The link between flushing the lavatory and turning the lights on may not appear that obvious. But businesses who understand it could be part of a market worth up to £780m, says the water regulator Ofwat.

Treating the nation’s sewage produces vast plumes of biogas — gas produced from organic waste — that can be used to generate electricity or fed into the gas grid, an opportunity Ofwat wants more companies to exploit.

“While some may be squeamish about this, it is an industry we ought to support because it is safe, green, sustainable and economically attractive,” Cathryn Ross, Ofwat chief executive, said on Wednesday. “As the old saying goes, ‘where there’s muck, there’s brass’.”

The regulator oversees 18 water companies in England and Wales, 10 of which also treat sewage.

Ofwat is not planning any policy changes to encourage more companies to make money out of what it calls “bioresources” — or “sludge”, as it is more commonly known. “It’s not like we can compel organisations to do this,” said an Ofwat spokesman.

But it is planning to provide more information highlighting the financial value of selling biogas, along with the farm fertiliser that can also be produced by treating sewage. This will it hopes encourage existing water companies and biogas businesses to “see where the value is” and act accordingly, the spokesman said.

The sludge market could potentially produce “benefits of up to £780m”, Ofwat said.

The move was welcomed by the biogas industry, which was one of the fastest growing in the world last year, according to the Renewable Energy Association.

However, some industry executives were puzzled by Ofwat’s announcement, since the UK government has moved to rein in support for biogas as it tries to cut back on renewable energy subsidies. “This is a little late in the day,” said Philipp Lukas, managing director of Future Biogas, which across the UK operates 10 anaerobic digestion plants— facilities that turn organic waste into biogas.

Some treatment companies had already been taking advantage of subsidies to produce biogas, he said, but the outlook for growth in the market had been clouded by the government’s cuts to green energy projects. “The future of many support mechanisms beyond March 2017 is uncertain,” Mr Lukas said.

Severn Trent, the FTSE 100 water company, said it was aware of the market potential that Ofwat has highlighted. “We agree there is the opportunity to create more value from sludge, with Severn Trent already using anaerobic digestion of sludge as part of our plan to generate the equivalent of half of our energy by 2020,” said Liv Garfield, Severn Trent chief executive.

“We welcome Ofwat’s approach to introducing market mechanisms that will help reveal broader opportunities both within and beyond the areas we serve.”

The Anaerobic Digestion and Bioresources Association said Ofwat’s ideas were welcome but needed to be carefully balanced to ensure fair competition between water and sewage companies, and the wider waste market.

According to Charlotte Morton, chief executive of the association, 75 per cent of sewage sludge is already treated through anaerobic digestion processes to produce biogas and renewable fertiliser. “The anaerobic digestion sector has grown hugely since 2010, now providing the UK with over 500 megawatts of baseload generation capacity,” she said.

The Renewable Energy Association says that by the end of 2016, the UK’s renewable gas industry will be producing the equivalent of four liquefied natural gas tankers a year, injected directly into the country’s gas grid. That could grow to 45 LNG tankers a year by 2035, the association says.

With 50 biomethane projects completed at the end of 2015 and another 16 expected this year, the industry says by the end of 2016, the UK will be producing more “green gas” domestically than all the LNG imported at the Dragon terminal in Milford Haven in 2014.

Additional reporting by John Murray Brown