Charities in England and Wales will be able to apply for up to £500,000 to fund projects that transform water services and help consumers and the environment.
Ofwat, the water regulator, will launch the £4m fund early next year.
It said charities, as well as other sectors including community groups and local government bodies, would be able to apply for grants.
The contest is part of Ofwat’s £200m Innovation Fund, which incentivises and rewards collaboration and innovation in the water sector.
John Russell, senior director of strategy, finance and infrastructure at Ofwat, said: “We need greater innovation in the water sector to tackle the significant challenges it faces. The Innovation Fund has inspired multiple collaborations between companies in and outside of the water sector.
“The ambition of the winning entries to date demonstrates the sector’s commitment to build a resilient water system that benefits the environment and customers.”
The fund has four main objectives, including adapting to climate change and protecting the environment.
So far, the fund has awarded a total of £63m to various projects, such as to help communities improve the health of their local rivers.
The statutory body, founded in 1989, is encouraging ideas that seek to support vulnerable customers, as the cost of living crisis worsens.
Previous winners of funding include Fair Water, a consortium featuring fuel-poverty charity National Energy Action, which was given £3.8m to explore ways in which customers could reduce energy and water use at home.
Ofwat is consulting on plans to continue the Innovation Fund until 2030.