Utility Week expert view: Trevor Loveday

Proposals for water abstraction reform currently going through the government mill would be a game-changer for power producers. About two-fifths of water abstracted in England and Wales is used for cooling power plant. Theirs might be good old-fashioned special pleading, but the generators are clearly in a special place.

In its proposed changes to the rules, the government says it is seeking to address growing demands on the water available for abstraction, including from population growth and climate change. This all makes a lot of sense in the current situation, where abstraction costs do not relate to water availability to the point where it can cost more to abstract water from areas where it is plentiful than where it is scarce. But things get in a tangle when you take into account the impact of tighter limits on water supply on nuclear power, new combined cycle gas plant, biomass-fired power stations and carbon capture and storage (CCS), which are part of the UK’s bid to mitigate climate change and growing demand for power. They all use huge amounts of water.

It’s hard to challenge the reasoning behind the ambition in the then Water Bill to see costs “better reflecting water scarcity and environmental damage”. And that translates naturally into a tighter rein on abstraction of water, with abstraction costs that reflect water scarcity.

However, a power station’s demand for coolant water cannot be changed without costly amendments to the plant. The rest of the electricity producers’ case is based on the notion that, unlike (say) the process industries that add waste products to the water they abstract and leave it in a used state, a power station just “borrows” the water and returns it swiftly, with nothing more than about 10°C added. That’s largely okay as an argument, but not entirely. Small temperature changes can damage habitats and break rules such as the 15°C European maximum temperature increase in salmon habitats.

The chief worry for power producers is yet another jab in the ribs for investor confidence. And arguably the source of greatest concern is the prospect of limited period abstraction licences where the duration of the licence falls short of the lifetime of the power station holding it. That could hike credit risk and present a financing problem for new-build plant.

Licence conditions that fail to accommodate power stations’ minor impact on water flows and quality, as well as the long-term need for guaranteed high volumes of water, clearly would introduce uncertainty for investors in power plant. And it could spoil existing power station sites where plant is closing but transmission infrastructure remains in place.

According to economic consultancy Trucost, water scarcity costs could add £1.7 million a year to the running costs of EDF Energy’s Sizewell B nuclear power station – rising to £2 million by 2025 if water stress increases in the region. Trucost also calculated that water scarcity costs at the nine power plants operating in east England could add about 6 per cent to industrial power bills.

There is some wriggle room. Some power plants already work under water restraints whereby abstraction rights are limited as associated river flows fall. And power stations use much less water than they are licensed to abstract. This is not peculiar to power plant. That creates opportunities to trade abstraction rights, which could be a means to address water abstraction restrictions. Energy sector respondents to the recent consultation on abstraction reform said trading offered good opportunities for new entrants in the abstraction market.

New-build power plant could head for the coast. That presents opportunities for better cooling systems that can add a few per cent to the plant’s efficiency. However, enter also new infrastructure costs and nightmare planning issues. And a Greenpeace study of 2007 forecast that climate change-induced rises in sea levels will inundate all bar one of the UK’s existing nuclear power plant sites on the coast over the next 60 years. Note: all siting proposals for UK new-build nuclear plant are within 2km of the sea or an estuary. This bodes badly for nuclear and also CCS.

Meanwhile, policy and regulation are pulling in opposite directions. Reform of power transmission charging is expected to draw new-build plant to the south of England – where water scarcity is at its highest. And the European Union’s sprawling Water Framework Directive requires “good ecological status” in waterways. The potential impact on power is as yet unclear. And ironically, water scarcity costs would be a lot less punitive on gas-fired plant, where direct air cooling is viable and commonplace.

The obvious and only solution is let customers pay water scarcity costs, which doesn’t sit well with addressing the rising cost of living. But water scarcity is not going to go away. In its Case for change paper, the Environment Agency said: “Increased demand and the effect of climate change on flows could be so great it means there isn’t enough water available for abstraction.” And ultimately, after the costs of market reform, new capacity and infrastructure capital, water scarcity charges will be lost in the noise.