Ofwat has paved the way for suppliers to temporarily increase water bills for thousands of businesses, as company failures left a hole in water firms’ finances.

The regulator said that many companies have struggled to pay their bills as the pandemic takes a toll on business.

As a result, water companies have seen bad debt across the market reach more than 2% of their non-household revenue.

Ofwat said that prudent suppliers should be able to plan for and deal with bad debt levels of up to 2%.

But anything above that they will now be allowed to recover from other business customers on their books.

Although water companies will have to shoulder a quarter of the bad debt above the 2% threshold, the rest can be added to companies’ water bills over the next two years, Ofwat said.

Ofwat business retail market director Georgina Mills said: “These decisions aim to protect the interests of non-household customers in the short and longer term, including from the risk of systemic retailer failure as the business retail market continues to feel the impacts of Covid-19.

“By implementing market-wide adjustments to price caps, we aim to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition.”

Yet, shares in listed water companies Severn Trent and United Utilities were both in the red shortly after markets opened in London.

The price increases will be smoothed out by keeping the increase in water bills in place for a minimum of two years, Ofwat said.

The regulator will still consult on some parts of the decision and is taking opinions until September.