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) rather than developing its own water resources. Trades can be for raw or treated water and are typically agreed as part of the water resources management plan (WRMP) process to ensure long-term water supply in an area.
Water trading can benefit:
- customers, as it can improve resilience of supply and allow more expensive investment in developing new resources within an water company’s area to be deferred, reducing future upward pressure on bills;
- the environment, by ensuring water is supplied to where it is scarce and there are existing environmental pressures, instead of developing new resources or using unsustainable abstractions; and
- the water sector, by enabling water companies to share in cost savings from trading instead of investing, and providing opportunities for companies to profit and innovate from trades.
Most water trades between water companies were agreed before privatisation. You can view trades between water companies in our bulk supply register (2017-18 available here). Since 1989, water trading has stayed at around 4% to 5% of distribution input (water into supply) and a report we commissioned from Deloitte in 2015 identified scope for increased trading levels. Our May 2016 decision document identified savings of £810 million (net present value, 2015-16 prices) from increased trading between water companies.
As a result of the benefits of trading we have introduced a number of measures to promote increased trading. A summary of these is provided in appendix 5 of our 2019 price review final methodology. The most significant of these is our water trading incentives. These are targeted financial incentives that lower the costs of importing water and increase rewards for exporting water.
Customers and the environment are protected through a requirement for water companies to comply with an Ofwat approved trading and procurement code to claim incentive payments. These ensure trades are economically efficient and environmentally sound. We have committed to maintain water trading incentives until 2025.