Ofwat has received the recommendations of the Abstraction Incentive Mechanism (AIM) taskforce established to consider how water companies can be incentivised to reduce their abstractions from environmentally sensitive water sources when river flows are low.

The proposal, which has been developed by the Taskforce at the request of Ofwat, is intended to guide the regulator in setting a reputational incentive for the AMP6 period and potentially a financial incentive for AMP7.

Introducing their proposals, the Taskforce said that AIM is one potential tool that companies have for reducing abstraction from sensitive sources. The other, and more common approach, is for the abstraction licence to be changed - however, this is likely to result in a reduction in the volume of water available to the company and may trigger the requirement for investment in expensive alternative water resources or demand management measures.

While the costs of AIM are therefore likely to be a lot lower, there is no guarantee of a reduction in abstraction at all times.

According to the Taskforce, in essence AIM offers an Opex contribution to helping address abstraction issues rather than a Capex one, whilst at the same time offering opportunities for reputational advantage.

The proposal makes recommendations on the following:

• What the objective of the AIM should be
• To which of a company’s sources should it apply
• The definition of when AIM applies
• Definition of the AIM baseline – i.e. how much the source would be used on average if there were no AIM
• Definition of the AIM incentive
• Calculation of a reputational incentive for AMP6
• Calculation of a potential financial incentive for AMP7

Key recommendations include:

• Where possible AIM should apply to individual sources – the paper says that where  companies feel it should apply to groups of sources justification should be provided.
• The conditions under which the AIM would apply – the AIM period – need to be defined for each identified AIM source. This will generally be via a hydrological trigger when a reduction in abstraction from the source would be, or is likely to be, environmentally beneficial.
• Definition of the AIM baseline - the average daily abstraction during the AIM period that would have taken place from a source if the AIM had not been in place. The key consideration is that the period of record selected should be representative of future conditions.
• Definition and calculation of the AIM reputational incentive - recommended that the impact of the incentive is measured as the deviation in the actual use of the source relative to the baseline usage. If a company abstracts less than the baseline in a particular year the score will be positive, if a company abstracts more than the baseline the score will be negative
• Definition and calculation of the AIM financial incentive - the AIM score would be multiplied by a unit (per Ml above or below the AIM baseline) reward / penalty rate.

The Taskforce said the design of the incentive rate and how it is applies will require considerable thought and detailed analysis, in order to avoid introducing any perverse incentives.

The Taskforce has also outlined the following possible timescale:

August Companies requested via Water UK Water Resources Network to review sources that may have a continuing effect on the environment and that they consider could be appropriate for inclusion under the AIM.  

Early Autumn-  Ofwat to consult on the proposals

Before Christmas - Ofwat to issue guidance or letter

January to March 2016 - Companies formally determine AIM sites and required information

1 April 2016 - Earliest date for a reputational incentive to start

Click here to download the Taskforce AIM recommendations in full