(Bloomberg) -- Thames Water’s troubles look set to cost the UK water industry dearly.

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The sector needs to raise an estimated ￡40 billion ($53 billion) of debt to meet the regulator’s requirement for infrastructure investment over the next five years, according to people with knowledge of the plans, and if recent bond sales are a guide they will have to pay a premium to do so. In the past month, Yorkshire Water, Anglian Water and Welsh Water have all borrowed at rates higher than Ofwat has currently factored in.

Applying Yorkshire’s costs to this amount of debt, then water utilities could face an additional ￡390 million in annual interest that the regulator hasn’t accounted for, calculations by Bloomberg show. Yorkshire paid the highest rates among recent deals, though even using the lowest from Welsh Water implies ￡140 million a year more.

It’s a sign that contagion risks after the default of Thames’s parent company have already started to materialize, though the figures don’t account for changes in future borrowing costs or the cash not being raised all at once. Still, the resolution of Thames’ finances looks pivotal for the sector’s debt burden, as it seeks to fix leaky pipes and curb sewage spills.

“The market and to a certain extent the rating agencies are questioning the regulatory regime,” said Jamie Irvine, an investment manager at abrdn plc. “You can see there is a lot more caution around the sector.”

Ofwat declined to comment specifically on the calculations. A spokesperson said it will take a final decision on its plan for the next five-year regulatory period in December, which will include the allowed cost of new debt, and it’s considering market data among the factors.

The regulator, which controls companies’ price of water bills and return on equity, can fine them for failing to meet targets. Total borrowing in the sector increased to ￡68.3 billion as of March 2023, up from ￡60.6 billion a year earlier, according to an Ofwat report.

While it can make changes to its estimated cost of debt to reflect moves in the market, a company with high costs won’t be able to fully recover the difference, according Paul Vickars, senior credit analyst at Bloomberg Intelligence.

“A company that’s debt is above the allowed level will have to absorb the extra costs, reducing profit and lowering margins, then making the companies less investible assets,” said Vickars.