The price of water

This article explores the determinants of water prices in the Netherlands and globally, and the trends in water pricing in the Netherlands.

Water is essential to society

Human health is highly dependent on the availability of clean water and many economic sectors, such as the agricultural, food, and energy sectors, are not able to produce valuable goods and services without water. Paradoxically, in many societies, water is affordable, perhaps precisely because it is so crucial. Access to clean water is often recognized as a universal human right and this is one reason why water prices tend to be regulated or controlled by governments.

Water prices are typically set to recover the costs of water treatment and distribution

One of the main drivers of these costs are possibilities for economies of scale. Larger amounts of water mean that the investment costs for water infrastructure can be distributed over more units of water. As a result, single providers are most efficient and this is another reason why state-owned and/or heavily regulated monopolies supply water in most areas. This is also why water costs more in small island states like Kiribati (more than EUR 5 per m³) compared to other countries (typically less than EUR 3 per m³). There’s also a substantial variation in the costs of building, operating, and maintaining water supply systems, due to differences in input costs (materials, energy, and labor), among other things. Also, the cost of water treatment varies depending on the raw water quality, which is highly dependent on where it is mainly sourced from: surface water (rivers, lakes) or groundwater. Surface water tends to be more polluted, so that treatment is more costly. Water prices also depend on the availability of government subsidies. Subsidies enable water suppliers to charge water prices that are lower than, but still related to, the production costs. In extreme cases, the connection between cost and price is completely severed, like in Ireland, where water suppliers are fully funded by the government and water users do not pay any water charges. Due to these differences in production costs and funding, the price of water relative to disposable household incomes varies greatly between countries. This is shown in Figure 1 below. Figure 1 plots water affordability (vertical axis) against the drinking water quality in selected OECD countries (horizontal axis). A score of 100 indicates that drinking water is of the highest quality, while a score of 0 indicates it is of the worst quality. This score is based on how many human life years are lost (DALY) due to the exposure to unsafe drinking water. The figure shows that drinking water quality varies considerably between countries.

In the Netherlands, water companies supply drinking water at an average rate of EUR 2.19 per m³

This rate (2023 prices) includes a usage tax (EUR 0.38 per m³) that applies exclusively to the first 300 m³ of water consumed annually. This means that larger users pay a lower effective water price. Dutch water prices are set in line with the production cost of water as required by the EU Water Framework Directive. The main water users are households (811 million m³ per year), the food industry (59 million m³ per year), agriculture, forestry and fishing (41 million m³ per year), chemical industry (39 million m³ per year).

Water is affordable in the Netherlands compared to other Northwestern European countries

In other Northwestern European countries, drinking water quality is similarly high (drinking water quality index of 95 or higher based on Yale’s Environmental Performance Index) and household disposable incomes tend to be similar (+/- 11% relative to the Netherlands, with the exception of Ireland (-21%)). For these countries, the cost of 30 m³ of water is expressed as a share of household disposable income (see Figure 2 below). Countries were differentiated based on their main raw water source (surface water or groundwater). This comparison shows that Dutch drinking water is affordable, even compared to countries that also mainly source from groundwater. The differences between the lowest and highest prices in each country suggest that the price of water relative to household income varies as much within countries as it does between countries. Also in absolute terms, water prices in the Netherlands are 16% below the median price (based on 2021 prices).

Water pricing has reached a tipping point in the Netherlands

In the past decades, the limited need for investment and operational improvements have enabled Dutch water suppliers to maintain low water prices. This is why water has become cheaper relative to other goods and services. In 2022, households paid a price that was 22% lower than in 1997 (in real terms). Industrial water users paid 14% less compared to 2017. However, water prices started to increase in 2023, with households and industrial users paying 14%-15% more. Water prices for 2024 have been increased by another 9% for households and 15% for industrial users.

Water suppliers have started to raise water prices to help cover increasing production costs

Production costs have increased due to increasing input (materials, energy, and labor) costs. Water prices are also increasing to enable investments in a future-proof water supply sector. In particular, the total investments by Dutch water companies will likely go up by 50% until 2029 in order to deal with (i) population and economic growth, (ii) climate change, and (iii) water pollution:

Water prices are likely to increase further in the coming years

The combination of increasing total water demand and shrinking water availability will increase water stress in the Netherlands. The Human Environment and Transport Inspectorate (part of the Ministry of Infrastructure and Water Management) warned in January 2024 that the availability and quality of drinking water can no longer be taken for granted. Climate change and pollution negatively affect surface and groundwater sources. Population and economic growth increase the total water demand. In response to this, the government aims to reduce water consumption of households and large users by 20% in 2035 (compared to 2022). The water supply sector will have to ramp up efforts to deal with this. Many other European countries also face mounting water stress (see Figure 4). This development will likely be reflected in higher water prices.

Water prices are shaped by the production costs of water and by government policies that reflect the crucial role of water. However, the supply of water will become increasingly challenging, and this is expected to lead to higher prices paid by water users. In the Netherlands, significant investment will be needed to keep clean water available, resulting in a clear break from the multi-decade trend of falling real water prices.