Ofwat has approved Thames Water’s trading and procurement code, enabling the water company to benefit from financial water trading incentives.

In PR14 the regulator introduced water trading incentives to encourage water trading between incumbent water companies on the basis that water trading can benefit:

• the environment, by allowing scarce resources to be optimised between company areas as well as within them;
• customers, as it can allow more expensive investment in developing new resources within a company’s area to be deferred, reducing future upward pressures on bills.

Although many companies, including Thames, already trade water, Ofwat has introduced a financial incentive to encourage them to consider more trading.

Water companies can only receive the water trading incentives if they produce, and are compliant with, an approved trading and procurement code. Thames Water was the second company to submit their code for approval in March 2016 and the consultation inviting comment closed in April 2016. Dŵr Cymru Welsh Water was the only respondent to the consultation and was supportive of Thames Water’s draft code.

Thames Water willing to trade with any party in principle

The Code sets out the policies, principles and requirements that will apply when appointed water companies and third parties trade with Thames Water. In principle, the water company is willing to trade with any party that either wishes to take from, or offer to Thames Water, a reasonable volume of reliable, sustainable and cost-effective water resources.

The utility operates across a water supply area of more than 8,000 square km, sharing borders with 9 other appointed companies: Affinity Water, Anglian Water, Bristol Water, Northumbrian Water (Essex and Suffolk), Severn Trent, South East Water, Southern Water, Sutton and East Surrey Water and Wessex Water.

Thames currently has 20 bulk supply agreements in place with neighbouring water companies, both for the export and import of raw and treated water, together with 15 bulk export agreements with new appointees, to supply specific sites. Thames Water is a net exporter of water, by volume.

The water company is also currently investigating in detail options for two potential large raw water imports into the Thames catchment for supplying London in the long-term submitted by United Utilities and Severn Trent Water.

Commenting on potential contract lengths, the Code says Thames will consider both short-term and long-term trades, with a preference in most cases for a contract term of at least 20 years with long duration notice periods linked to the time needed to find alternative sources of water.

To qualify for a trading incentive, a trade must have been agreed no earlier than July 2013 – the qualifying trade must be operating during the period April 2015 to March 2020.

 The Code states:

“We assure Ofwat and others that we will not manipulate any of our current trades in order to exploit the financial incentives for trading. We would look to our current trading partners to do the same.”

Thames: water trading could be supported by more flexible abstraction licences management 

Thames Water also believes that water trading could be supported by the more flexible management of abstraction licences. For example, some companies (and other, private abstractors) currently abstract directly from the same water body or several water bodies that were hydrologically linked. The Code says:

“A framework that allowed these abstractors to share or ‘pool’ their abstraction entitlements such that a cooperative trading arrangement was possible, would enable them to alter their actual abstraction on a mutually-agreed basis. This could improve water availability and the effective management of resources in both the short term and long term.”

In the future, Ofwat said it may conduct an annual review of approved codes and provide further guidance to companies by the end of June each year.

Click here to download Thames Water Trading and Procurement Code