Regulation of the water industry Contents

1Increasing supply


9.Increasing the supply of water is one part of the twin track approach to increasing resilience, particularly in the context of the increased likelihood of drought. Water companies mainly take water from lakes, reservoirs and rivers (and underground sources to a lesser extent): this is termed abstraction.30 Water companies are not the only companies that abstract water. In 2015, water companies in England and Wales abstracted over 15 million litres of water per day to produce drinking water; around a third of the total volume of water abstracted daily.31 By comparison, 70 per cent was for other uses such as industrial processes and electricity production and less than 1 per cent was for agriculture.32 There are around 19,000 abstraction licences in force in England; of which 1,400 are for public water supply.33 Abstraction is regulated by the Environment Agency (EA), which provides licenses to anyone taking or transferring more than 20,000 litres of water a day.34 The EA controls “how much, where and when water is abstracted” through its licensing system and it has “the power to amend or revoke existing licences” where abstraction is deemed to be damaging the environment.35

10.Sir James Bevan, Chief Executive Officer of the Environment Agency, explained that the abstraction licensing system was “designed for a period where there was no water stress […] and far fewer people”.36 He told us that “many of the abstraction licences have no limits on the amount of water that you can take out of the ground, and many of those abstraction licences are very long-term”.37 The water abstraction licensing system, “many aspects of which date back to the 1960s” is being reformed by the Government.38 Defra identified that there was a lack of flexibility in coping with increasing demand for water and that the abstraction service was outdated and paper-based.39 In January 2016, Defra published its Water Abstraction Plan, including solutions such as “developing a stronger catchment focus”, a principle that was supported by some who responded to our inquiry.40 The Government will report to Parliament by May 2019 on the progress made regarding abstraction reform.41

11.There appeared to be uncertainty over whether abstraction reform would be underpinned by legislation. The Committee on Climate Change stated that “final reform proposals were originally expected in a draft Bill later in 2017, but this was not completed and there is some uncertainty as to whether time can be found in the parliamentary schedule to take this forward”.42 The Chartered Institution of Water and Environmental Management (CIWEM) stated that:

For a significant period of time, there was a recognised need for primary legislation to provide the Environment Agency with powers to revoke certain unsustainable abstraction licences and allow increased optimisation of licences through trading. Due to the legislative programme created by Brexit the chances of new water legislation were considered minimal and therefore a more voluntary and regulatory approach has been taken which, whilst it theoretically could achieve results and which proposes measures which [we are] supportive of, may fail to achieve the required savings in the longer term without legislative teeth.43

WWF-UK similarly stated that “the plan’s success is heavily reliant on voluntary approaches” and that:

To protect rivers from over-abstraction, statutory environmental flows must be protected in all rivers, through caps on all abstraction licences when river flows go below an agreed level (“hands-off flows”). This would provide welcome regulatory underpinning to the proposed approach and encourage innovation in terms of efficiency; trading, storing and sharing water; and driving down demand.44

12.Sir James Bevan, however, stated that “at the moment, we are finding that the water companies understand the importance of reducing unsustainable abstraction and we are concluding agreements with them […] to ensure that we are at sustainable abstraction levels”.45 He acknowledged that “those levels will have to come down further in future” but considered that the EA had “the powers that we need to get to where we want to get to”.46 Sir James stated that he “would rather try to reach voluntary agreements than wield a big stick”, a sentiment echoed by Dr Thérèse Coffey MP, Parliamentary Under Secretary of State for the Environment, who considered that “it is often quicker to get the voluntary approach going than trying to prepare legislation”.47 Dr Sebastian Catovsky, Deputy Director for Water Services, Defra, stated that “many of the changes that we need to deliver to reduce over-abstraction come from water company licence changes” and that:

[Defra] and the Environment Agency have set clear targets for how much we want to achieve through the current approach in terms of reducing over-abstraction. We want to get to 90% of surface water bodies and 77% of groundwater bodies being in good ecological status as a result of water resources. If we do not achieve that by 2021, we will look again at what additional powers are needed.48

13.Reform of the abstraction system was long overdue, and we welcome the focus on catchment-based approaches. The Government and Environment Agency must make a rigorous assessment of whether a voluntary approach will be sufficient to protect water resources and the natural environment in the long-term. The legislative demands of Brexit must not prevent statutory reform, should it become necessary. In its update to Parliament in 2019, the Government should include an assessment of the need for statutory reform.

Water transfers and trading

14.As water becomes scarcer, it will not be always possible for water companies to increase supply by abstracting more water. Another method is transferring and trading water between regions, particularly where there are areas of surplus and deficit. A 2018 report by the National Infrastructure Commission (NIC) on drought resilience was particularly supportive of water transfers and explained that “a range of studies have all found a positive cost-benefit case for greater transfers and water trading”.49 Ofwat has also commissioned studies that “identified scope for increased trading levels” and “identified savings of £810 million (net present value, 2015–16 prices) from increased trading between water companies”.50 Despite this, transfers currently only make up around 4 per cent of total supply, a level that has barely changed since 1989.51 We therefore decided to explore the feasibility of water transfers and trading as part of our inquiry.

15.Water trading is “where a water company responsible for supplying water in an area buys it from someone else (either another water company or third party provider)”.52 Both raw and treated water can be traded, and trades “are typically agreed as part of the water resources management plan (WRMP) process to ensure long-term water supply in an area”.53 Water trades are sometimes referred to as bulk supplies, and Ofwat maintains a register of these transactions.54 Water companies agree the price and terms and conditions through “bulk supply agreements”.55 Rachel Fletcher, CEO of Ofwat, explained that “where there are trades between companies, there are commercial arrangements in place that govern the terms of those trades, both in terms of the volume and the price, including what happens when there is water-resource pressure”.56 She stated that “there are very low levels of water resource transfers between water companies” despite there being “water-rich and water-scarce companies side by side”.57 She added that “it begs the question of why transfers are not happening to improve resilience”.58 Ofwat has “introduced a number of measures to promote increased trading” in PR19, such as water trading incentives; these are “targeted financial incentives that lower the costs of importing water and increase rewards for exporting water”.59

16.Steve Robertson, CEO of Thames Water, explained some of the challenges associated with transferring water:

i)When the likelihood of simultaneous drought is high, “we have to be careful about assuming that we would be able to transfer water”;60

ii)Water is heavy, so “if you want to transfer it, it is quite expensive because you have to pump it up and down hills”;61

iii)There are “environmental issues that also need to be handled in terms of invasive species”;62 and

iv)Combining “different sources of raw water presents a specific set of challenges.63

In addition, CIWEM considered that leakage in the water system created a “risk of losing a significant amount of […] water before it gets to its destination”.64 The NIC found that the scale of the required infrastructure “goes well beyond that seen in the plans currently proposed by water companies” and “is likely to need strengthened regional approaches and perhaps an independent national framework”.65

17.Despite the challenges, Rob Lawson, Chair of Water Resources Panel, CIWEM, told us that increasing water transfers between companies was “certainly possible” and that:

Water Resources in the South East, which is the collection of various companies that have collaborated on water resource planning in the south-east over the past 10 years or so, is looking at quite a lot of intercompany transfers of that scale, in that part of the country.66

United Utilities expected “that future resilience in water supplies will depend upon an increased level of water trading across company boundaries” and that “operating in a region with a relatively strong water resources position, we have promoted the possibility of a north-south water transfer of up to 180 ML/day from Lake Vyrnwy [Wales] to the River Thames, via the River Severn and a new interconnector pipeline”.67 Steve Robertson, CEO of Thames Water Utilities Ltd, considered that water transfers were “a really important part of the overall solution”, although not “a silver bullet”.68

18.The Government was supportive of water transfers: Sebastian Catovsky, Defra, considered that water transfers were “crucial” for resilience in the context of increased population and more climate change incidents.69 He suggested that the 4 per cent that is currently transferred between companies “probably needs to double over 10 to 20 years”.70 The Minister, Thérèse Coffey MP, stated that “there should be more on water transfers” and that the Government recognises that it “is not happening yet but [is] starting to see some more relationships happening between water companies, recognising the challenges they face”.71 To increase transfers, water companies may need a change of mindset; Rachel Fletcher suggested that in emergencies, companies should be “co-operating and collaborating so that customers get the best possible service” rather than “thinking about this as a commercial transaction”.72

19.Although there are infrastructure and environmental challenges to be overcome, water transfers should play an important role in increasing supply and resilience. Although transfers might be difficult to put in place during short-term episodes of drought, they would help companies to manage their resources effectively in the long-term. It is therefore disappointing that only 4 per cent of water is currently traded. This suggests that Ofwat’s incentives are not strong enough.

20.We note Defra’s suggestion that 8 per cent of total supply will need to be transferred in the next 10 to 20 years. The Government and Ofwat should make a strategic assessment of the need for water transfer infrastructure and confirm a long-term target for water transfers. We are concerned that existing incentives in PR19 are not strong enough to incentivise water companies to invest in water transfers.


21.Abstraction and transfers are two methods of increasing the amount of water supplied to water companies. However, taking a wider view of increasing supply to customers, the issue of leakage becomes pertinent. Water companies in England and Wales are responsible for 343,865 kilometres of water pipes, which vary in age and construction material.73 An estimated three billion litres of water are lost through leakage every day—enough to fill 1,273 Olympic swimming pools.74 Leakage figures for 2017–18 showed that, on average, 9.3 cubic metres of water were leaked per kilometre of water pipe per day, with the worst performer being Thames Water (22.1 cubic metres per kilometre per day).75

22.Water leakage matters for two reasons. First, the loss of water through leakage has an impact on how much water is abstracted; the Environment Agency indicated that water companies have relied on abstraction to respond to rising demand and that they should instead “invest more in infrastructure to address leakage”.76 Second, it impacts on consumer perceptions of the industry and their willingness to reduce water use. The Consumer Council for Water (CCWater) stated that “consumers are discouraged from becoming more water efficient because they believe that companies should be doing more to tackle levels of leakage”.77 CCWater’s research has shown that “three quarters of consumers in England felt that companies do not do enough to save water, and 72% would do more to save water themselves if they could see that water companies were also doing more”.78 Demand reduction is examined in the next chapter.

23.Detecting water leaks is challenging. Steve Robertson, CEO of Thames Water, told us that it had a “massive network” that was “very dense”, particularly in London.79 He explained that “if you think about any pipe network, every time there is a connection, there is an opportunity for a leak to happen”.80 He added that “98% of the water that we lose in leakage is under the ground. You would never see it”.81 However, he explained that “in terms of finding leaks and sorting them, there is a lot of quite cool technology that is now available”, such as drones, and acoustic loggers, which “listen to the water going through the pipe and help to narrow down the area where a leak may be”.82

24.Although overall leakage has reduced by around a third since its peak of 5 billion litres per day in the early 1990s, much of the reduction occurred in the first decade after privatisation, with only incremental improvements made since.83 CIWEM added that “the industry has made little progress in improving leakage during the last 5–10 years” and noted that “the current replacement rate is about one in every 200 years, so it will take 200 years to replace the current distribution network”, which is “obviously not sufficient”.84 Ofwat told us that it wanted “to see a renewed push” and has set “a challenge for the next price review [covering 2020 to 2025] to see leakage cut by a further 15% - which would save enough water for 3.1 million people”.85 Defra’s 25 Year Environment Plan contains the same target.86

25.We discussed this target with witnesses. Waterwise considered that “the 15% leakage target outlined in the PR19 methodology is driving ambition in companies and Sebastian Catovsky, Defra, stated that “the 15% will feel like quite a step change in the next five years so it will be quite ambitious to deliver nationally”.87 However, Sir James Bevan, CEO of the Environment Agency, told us that he “would like to see even stronger leakage targets” and highlighted that the National Infrastructure Commission (NIC) had suggested a leakage reduction target of 50 per cent by 2050.88

26.In September 2018, water companies submitted their business plans for 2020–2025 to Ofwat. The industry’s Manifesto for Water, published at the same time, highlighted “proposals to cut leakage by more than 16% over the five years, with some companies intending to go even further”.89 However, many water companies only set themselves the minimum target of 15% by 2025, including some of the worst performers for leakage (such as Thames Water and United Utilities).90 A few water companies also published long term leakage reduction targets, such as 50% by 2050 (Thames Water) and 50% by 2045 (Anglian Water).91

27.Failure to tackle leakage can incur penalties from Ofwat; for example, in June 2018, Thames Water incurred £55 million in penalties for “missing the commitment it made to customers to cut leaks” and has agreed to pay an additional £65 million back to its customers.92

28.A shocking amount of water is lost through leakage daily. As well as being wasteful, it gives a poor impression to the public about the value of water. Reducing leakage should be a top priority for the water industry.

29.We are pleased that Ofwat has shown enthusiasm to levy strong penalties on water companies that fail to reach their leakage reduction targets.

30.Ofwat’s target for water companies to reduce leakage by 15% by 2025 is not ambitious enough and Ofwat should set a long-term target for water companies to reduce leakage. This would help focus efforts beyond the five-year period of PR19. We consider that continuing the trajectory set by the target of 15% by 2025, the water industry should collectively be aiming to reduce leakage by 50% by 2040, rather than 2050.

30 Discover Water, Where water comes from, accessed September 2018

31 Discover Water, Where water comes from, accessed September 2018

32 Discover Water, Where water comes from, accessed September 2018; these figures do not represent use of water from mains supply, i.e. that which is provided by water companies.

33 Figures for 2016; Department for Environment, Food and Rural Affairs, Number of abstraction licences in force by purpose and EA regional charge area: 2012 to 2016, May 2018

35 Environment Agency, Managing water abstraction, 2016, p 6

36 Q 270

37 Q 270

38 Committee on Climate Change (RWI0006) para 2; Department for Environment, Food and Rural Affairs, Water abstraction plan, May 2018

39 Department for Environment, Food and Rural Affairs, Water abstraction plan, May 2018

40 A catchment is the geographic area of land drained by a river; For example, EnTrade (RWI0029) paras 9–10, Blueprint for Water (RWI0020) para 3.2

41 Department for Environment, Food and Rural Affairs, Water abstraction plan, May 2018

42 Committee on Climate Change (RWI0006) para 11

43 Chartered Institution of Water and Environmental Management (RWI0021) para 20

44 WWF-UK (RWI0035) para 1.5

45 Q 275

46 Q 275

47 Q 273; Q 310 [Thérèse Coffey]

48 Qq 310–11 [Sebastian Catovsky]

49 National Infrastructure Commission, Preparing for a drier future: England’s water infrastructure needs, April 2018, p 10–11

50 Ofwat, Water trading, accessed September 2018

51 National Infrastructure Commission, Preparing for a drier future: England’s water infrastructure needs, April 2018, p 10–11; Ofwat, Water trading, accessed September 2018

52 Ofwat, Water trading, accessed September 2018

53 Ofwat, Water trading, accessed September 2018

56 Q 263

57 Q 260

58 Q 260

59 Ofwat, Water trading, accessed September 2018

60 Q 158

61 Q 158

62 Q 158

63 Q 158

64 Q 50 [Rob Lawson]

65 National Infrastructure Commission, Preparing for a drier future: England’s water infrastructure needs, April 2018, p 10–11

66 Q 49

67 United Utilities (RWI0003) para 11

68 Q 158

69 Q 305

70 Q 305

71 Q 304

72 Q 263

73 Discover Water, Leaking pipes, accessed September 2018; Q 138

74 Defra (RWI0018) para 3; Discover Water, Leaking pipes, accessed September 2018

75 Discover Water, Leaking pipes, accessed September 2018

77 Consumer Council for Water (RWI0004) para 3.4.1

78 Consumer Council for Water (RWI0004) para 3.4.1

79 Q 138

80 Q 138

81 Q 138

82 Q 138

83 A group of UK water sector investors (RWI0027) para 3; “Reality Check: Have water companies cut leaks by a third?”, BBC News, 6 August 2018

84 Chartered Institution of Water and Environmental Management (RWI0021) para 45

85 Ofwat (RWI0016) para 28

86 Department for Environment, Food and Rural Affairs, A Green Future: Our 25 Year Plan to Improve the Environment, January 2018

87 Q 298

88 Q 266

89 Water UK, Ambitious new vision for water, 3 September 2018

90 Thames Water, Our Business Plan 2020–2025, September 2018; United Utilities, Our business plan for 2020–2025, September 2018; Discover Water, Leaking pipes, accessed September 2018

91 Thames Water, Our Business Plan 2020–2025, September 2018; Anglian Water, Our plan 2020–2025, September 2018

Published: 9 October 2018