The largest water reuse system in the UK, which could save thousands of litres of water a day for people living in one of the driest regions of the country, is not allowed to be switched on because of drinking water regulations.

As water supplies in England reach critical levels, the Guardian can reveal that a model water recycling system within an urban housing development in Cambridgeshire has not been switched on since it was made ready in 2021.

Thousands of residents could be saving about 25 litres per person per day by using recycled rainwater in their homes for non-drinking purposes. But the water reuse system – installed by Cambridge Water at the Eddington urban quarter, a mixed development of housing, student accommodation, academic research space and a primary school and nursery – has been switched off because the Drinking Water Inspectorate (DWI) deems it is not in line with the law.

This summer’s drought has led to Cambridge Water and neighbouring Anglian Water imposing hosepipe bans as reservoirs have run low.

The block to the water reuse scheme, and others that water companies want to install, is hampering attempts to bring in large-scale water recycling schemes for new developments and tackle the extreme water shortages the country faces by 2055, experts warn.

Despite ministers in the current and previous governments being aware of the obstacle, there has been no change to the law and the reuse system remains locked down.

Lutz Johnen, the chair of the UK Water Reuse Association, said the block at Eddington needed to be removed urgently and the system copied at scale across the country.

“The government is aware of this issue and there is activity around this. But they need to act urgently. We are running out of water, we are seeing that this summer, water companies are struggling,” he said. “Rainwater harvesting and grey water recycling are well-proven and sustainable technologies that have been implemented internationally at scale for years. The UK is lagging behind.”

Water reuse involves either rainwater harvesting or recycling grey water from household appliances, or both, for domestic and commercial buildings. In homes it can save 20 to 25 litres of water per person per day.

Other countries in Europe, such as Belgium and Germany, have had reuse systems operating for more than 20 years. In Belgium, mains water use is about 90 litres per person per day, compared with 140 litres per person per day in England and Wales.

At Eddington, on the north-western edge of Cambridge, the urban quarter developed by Cambridge University will eventually provide homes for 8,000 people. Its state-of-the-art water recycling system involves swales that capture rainwater and feed it into a lagoon that protects nearby brooks from flooding.

Cambridge Water designed a treatment system that allows the lagoon’s water to be recycled back into the homes for toilet flushing and other non-drinking purposes, with the aim of significantly reducing water consumption to about 80 litres per person per day.

But the DWI intervened to object, saying water companies providing grey water in homes was illegal, according to its interpretation of the 1991 Water Act.

Section 70 of the 35-year-old act makes it an offence to supply water that is unfit for human consumption for household use. In addition, regulation 4 of the water supply (water quality) regulations 2016 requires water supplied for domestic purposes to be wholesome, meaning it must meet the same standards as drinking water.

Labour ministers are channelling millions of pounds into the Greater Cambridgeshire area, one of the most water-scarce in the country, as a key growth area. They have held up the Eddington development as an example of innovative water reuse schemes and are aware of the legislative block.

Last year, Matthew Pennycook, the minister for housing, promised to work with experts to switch on the water recycling system at Eddington by 2026.

Cambridge Water said in a statement: “Cambridge Water is working with the Department for Environment, Food and Rural Affairs (Defra) to identify solutions to the current legislative constraints that mean water companies can only supply potable water to households.

“We are keen that the water demand savings are unlocked at Eddington from this installation as soon as practically possible, particularly as Cambridge is an area of significant water stress. We believe these types of schemes have a critical part to play in reducing the demand for water.”

The Environment Agency has predicted a water demand gap in England of 5bn litres a day by 2055 unless urgent action is taken.

In March, the DWI created a framework for rainwater harvesting and grey water reuse in homes and commercial properties, after being told to act by ministers. The DWI agreed that using rainwater and grey water for applications that do not require a supply of water of drinking water quality was needed to tackle water shortages. Its report recommended the law be changed to allow dual-use water systems in homes.

A spokesperson for the DWI said the government was reviewing its recommendations. They said while rainwater and grey water reuse could help address water shortages, it had to be done safely and not pose risks to public health. “Under the Water Industry Act 1991, all water used for domestic purposes must be wholesome. As the regulator, the Inspectorate acts in the interest of public health by enforcing this legislation,” the spokesperson said.

A University of Cambridge estates division spokesperson said: “Sustainability is embedded in the design of Eddington and water scarcity is an important issue in Cambridge. The rainwater harvesting system has not been switched on at Eddington because the extensive commissioning process in 2021-22 revealed a gap in regulations that can only be fixed by changing the law.

“Currently, the system would need to run on drinking-quality water, even for non-drinking water uses, which is not possible for homes on the scale delivered in Eddington. We have engaged positively with the Drinking Water Inspectorate and Defra. We welcomed a commitment from the minister to review the regulations. The forthcoming water bill may be an opportunity to improve the regulations.”

A Defra spokesperson said: “We want to see adoption of rainwater recycling and grey water reuse and we’re working with the Drinking Water Inspectorate to review the regulations and make this happen. We know the water system isn’t working and we’re taking action – banning unfair exec bonuses and setting up a new regulator, backed by a record-breaking £104bn of private investment to fix leaking pipes and build nine new reservoirs.”

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