The site was described as “the firm favourite on economic, environmental and geological grounds”.
The company is now working towards submitting a planning application for construction to start no earlier than 2016.
A spokesman said: “The sites we have looked at all have to be within a certain reach of where the water would come from, near Cheddar. We looked at 35 all over the county and have been narrowing them down on geological and cost grounds.
“The one we have come up with is, we believe, the best solution, but there is a long way to go yet.”