Water bills in England and Wales are set to fall by an average of £50 between 2020 and 2025, under plans published by the industry regulator.
Ofwat said firms would also have to invest an additional £6m each day in improving services for customers.
It comes amid widespread dissatisfaction with the performance of many water companies.
Ofwat said the measures would mean “better services, a healthier natural environment and lower bills”.
“[Water companies] will be accountable not just for reporting against their performance but they’ll face tough penalties if they don’t achieve those targets,” Ofwat boss Rachel Fletcher told the BBC’s Today programme.