Households look set to save up to £25 a year off their water bills from 2020 to 2025 under plans put forward by regulator Ofwat.
The watchdog said its upcoming price review would be tough on companies and ensure customers can look forward to "lower bills, improved services, reduced leakage and more help for the most vulnerable".
Under the plans, which set limits on the prices that customers in England and Wales will pay for water between 2020 and 2025, Ofwat said it is proposing to set the so-called cost of capital that has a direct bearing on bills at a record low of 2.4%.
It said this could see customers save between £15 and £25 a year on average from 2020.
The plans give water companies less room to charge customers based on the costs of raising debt or equity.
This comes after Ofwat drew harsh criticism from the Public Accounts Committee last year for consistently overestimating companies' costs when setting price limits - leading to higher bills for customers.
Ofwat said it will also for the first time see help for vulnerable customers included as an "explicit part" of the price review, with water companies required to draw up and deliver plans to identify and help those in need.
The regulator said it wants suppliers to "go the extra mile" and take firmer action on tackling leaks.
In its most stretching target yet, it wants firms to save 170 billion litres of water a year - enough to meet the annual needs of 3.1 million people.
Cathryn Ross, chief executive of Ofwat, said: "The next decade will see profound changes in customers' expectations and we are pushing the water sector to be at the very forefront of that."
She added: "We've said many times already that this will be a tough price review for companies
"We will cut the financing costs they can recover from customers and, with this lower guaranteed return, they will need to more efficient and innovative than ever before."
The Consumer Council for Water (CCWater) welcomed Ofwat's announcement but warned against companies "being able to give to customers with one hand while taking from them with the other".
CCWater chief executive Tony Smith said: "This is positive news for customers. Ofwat has been over generous to water companies in the past at the expense of customers - a point we have repeated publicly many times and has been echoed by the National Audit Office and the Public Accounts Committee.
"However, we are concerned that the regulator has decided to remove the cap on the financial rewards companies can receive for meeting their performance targets.
"This could hand companies an opportunity to claw back some of the money they would be unable to get through lower financing costs and it could lead to bill increases which many customers view as rewards for doing the day job."
Companies will submit their business plans to Ofwat in September next year and Ofwat will publish its final decisions in December 2019.