We have just experienced (and arguably still are experiencing) the “wettest drought on record” – surprised, yet again, by an odd water supply situation caused by “unexpected” weather.
The blame for this often falls to climate change and global warming, which variously causes more rain or less rain. The problem essentially, though, is that of “different rain” – the additional energy in weather systems from global warming causes rain to fall differently, at the wrong place, in the wrong quantity, at the wrong time. This has been responsible for flooding and drought in different parts of the same country at the same time (and not just in England). There are no guarantees as to which areas will have too much or too little at any given time.
So how should we adapt? Naturally, water efficiency and recycling will play their part, but beyond that we should look to develop a national grid to move water from areas of temporary or permanent surplus either to storage (in reservoirs) or to areas of current deficit. In addition to contributing to security of water supply, a national water grid may also have a role in flood amelioration.
Not that long ago, national gas transmission systems did not exist. Town gas was made from coal in local gasworks and distributed to the local community through local distribution networks. Not only is there now a national gas transmission system in most (if not all) European countries, but there is ever increasing international connectivity creating an international gas transmission network, with gas able to travel from such distant and diverse sources as Siberia and Algeria to the north of Scotland, and vice versa.
Analogous to this, water infrastructure has progressed from the days when each dwelling had its own local supply (usually from a well or spring), through the creation of small, private and municipal supply companies, to the creation of area boards and the current large, integrated water and sewerage companies, each supplying significant areas of the UK. An obvious evolutionary step would be a national grid for water.
There are already precedents for water grids of this scale. For example, the state of Victoria in Australia, which covers an area larger than Britain, is developing its own state-wide water grid, and a large water grid is being built in southeast Queensland.
Bulk transfer of water does not require high technology – the Roman Empire managed it extensively. Vast quantities of water are already moved by our river systems – and rivers will undoubtedly need to form a major part of a national transmission system for water. It may even be that what is required are a few, relatively short connections from the lower reaches of some rivers to the upper tributaries of others – for example, an interconnection between the lower Severn and the upper Cherwell, around 40km. In theory at least, this would allow water to be transported from Welsh mountains to Kent.
The ability to use relatively few, short, interconnections means the capital cost of a national grid for water could potentially be relatively modest: tens or at most hundreds of millions of pounds rather than billions. To the extent that the bulk of the transfer would use existing river systems, the running costs may also be quite low, albeit that in any such development consideration will need to be given to factors other than capital and operating costs.
One of the reasons why a national water grid has not been developed is that the current regulatory structure provides little or no incentive to the regional monopolies to work together. Over the medium and long term, returns to shareholders are closely linked to the value of water company regulatory asset bases. Expensive local assets mean greater profit than lower cost national solutions. In principle, therefore, a company such as Thames Water may have a greater incentive to build reservoirs in Oxfordshire than to invest in a national grid.
In this context, it is interesting to note that one of the key features of Ofgem’s RIIO framework is to encourage the involvement of third parties in network development. The energy regulator’s approach is particularly relevant, because it is trying to ensure that substantial investments are made to both develop a national offshore electricity grid and, at the same time, reinforce existing electricity transmission grids, while facilitating the connection of new nuclear and wind generators.
Only very limited forms of competition can be sustained in a series of discrete monopolistic local “water producers”, for which the system marginal cost is always the local marginal cost. Martin Cave’s review of water competition in 2009 provided an ideal opportunity for a national water grid to be considered. It did recommend several changes that would facilitate bulk trading of water between water companies, but it is somewhat disappointing that overall it focused much more on disaggregating vertically integrated water companies than on putting in place positive financial incentives to develop a national grid for water.
Rather than fussing over detailed accounting separation, if Ofwat is serious about competition its first steps need to involve borrowing ideas from Ofgem’s RIIO framework and taking a more proactive approach to incentivising companies to develop a national grid for water. Only when that project is on track should it worry about more detailed market reforms and the vertical separation of the companies.
In particular, it would be good to see Ofwat adopt Ofgem’s idea of having an “innovation stimulus package” that could be used to investigate the technical options for a national grid for water – maybe dispelling some of the existing myths. It would also be good to see Ofwat giving third parties a greater role in delivery of large and separable projects, as a national grid for water would be. “Third parties” might even encompass separately owned subsidiaries of existing water companies. Finally, Ofwat should give the project long-term certainty over how it would be regulated.
With these measures in place, the industry would be able to develop and implement an appropriate solution, thereby providing the foundation for greater choice and competition for customers and, more importantly, the ability to manage a changing climate.
Colm Gibson is a director in the Economic and Financial Consulting practice of FTI, focused on the energy and water sectors
This article first appeared in Utility Week’s print edition of 6 July 2012.
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