Abstraction reform: coming out of the shadows

Abstraction reform is the forgotten part of the water sector. First touted in 2011’s white paper “Water for Life”, it failed to make it into the first draft of the Water Bill, and was never added before the bill became law in 2014.

Now, attention is returning to it, with Ofwat mulling over recommendations to adapt the current regime and encourage water companies to take less water from the environment with a system of reputational and financial incentives.

Although some details are still to be finalised, Ofwat hopes the new regime will balance abstraction levels with environmental needs. It will fall short wide ranging and dynamic reforms to the abstraction regime which have been called for since the 1960s – but is a starting point for change.

Abstraction Incentive Mechanism (AIM) Taskforce

The AIM has been put forward to Ofwat by a taskforce the regulator created in April 2015 to advise on developing a system for encouraging water companies to reduce their abstraction levels in environmentally-sensitive areas when water is scarce.

But even this was fraught with difficulties as in April, the regulator had to put out an appeal to water companies, including Welsh Water and Dee Valley Water – both of which would not be affected by changes to the abstraction regime in England (see box) – to join the taskforce.

At the time, only five companies – Affinity Water; South East Water; Thames Water; United Utilities; and Wessex Water – were part of the taskforce to help develop the AIM scheme.

The appeal worked, with Anglian Water, Severn Trent Water and Southern Water joining the taskforce, with WWF, the Environment Agency and Ofwat also represented.

The taskforce reported back to Ofwat with plans for how the incentive based system – initially reputation based for AMP6 and then financially motivated for AMP7 – could work.

The mechanism

AIM is described by the taskforce as “one potential tool” to reduce levels of abstraction in water stressed areas, and it is said to provide a cheaper alternative to altering the companies’ licence conditions.

The idea is that water companies will be encouraged to use their existing asset base more effectively to reduce how much water they take from water stressed sources. The alternative, which would revolve around changing the abstraction licences, is viewed as more complex and expensive because it would force companies to develop new water sources and build new assets.

“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 recommendation says.

The reputational incentive, which could be introduced from April next year according to the taskforce, will be based upon how much or less water is abstracted from the source relative to a baseline.

If a company abstracts less than a baseline figure the score will be positive, if a company abstracts more than the baseline the score will be negative.

From AMP7 when the financial incentives are set to be introduced, the score would be multiplied by a per unit reward/penalty rate.

Reporting would be both in the companies’ annual reporting process and the annual review of the water resource management plans.

However, the taskforce does acknowledge this system is not without its problems, with the companies being able to continue to abstract when it is prudent to do so, even during periods of water stress.

Work still to be done

The theory is in place, as is a potential timetable, but there are still some key details that need to be finalised.

Prime among them is establishing the baseline figure for each AIM water source. The taskforce suggests looking taking the average of the previous six to ten years as a possible approach, but states this would only work if this period is “representative of future conditions”.

The level of the financial unit rate that would be used to set out the reward or penalty level also needs more detailed work. This needs to be based upon the environmental impact of the AIM, and the benefit reducing abstraction will have on an area, as well as customers’ willingness to pay. The taskforce warns: “If the benefits do not justify the costs then the AIM should not be applied.”

The final key element that needs to be developed is the definition of the AIM period and when the regime would kick in. This would have to be defined for each source and there will have to be a “trigger” to set out when lower abstraction would be beneficial. This could be river flow condition, or groundwater levels – depending on each individual site’s characteristics.

While not the full blown reform being called for within the sector, the recommendations made by the AIM taskforce have once again put the topic back on the agenda. The next step is to finalise all the details, and then for the regulator to introduce the regime in the spring.