because 35% of 70% is less than the Single Person status discount of 25% which they would already receive. But if the WCRS increased to 50%, the household would be entitled to a reduction of 50% of 70% which is 35%. They would therefore receive, through the WCRS, a further 10 percentage points reduction on their water bill over and above the Single Person status discount.

[xxii] Universal credit: incomes, incentives and the remaining roll-out | Institute for Fiscal Studies (ifs.org.uk)

[xxiii] There have been no recent attempts to model take-up of CTR at a Scottish or GB level.

[xxiv] Appendix A: Smart metering in revised draft water resources management plans - GOV.UK (www.gov.uk)

[xxv] How is my water bill worked out? - CCW

[xxvi] Independent-review-of-water-affordability.pdf (ccw.org.uk)

[xxvii] Independent-review-of-water-affordability.pdf (ccw.org.uk)

[xxviii] Water-for-All-Water-Affordability-and-Vulnerability-Report-2019-20.pdf (ccw.org.uk)

[xxix] https://www.ccw.org.uk/publication/water-mark-2023/

[xxx] Independent-review-of-water-affordability.pdf (ccw.org.uk)

[xxxi] https://www.water.org.uk/wp-content/uploads/2021/04/Quantitative-analysis-of-water-poverty-in-England-and-Wales.pdf