EnvC 48/14
Response to Defra Consultation
Making the Most of Every Drop – Reforming
the Water Abstraction Management System
28 March 2014
Introduction
Energy UK is the trade association for the energy industry. We represent over 80 members
comprising generators and gas and electricity suppliers of all kinds and sizes as well as other
businesses operating in the energy industry.
Together our members generate more than 90 per cent of the UK’s total electricity output,
supplying more than 26 million homes and investing more than £11 billion in the British
economy in 2012.
Key points
There is a range of views among power station operators regarding the efficacy of water trading
to address future challenges of water availability. These views are informed largely by the types
of power station owned by the operators and the geographical location of those plants. The
range derives partly from the open nature of the questions in the consultation document and the
lack of need to make choices between discrete options. Some operators have found it difficult to
come to a view because of the lack of supporting information on agent-based modelling of water
abstraction management options in the Trent & Derwent catchment, which is a significant area
for electricity generation using thermal plant.
Our overriding concern is that the abstraction reform process should not lose sight of the
intrinsic link between secure electricity supplies and access to secure water supplies. Electricity
Market Reform, as outlined in the Energy Act 2013, will bring about unprecedented changes
within the power sector over the next 10 ten years and it is vital that water resource
management complements those developments, takes account of contractual arrangements for
electricity supply and creates the regulatory clarity and certainty needed to secure the large
investments that will be required to deliver the transition.
We would also urge Government to seek to avoid regulatory complexity wherever possible, as
this will increase costs for the operators and, consequently, for electricity consumers.
Water resources will be a key element of the power sector’s approach to climate change
adaptation. The thermal efficiency benefits of water cooling lead to more useful energy
Energy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
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produced per unit of fuel used, helping to reduce both greenhouse gas emissions and
production costs compared to other techniques. In view of increasing environmental
pressures at potential coastal and estuarine locations, we anticipate an ongoing role for waterdependent thermal power plant on English rivers for several decades to come.
We appreciate the open way in which Defra and the Environment Agency have engaged with
key stakeholders to date and we look forward to maintaining that active engagement as plans
for water abstraction management reform progress.
Consultation questions
1) What are your views on the proposal to convert seasonal licences into abstraction
permissions based on water availability?
We have no particular concern with this proposal provided that the way in which it is done does
not detract from the rights of existing water users not subject to seasonal constraint, who also
need reliability. This may depend on the definition of ‘availability’ used and the way in which the
overall transition of the reliability of pre-existing rights to the new regime is brought about.
2) What do you think about the different proposed approaches to linking abstraction to
water availability for surface water and groundwater abstractions?
Our ability to respond in an informed way to this consultation has been substantially reduced as
a result of the delay in carrying out some of the supporting modelling work commissioned by
Defra. The only trial catchment in which there were power sector agents, the Trent & Derwent,
is not expected to be modelled before the end of the consultation period. We therefore request
that our comments on the findings of this work, when it is made available to us, should be
regarded as supplementing our present consultation response.
Given the scale of the potential threat to the power sector arising from curtailment or revision of
its existing water rights, which underpin key existing power stations and are prerequisites for
investment in new assets, we consider the headline cost benefit assessment of all options within
the Impact Assessment is potentially misleading. The costs and benefits evaluated to date,
dominated by delay in capital investment in the water sector, range from a few tens to a few
hundreds of £million. The cost of a single 2,000MWe Combined Cycle Gas Turbine (CCGT)
thermal power plant is of the order of £1billion. Thus issues around the uncertainty of
investment and return from the electricity sector are likely to dwarf the impact assessments
carried out to date.
Much of the focus of the reform discussion is naturally on consumptive water use. However, for
tower-cooled thermal power plant, gross use for cooling purposes is a vital consideration
because operation of a plant would be impaired if it were unable to abstract the design gross
amount for a given net abstraction. It is important not to lose sight of this potential to affect
power plant operations in water resource management decision making.
Based on the information presented in this consultation we would like to raise the following
points:
a) Environmental versus Societal Use
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We remain concerned about the way in which the partition of the total water resource between
the environment and total societal use is to be determined in both the “Current System Plus”
(CSP) and the “Water Shares” approaches.
Where the limiting environmental protection derives from the Water Framework Directive
(WrFD) (rather than water-dependent Protected Areas), one of the choices that should be
available to society and explored via River Basin Management Planning (RBMP) is the
environmental status objective that should be set at the water body level. Different objectives
(“good”, “moderate”, etc) could lead to different partitioning of the total resource between the
environment and would-be users (e.g. as a result of the UK Technical Advisory Group’s
(UKTAG) Environmental Flow Indicator (EFI) approaches of 2013). One factor that should play
within the choice (e.g. via disproportionate cost considerations) is the consequence for existing
users, were their existing rights be reduced (e.g. as a result of setting a more stringent WrFD
target e.g. “moderate” in 2015, changing to “good” in 2021 or beyond). This issue is noted by
AMEC1 (2013) in the consultation supporting material, but merely to state that it has not been
taken into account by AMEC and hence probably not by Risk Solutions in its trial catchment
modelling work for Defra, although at the time of preparation of this response the detailed Risk
Solutions modelling work is not publicly available.
Throughout the stakeholder engagement on development of the reform options, Defra has
tended to assume that the water resource allocation to the environment should be that
consistent with ‘good’ status. We take the view that this is not necessary, should be a choice
available to society and, if this is not the case, could adversely and significantly affect the
interests of current and future would-be water users.
The extent to which the environment has evolved to be dependent on non-natural flows e.g.
linked to transfers, or discharges from other activities that achieve a transfer or which derive
from groundwater, which otherwise would not have flowed to the river, should be carefully
considered within the WrFD RBMP. In some cases, low flows in lowland rivers in England
consist of flows which may be considerably higher than the natural flow. It is not necessarily the
case that the basis of ecological environmental protection should be established to be that
which is dependent on the artificial flows. It may be more appropriate to set the basis for
ecology linked to the natural flows. Equally, it should not be presupposed that it is always
appropriate to seek to restore flows closer to natural, as there is a history over many centuries
of man’s use of water bodies leading to development of cities, land use, location of strategic
industries, etc. WrFD RBMP objective-setting provides an appropriate framework within which to
establish appropriate and self-consistent ecological and flow objectives, but we are not
convinced that the combination of WrFD objective-setting in RBMP, including the definition of
flows consistent with Good Ecological Potential/Moderate Ecological Potential (GEP/MEP) for
Heavily Modified Water Bodies (HMWB), and abstraction reform environmental allocation
principles, together will strike an appropriate balance between water use and environmental
protection.
We note the different approaches of CSP and Water Shares in relating the total water resource
to individual water users.
However, in both systems, by
1
'Environment Agency: Support to Abstraction Reform Programme - Hydrological Aspects of Regulatory
Inputs to Trial Catchment Modelling', AMEC Environment & Infrastructure UK Ltd, Report September
2013, 33249RRLon014.
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
changing the balance of allocation of resource between environment and societal
use

and between the various users,

and, introducing additional uncertainty through the detail of the rules, including
the introduction and operation of new Hands Off Flows (HOFs) in CSP and the
reliability pools in Water Shares,
there is the potential for the emergence of new water resource related constraint on the
operation of the electricity supply sector. This could introduce a new dynamic affecting the
operation of electricity markets, especially with respect to plant availability forecasting, and
could be material in the consideration of national security of electricity supply. There are
potential effects on the operation of the existing power station fleet, including the creation of
severely devalued power plant assets/sites, and it could represent an additional barrier to
investment in water-dependent power plant.
b) High flows and HOFs under CSP
Regarding CSP, we are not convinced that making water available for use at high flows will
prove to be a significant benefit. Were it to be so, existing or new users could surely have
applied to make use of it! There are also issues of water quality (e.g. silt burden) which may
render the use of such water unattractive.
Aspects of the CSP basis of allocation are explored further in the specific Questions 3 and 4
below. In order to make our response to Question 2 ‘stand alone’ we pick out key points here:

In principle, the use of a tapered (i.e. gradual reduction to zero over a specified range of
river flows) rather than ‘cliff-edge’ (i.e. all or nothing) approach to HOF is advantageous
in that when water is constraining on an activity the constraint is less sensitive to small
perturbations in flow. This simplifies output risk management. However, the overall
commercial pros and cons for a particular installation will depend on the balance of
expected operation at river flows close to the HOF.

We do not consider that the use of regulatory minimum flows is necessarily an
appropriate means of providing the environmental protection required at low flows if it
were to be implemented as a uniform HOF for all users in each catchment. In some
cases, this would be equivalent to asserting that the societal benefit accruing from
meeting environmental need was always greater than other needs (e.g. security of
electricity supply, public water supply, etc). We prefer a system similar to the ‘drought
management’ approach under current law within which users seeking high reliability
rights could make their case. Depending on the probability of occurrence, regulatory
minimum flows could be a barrier to investment in new plant or major upgrades to
existing water-dependent plant.
c) Timing/notice period of water allocation under Water Shares
We are concerned at some aspects of water availability establishment in Water Shares that are
not explored in specific questions.
Firstly, assuming fortnightly allocation blocks as in Appendix C, there is an issue over the timing
of announcement of the fortnightly allocation. Consider, for example, the allocation block
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consisting of Weeks 30 and 31. Is it intended that this is announced at midnight on the last day
of Week 29? This would have the advantage of having the most up to date view of actual flows,
groundwater levels and actual and future weather, but minimises the time in which potentially
constrained users have to manage their water-dependent commercial positions. This in turn
affects the options available to affected users and probably the costs associated of managing
the positions. For thermal power stations, the costs of managing positions in the electricity
market could be significant. Conversely, announcing firm allocations well ahead (say month in
advance) runs the risk of either allocating too much (leading to the potential for environmental
effects on a scale not regarded as acceptable) or too little water (leading to lost exploitation
opportunity) to users. Given the variation in trading pool characteristics, the appropriate timing
of allocation announcement may vary between catchments (e.g. reflecting the recession
timeframes for base flow, response timescales to rainfall, etc, or the type/mix of abstractors and
their ability to react to changing allocations).
However, differences in timing of allocation announcements in catchments may have some
implications for the linkage between electricity and water markets.
For many catchments the actual flow occurring will reflect a combination of the predictable ‘base
flow’ linked to the contributing aquifer recession curves and the unpredictable short-term
response to uncertain rainfall. It is important to ensure that provision is made in the allocation
approach to allow abstractors to benefit from water body response to rainfall that was unknown,
or at least quantitatively unpredictable, at the time of the original allocation announcement.
Failure to provide a mechanism to allow exploitation by abstractors of the flow derived from
recent rainfall would represent a significant lost opportunity for beneficial use. Appendix C
recognises this effect, but does not appear to deal with it sufficiently. It may be that the
allocation should be done in multiple phases. For example, for a fortnightly allocation, the
allocation of reliable ‘base flow’ could be done one week ahead, with additional allocation
resulting from rainfall on a day-ahead basis. Alternatively, the base-flow allocation could be
week-ahead and give rise to an expected flow curve based on ‘base-flow’ alone, with
abstractors being authorised to abstract a proportion of the difference between the rainfalladjusted and base-flow curves at appropriate locations. In some cases, depending on timing,
there may have been some useful recharge occurring between the initial baseflow related
announcement and real time, which might allow refinement of baseflow related allocation.
We welcome the flexibility in timing of use that appears to be intended in the Water Shares
approach in which, once the fortnightly allocation (m 3) is made, subject to abstraction permit
restrictions, there is flexibility on within-day and within-fortnight use of the water. This may result
in some economically useful flexibility, which would be of no environmental consequence
compared with a rigid daily allocation. However, the commercial scheduling of the operation of
water-dependent power plant is a complex, market-based process based on half hour blocks,
but with trading of energy and fuel taking place on timeframes from half an hour up to several
years ahead. Whether the combination of the typical technical capabilities of plant with the
flexibility in timing of use of a fortnightly allocation is sufficient to allow appropriate functioning of
the water and electricity markets requires detailed consideration in Defra’s ‘market design’
initiatives. Central to this will be whether or not sufficient rights in high reliability pools will be
available. Moreover, for efficiency, it may be necessary to consider mechanisms to allow
transfer between users of elements of short-term allocations within the window of the original
time-bound allocation, as uncertain ‘on the day’ needs are determined and the need for
additional, or identification of surplus, allocation emerges as time goes on through the allocation
block.
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d) Implications of linking abstraction to water availability under Water Shares
There could be a fundamental mismatch between the needs of some classes of abstractor,
including thermal power plant, and the principle of allocation/entitlement in some
implementations and/or outcomes of the Water Shares approach. In order to produce a given
energy output (MWhe in a given day), a tower-cooled thermal power plant requires access to a
minimum amount of consumptive water in that day. It would be unable to use an additional
allocation for production of additional energy output beyond that which is commercially rational.
There is also a site-specific maximum useful allocation because plant equipment limitations
(steam generator size, turbo-generator sizing, etc) govern maximum output. Any reduced
allocation i.e. lower than that which corresponds to the commercially rational production level,
would result in constrained output. The commercially rational production is determined
principally via the electricity market (although this interacts with other markets such as fuel) and
is influenced by demand. Any additional constraint could have implications for security of
electricity supply, especially if conditions were such that constraints were to occur
simultaneously across a number of plant.
The existing abstraction licensing system, which results in an allocation/entitlement of a fixed
volume flux over most of the time with the possibility of a HOF preventing operation at a known
probability is well suited to underpinning commercial operation of a power station. Normally, an
operator applies for, and is successful in obtaining, sufficient water rights to operate the power
plant in the desired commercial mode (often baseload for new plant) and factors the HOF into
commercial assessments prior to the decision to proceed with the project. Indeed, the
availability of sufficient water is a factor in determining the size of the plant for which application
is being made. On the other hand, in Water Shares the ‘proportional to the flow approach’
means that a power station could have either a surplus or a deficit of allocated consumptive
water right deriving from their entitlement on a given day, depending on the structure of the
reliability groups and the distribution of the operator water rights within such groups. Whilst this
may be viewed as a positive by Government as providing a driver for an active water rights
trading market, the potential for water rights deficit might well be a significant barrier to
investment in upgrades to existing plant and in the construction of new plant and would create
an uncertainty in the electricity market with respect to existing plants. Of course, the
entitlement/allocation deficit may be addressed via the market should active markets exist,
though in the early days it will be difficult to generate sufficient confidence in the degree to
which markets can be relied upon.
Third parties may have some potential role to play in allowing abstractors to manage the
commercial risk arising from the mismatch between their flow proportional allocations and their
operational needs.
3) Would it be helpful if abstraction conditions required abstractors to gradually reduce
their abstraction at low flows before stopping, rather than being just on or off?
We agree that, in general, the use of a smoother form of restriction leading eventually to loss of
abstraction right is preferable to a discrete off/on switch. This makes the reliability of the
abstraction in question less vulnerable to small perturbations in flow occurring around the HOF
threshold value. The pros and cons for an existing abstractor with a HOF condition will depend
on the business significance of the variation in river flow over which the gradual restriction is
applied. In the example given in the consultation (Appendix C), the abstractor suffers a
modified abstraction right for 10% of the time. This consists of a disbenefit of reduced
abstraction right for 5% of the time (corresponding to river flows just above the existing HOF
threshold) and a benefit of a new right to abstract some flow when previously no abstraction
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was allowed for 5% of the time (corresponding to river flows just below the existing HOF
threshold). Different abstractors will have different views on the merits of this arrangement
depending on their view of the consequences of the reduced/increased parts of the right for their
business.
4) Do you think the proposal to protect the environment using a regulatory minimum
level at very low flows is reasonable? If not, how do you think we should protect the
environment at very low flows?
We do not consider that the use of regulatory minimum flows is necessarily an appropriate
means of providing the required environmental protection at low flows if it were to be
implemented as a uniform HOF for all users in each catchment. Where the minimum flow is
related to WrFD objectives (rather than water dependent Protected Area requirements) this is
equivalent to assuming that the degree of additional environmental protection provided is
always more beneficial than the societal use that it would displace. We consider that the societal
benefit that results from underpinning security of electricity supply could be an equally important
or even more important consideration in some cases. Depending on the level at which the
implementing HOF were set, it could be a barrier to investment in new construction or upgrades
to existing water-dependent power stations.
We consider that it would be preferable to have a water resource allocation system at low flows
closer in spirit to the existing drought management approach in which flow could remain
available at very low flows to users seeking high reliability, such as power plant operators,
depending on the severity of the environmental consequences. There could be provision in the
reformed system in extreme droughts for interventions by the Secretary of State that could
result in temporary re-allocations of scarce water resource subject to a fast-tracked hearing in
which the perceived needs of, and risks to, the environment could be balanced in the prevailing
circumstances against other societal needs and risks relevant to the abstraction by users such
as power plant operators, water companies, farmers, etc. The limiting of grounds for intervention
of this and other kinds is a key element in the system design for Water Shares, as otherwise it
would be difficult for the value of an entitlement to be determined.
If, nonetheless, Defra decides to proceed with an implementation of regulatory minimum flows
linked to blanket HOF conditions, a fast-tracked ‘appeals’ process should be put in place to
allow affected abstractors seeking high reliability supply to put their case based on the
prevailing circumstances.
5) What do you think of the proposal to require abstractors who discharge water close to
where they take it from to continue to discharge a proportion in line with their current
pattern?
We agree that the consumptiveness and the locations of abstraction and discharge associated
with a water resource use right is a key consideration and that any proposed change in
consumptiveness, location of abstraction and/or location of associated discharge needs to be
managed within the water rights framework, and possibly with regard to other regulatory
requirements covering, for example, process, activity and/or discharge. For some sectors this
will link with Best Available Techniques (BAT) for the installation, or corresponding ‘good
practice’ guidance. Relevant changes may be due to any or all of changes in

the activity associated with the right,

definition of best practice/BAT,
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
wider societal or environmental perspectives that may lead to possible value in changing
intake or outfall locations without change of activity.
Even for cases where the installation and its operation do not change, any proposal to change
the location of abstraction and/or discharge needs to be carefully examined within the
appropriate regulatory frameworks that factor in both environmental and wider societal
considerations, including the potential effects on users who were in some way dependent on the
previous arrangements.
Careful and site-specific consideration of ‘current pattern’ may be required. This should be taken
to include the range of operations that an installation may be called upon to perform regardless
of what it has currently, recently or historically been performing. For example, for a tower-cooled
power station designed for evaporation of about a third of the gross abstracted water in steady
high-load operation, the actual proportion evaporated over a particular time period will very
much depend on the load required of the power plant. At low load factor, with many starts and
stops, the actual proportion evaporated may be considerably lower than in the ‘high-load’ design
operation. Consideration of water use for non-cooling activity (e.g. ash management) may affect
this too.
The focus of the consultation and the reform development has been consumptive freshwater
use. This is natural from a water resource perspective. However, it is important to recognise that
gross abstraction also needs to be taken into account within the overall installation permitting
and any link with the reformed abstraction regime considered. During the stakeholder
engagement process and elsewhere in the world, the concept of the unbundling of water rights
and ‘traditional intake provisions’ has been suggested and may be relevant in this context. For
example, in the above illustration, the tower-cooled power plant may be designed to abstract at
2.4m3s-1 and discharge 1.6m3s-1 (both as, say, hourly averages ignoring any water use for ash
management or other non-cooling purposes). From a water resource perspective, the principal
issue for most purposes would be the 0.8m 3s-1 of consumptive use. However, the ability of the
installation to operate would be impaired if it were not in a position to be able to abstract the full
2.4m3s-1. Thus, both the gross and net needs of a user are material to consideration of possible
impairment/derogation.
Often the detailed plant arrangements may lead to a short ‘depleted reach’ of reduced flow
between intake and outfall and the effects associated with the gross abstraction should be
regarded as ‘tolerable’.2 In some cases, the intake and outfall arrangements for the site in
question may lead to the return of water to the aquatic environment through more than one
outfall and/or possibly to different water bodies. This may lead to some water bodies
experiencing depletion of up to the gross abstraction and some water bodies receiving a
transfer of water. The site-specific choice of intake and outfall locations tends to be made during
the planning/initial permitting process and is not normally subsequently changed. In many cases
it may not be technically feasible to change.
When establishing the water rights and permitting in the reformed world for a given installation,
the above should be taken into account. There are some parallels with the ‘water company’
considerations in Question 6.
2
This could include entrainment/impingement of aquatic biota and the hydraulic consequences for the
water body of the gross abstraction.
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6) How best do you think water company discharges should be regulated to provide
reliable water for downstream abstraction without impacting on water quality objectives
or constraining flexibility in water management?
The water industry should be regarded overall as a weakly consumptive sector, i.e. with a high
proportion of its gross abstraction to be returned to the environment, albeit with dispensation in
many cases for allowing the ‘used’ water derived from the abstractions to be returned to the
environment remotely, usually downstream, from its point of abstraction. In many cases, the
public water supply networks that have developed over many years to deliver robustness and
flexibility in supply make it impossible to link a specific abstraction with a particular discharge in
a meaningful way. A degree of toleration of the resulting reduced flows in some river stretches is
implicit.3 Any change from current abstraction and/or discharge arrangements should be subject
to a sufficiently comprehensive regulatory assessment in which the pros and cons of the
proposed change are explored both with respect to the environment and the wider societal
considerations including potentially affected users. Thus, using the example in the consultation,
it is not obvious that a proposal to close an obsolete sewage treatment works and transfer its
operation to another more efficient or upgraded works is necessarily a societally optimal or
indeed societally tolerable change when the consequences for relocated flow are fully factored
in. It may be necessary and appropriate for the Water Industry to undertake compensatory
measures associated with such a change or consider and ultimately implement alternatives
(such as upgrade to the obsolete plant or including an appropriate water transfer scheme as
part of the package of development to re-route the existing plant sewage). The framework for
the determination of what is necessary or appropriate from the wider societal perspective needs
careful consideration, not least because of the statutory duties of water undertakers and their
current economic regulation. The current asset management plan framework (AMP/PR) may not
be sufficiently general. Changes to the structure and regulation of the Water Industry resulting
from the forthcoming Water Act may also need to be considered in this regard.
The Water Industry should not be regarded as holding a set of abstraction licences allowing
100% consumption and a set of sewage treatment works which create ‘new water’ that can be
directed as the operator of the plant wishes.
The Water Industry controls a number of reservoirs and associated abstraction licences
together, contributing to their obligations regarding maintenance of public water supply. The
increased trading opportunities that may arise through abstraction reform may create new
commercial opportunities for the water companies to exploit stored water (by discharging to
meet other abstractor need or by pipe transfer). Whilst more efficient societal use of storage is a
desirable outcome from reform, care should be taken to ensure that abstraction licence
conditions designed to protect the public interest are not exploited in the future solely for
commercial gain where the abstraction adversely affects the interest of other river users.
7) If you are an abstractor, how would these charging proposals affect your business?
Any changes to the charges associated with water use would be factored into business
decision-making in two distinct ways. In project decision-making, whether or not to proceed with
an investment, the return from which would be dependent in part on water costs, would be
determined with regard to a view on how the price of water and water rights would affect the
competitiveness of the plant through the life of the proposed investment. There would
3
Where water for public water supply is derived principally from groundwater, other considerations may
apply concerning the appropriateness of the scale of the abstraction compared with the recharge.
Groundwater exploitation may result in artificially enhanced river flows.
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necessarily be some degree of uncertainty. For an existing plant, the cost of water rights and
water used would play into decisions on whether or not to operate that plant having regard to
the range of prevailing market conditions. To the extent that operation and market conditions
are predicted in advance in order to agree contracts for electricity sales and fuel purchasing,
etc, such charging would influence decision-making over timescales from day-ahead to several
years ahead of time.
If the basis of charging is restricted solely to recover the administration of water resources and if
the current range of water rights holders persists, it would appear unlikely that future water
rights/water use charging would be a strong driver for thermal electricity generation. However,
should the basis of charging differ from administrative cost recovery (e.g. to address a
perceived externality or drive behavioural change in abstractors) the impact of charging may
increase. Moreover, where water resource availability is, or threatens to be, restrictive on
operations, and access to sufficient water is obtainable through trading, the price of water or a
water right may differ greatly from the administrative charge for that water or right. Such pricing
may be a stronger driver for electricity generation.
We are a little surprised that the differences in the annual ‘administrative costs’ between CSP
and Water Shares indicated in the Regulatory Impact Assessment (Annex A) are so modest.
We would have thought that the cost of providing an effective trading platform in each of the
catchments in which Water Shares were implemented might be rather higher.
Clearly, the extent to which changes in water or water rights charges are passed on to the end
user depends on the business positions of the various actors. However, in general, increases in
charges or prices would be expected to lead to increased prices for consumers of electricity.
In general, within the current proposals, we see water resource availability/reliability as a
stronger driver than charging on business decision-making in the thermal power plant sector (if
charging is based on administration cost recovery alone, with a user base similar to that of
today).
We have not located in the consultation material what the charges raised in either CSP or Water
Shares would be used for. Clearly, if the basis for charging for issued rights were to cover
administration costs, then the charges levels and factors would be set appropriately and the
charges levied redirected to the system administrators. However, it appears possible,
particularly in CSP, that Government may decide at some point to set charges to incentivise
abstractor behaviour or in relation to residual impacts of operation, rather than on pure
administration cost recovery. In such cases, what would be done with the funds raised? For
example, one possibility would be to retain the overall net price to the body of abstractors equal
to that required to cover administration costs and return any additional funds levied from
abstractors back to abstractors, redistributed according to some agreed rules designed to
encourage behaviour change, etc.
Many details of the charging scheme remain to be worked up in detail and we would wish to be
consulted upon them in due course.
8) To what extent would a system that charges abstractors partly on permitted volumes
and partly on actual usage (i.e. a two part tariff) encourage abstractors to use less water?
There are already strong price drivers in thermal power stations to optimise actual water use
(i.e. not use more than is consistent with site-specific best practice) because increased use
would require pumping and could be associated with increased use of treatment chemicals.
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Optimisation is not the same as minimisation, as many factors contribute to the determination of
the optimal water use configuration for a power plant including local water quality, detailed site
systems design, the choice of materials of the plant, the need for chemical use for water
treatment, discharge water quality, pumping and treatment costs, etc. Introduction of a two part
tariff may change the point of commercially optimal water use for a given plant if the cost for
actual water use is increased sufficiently, though it is likely that such charges would need to be
very significantly greater than those currently in use to be material in this regard. However,
depending on the basis of charging, the resulting commercially optimal water use may result in
worse outcomes when all the societal and environmental consequences are considered.
As in our many previous consultation responses, we do not regard reduction in water use as
necessarily desirable, bearing in mind the overall environmental consequences across all media
in line with the Industrial Emissions Directive (IED) and BAT principles. We consider that
responsible and optimal water use on a site-specific basis is the appropriate position for thermal
power plant operators to define and maintain.
We support the principle that charging should remain at least partly linked to ‘right’ rather than
‘actual use’ because the business significance of a water right for the power sector is
considerably wider than just the ‘actual use’ associated with it in a given year. In the power
sector, the maintenance of the water right and the ability to operate, if required, the asset
associated with it, is of importance not only for the right owner in question (where it may
represent a strategic choice to cover ‘market conditions’ and provide diversity of asset) but also
from a national security of supply/diversity of plant perspective.
9) Would quicker and easier water trading benefit abstractors now? How beneficial do
you think it would be to abstractors in the future?
We consider that quicker and easier water rights trading would be of benefit to abstractors now.
As noted in the consultation support documents, there are instances in which a power plant
operator can identify with confidence a surplus water right for a period (e.g. as a result of
planned outages or a view on market conditions). If there are abstractors in the relevant
catchment who could benefit from additional water rights on a temporary basis, there is the
potential for a societally beneficial trade which most likely would not take place under the
current system because of the administrative and regulatory difficulties. Conversely, there may
be circumstances in which a thermal power plant is potentially commercially able to operate but
constrained through a water rights restriction which could be relaxed through temporary
acquisition of rights held by another party or parties. However, it should be noted that the
quantity of water that is likely to be available or required for trading by the electricity sector will
be substantial, and in some catchments may not be comparable to the requirements of other
actors. The risk that existing plant/sites may not have sufficiently reliable access to sufficient
quantities of water following possible tightening of WrFD target objectives is of sufficient
significance to be part of the disproportionate cost considerations in WrFD objective setting.
The extent to which trading will benefit abstractors in the future depends on the balance of their
needs, rights held and actual availability of water. This may vary in time as the various agents
respond to short-term and long-term market signals and uncertainties which are in turn to some
degree dependent on the form of the reformed abstraction system in the catchment(s) of
interest. For power plant operators, a key concern is that the ‘water shares’ allocation, being a
proportion determined by the entitlement to a varying available pool, does not necessarily fit well
to their need depending on the fine detail of the allocation basis in terms of reliability group
definitions, access and distributions. For installations such as power plant, the desired water
right to enable normal operation is fixed in volume terms (e.g. x m3/d). Any rights allocation
Energy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
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Page 11 of 22
resulting in less than that amount would result in operational constraint and if the prevailing
commercial position of the plant would be for greater operation then the operator would be
seeking to acquire additional rights, if available at an acceptable price. Trading would be
beneficial in allowing an operator to manage the mismatch between a flow-proportional
allocation and a fixed need. Also, were an operator to have entitlement that would not be
exploitable on a temporary basis because of the commercial or outage position of the plant, the
ability to trade the temporary surplus allocation or right provides advantage to the operator and
the potential right purchaser.
The issues are related, but different, for a would-be investor in new plant (or major existing plant
upgrade) in which the decision whether or not to invest may depend on confidence in the return
on investment, which could be linked to the ability to secure and maintain sufficient water rights
through the lifetime of the plant.
We recognise that Defra is aware of the issue, and the reliability group approach to Water
Shares set out in Appendix C appears to have the necessary features to address this concern,
provided that at the point of transition to the new regime (i.e. post Restoring Sustainable
Abstraction (RSA) and WrFD revisions to current rights) operators have sufficient high reliability
rights holdings in the form of the reviewed abstraction licence to be transitioned in the new
regime. However, given:

the uncertainty in the RSA and WrFD outcomes prior to transition to the new regime

the definitions of environmental protection that will be implemented in the new regime,
as possibly influenced by future developments on
o
EFIs for WrFD for “good” status (natural water bodies)
o
EFIs for WrFD for “good” potential (for HMWB),
o
Establishment of flow requirements for Protected Areas or
o
forthcoming EU Guidance on e-flows
we cannot say with confidence that the position will be satisfactory. There seems to be the risk
that some power station operators may transition to the new regime with insufficient quantities
of reliable water for some power plants. This would have profound consequences for the value
of the affected assets/sites.
Given the capital costs of power plant and the commercial exposure to risk of restricted
operation linked to abstraction rights, we consider that power plant operators should be given
every opportunity to acquire rights of high reliability. The definition of reliability pools in
catchments should have regard to the needs of dependent users of high economic value.
Where the size of the high reliability pool would be inconsistent with achievement of GES or
GEP, this may be good evidence of the disproportionate cost of adopting GES or GEP as the
appropriate water body objective.
Some actors may choose to avoid the uncertainty by choosing to invest elsewhere, or not at all,
or withdraw from an existing plant/market. The trading option will not be of benefit to them and,
to the extent it may advantage competitors, would be a disadvantage. Remaining agents may
take advantage of any surplus rights that become available. The usefulness of trading will be
very catchment-specific and will vary in time depending on the market conditions experienced
by the range of actors in the catchment. It will also depend strongly on the initial market set-up
Energy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
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Page 12 of 22
(e.g. the initial allocations/entitlements of the various agents compared with their actual needs
and the initially available tradeable resource).
We are concerned about how the statutory obligations of, and funding mechanisms for, water
companies may affect water rights or water allocation trading. Whilst we consider that trading
can potentially make a useful contribution to achieving improved societal allocation of scarce
water resource, we are concerned that the unique position of water companies could lead to
market distortion that would work against the interests of non-water company participants. We
suggest that this is an important aspect of market design that should be considered fully by
Defra through its ‘market design’ activity.
There may also be advantages in future in simplifying arrangements for the trading of physical
water, taking account not only of issues of water volume but also of water quality. This may
become increasingly important if new storage and transfer infrastructure is developed.
10) To what extent do you see additional benefits in the wider range of trades that can
happen under the Water Shares option, compared to the Current System Plus option?
We do not see in principle that there need be any difference in the range of trades that can be
made available under either system of water rights allocation. However, it would appear that
Defra has deliberately designed the two option packages so that Water Shares includes a wider
range of ‘pre-approved’ trades than CSP. One fundamental difference is that in CSP there is
only one entity that can be traded (i.e. the licence) whereas in Water Shares there are two
entities (the short-term allocation and the permanent entitlement). On the assumption that the
necessary governance procedures for a short-term allocation trade need be less stringent than
that of a permanent trade, superficially it would appear that this is a key distinguishing feature of
Water Shares. However, it is possible that, were there sufficient will, similar provisions could be
achieved in CSP via the short-term leasing of licences (or parts of licences), though the legal
overheads of this and regulatory approvals would be more onerous than the mechanisms that
would have been set up in Water Shares. Perhaps the emergence of such contractual
arrangements might be a cue to consider evolving from CSP to Water Shares in a given
catchment, or possibly establishing in the relevant CSP catchments rules for pre-approved
trades allowing quick and cheap short-term trading of rights.
Similarly, an emerging desire to trade upstream in a CSP catchment might reasonably trigger
consideration of rules for pre-approved upstream trades.
Clearly, the wider the pool of participants in a given trading arrangement and the simpler and
cheaper the mechanisms for approving, agreeing and executing trades, the greater is the
potential for useful trading to occur. Whilst the implications of the different options will be
different in different catchments, the anticipated default trading opportunity in the Water Shares
package would appear to be significantly enhanced compared to the anticipated default for
CSP. However, in detailed design of enhanced catchment rules and the pre-implementation
consultation on an individual proposed CSP catchment, there would be an opportunity to
explore demand for some trade types (including short-term or upstream) based on the ‘basecase’ catchment set-up and supporting modelling. In this way, an individually tailored CSP
catchment set-up could be established at launch which might provide enhanced economic
opportunity at modest cost compared with a ‘plain vanilla’ CSP.
11) Do you agree that participation in abstraction trading should initially be limited to
those with a direct interest in abstracting water?
Energy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
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Page 13 of 22
We share the concern that completely open water rights markets may attract speculator
participants who could create inappropriate market conditions. We support the view that initially
participants should be restricted to those who have a direct interest in abstracting water. We
assume and support that the definition of ‘direct interest’ would be such as to exclude
participants whose intent is to acquire water rights and ‘retire’ them (e.g. to provide
supplementary flows to enhance environmental protection). However, we note that the proposed
definition of participant restriction may allow this (e.g. for a participant who owns land on which
there has been demonstrated a need for abstraction but for which no abstraction actually comes
about). Thus, we would propose that, should the expected ‘use’ not materialise within a
reasonable period (say six years, being one WrFD RBMP cycle), the participant should lose the
right to participate in trading. However, clearly, this should not apply in Water Shares after the
initial allocation. As time goes on, it is clearly possible that a participant who acquired rights on
the basis of a water-dependent activity might then close that activity. The participant should not
then immediately lose the rights that were initially allocated because of that activity and any third
party who had acquired permanently some of those rights through trading should not find that
right removed. If the rules of the scheme are such as to limit participation to those with direct
interest, should a participant lose the ability to actually use some or all of the rights issued to
them, they should be given a reasonable time to ‘close out’ their excess right position (i.e.
avoiding the ‘distressed seller’ position).
Further to this, as discussed in our various stakeholder engagement documents previously,
power station sites have a life beyond that of the plant currently placed there. This offers various
societal advantages including better exploitation of sunk investment (e.g. in electricity, fuel and
by-product infrastructure) as well as development of a skilled workforce, local community
conditions, etc. The availability of water resource is a key consideration in developing new
water-dependent strategic infrastructure such as thermal power plant. Thus, the existing licence
should be viewed not only as linked with an existing plant but also in the context of potential
new plant or major existing plant upgrade opportunity. In some cases, there may be some
period of time between the succeeding of an existing plant with a new plant, leading to changes
in the actual use of water at that location. It could be that for several years there may be no
actual water use. It is nonetheless a vital element of the development of the new plant that the
owner can have sufficient confidence that sufficient water rights are held to cover the operation
of the new plant. Thus, the definition of ‘direct interest’ should include developers of plants/sites
in such circumstances, at least for a reasonable period of several years following closure of an
existing plant. The new regimes may allow those rights to be held by the developer but traded
temporarily in the intervening period prior to the operation of the new plant, thus allowing
continued societal exploitation of those rights.
We support the principle that ‘a justified need for abstracting water’ does not necessarily include
tests of land ownership or control of existing infrastructure as, in developing new waterdependent infrastructure assets, the acquisition of water rights may be a key project risk and a
developer may wish to acquire sufficient rights before proceeding beyond the ‘paper project’
stage, including prior to acquisition of access to land.
A distinction in the eligible participants definition should be drawn between the trading of
‘permanent rights’ and ‘temporary rights’ (e.g. two-weekly allocation). The test for participation in
temporary trading should be more onerous (being limited to those with the potential to physically
abstract within the relevant period of the trade).
Energy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
www.energy-uk.org.uk
Page 14 of 22
We recognise that, with appropriate regulation, participation in markets other than by those with
‘direct interest’, such as brokers and speculators, can promote economic efficiency and we
suggest that this possibility, and rules to control it, be kept under review.
We are unclear and confused by the wording on p39 stating in CSP ‘that there would be no
requirement for abstractors to demonstrate a need for water to trade”. After some consideration,
we conclude that, as any ‘abstractor’ in CSP would have been required to show ‘reasonable
need and efficient use’ and possess an ‘intake’ (or at least have prospect of control of one within
a reasonable timeframe)4, this wording is not intended to allow or encourage the operation of
speculators within CSP. We suggest that Defra clarifies this in the consultation response.
12) Do you support our proposals for a more consistent approach to making changes to
abstraction conditions? If not how would you improve the proposals?
We agree that fundamental to both CSP and Water Shares is a clear statement of the scope for
future interventions in each option. We do not consider that such statements have been made
to date. The scope for intervention should be considerably less in Water Shares than CSP. The
statement of intervention scope should cover separately each of:

revision of ‘rules of the scheme’ (both overarching and catchment-specific, if applicable)

intake permits (by which we mean the constraints and obligations placed on an intake
structure irrespective of the water rights that the intake operator may have).
There is insufficient detail in the consultation proposals on the scope for interventions. In the
following paragraphs, we reply to the specific question asked and make some additional
remarks. However, we see the ‘scope for intervention’ as requiring considerable detailed
discussion. It may be one of the key properties distinguishing CSP from Water Shares and we
highlight its relevance to the determination of risk to would-be investors in water-dependent
infrastructure assets such as power stations.
We note (p39) that in the CSP trading it is envisaged that there is no requirement for abstractors
to demonstrate ‘need’. From the context, we assume that this should be read as ‘abstractors
acquiring rights by trading’. Whilst we agree that introducing ‘need’ tests into trading is
inappropriate (other than the ‘direct interest’ test), it raises the question of how the underlying
rights distribution in CSP might be periodically reviewed, and in particular whether or not it is
proposed to maintain the current need and efficient use tests. Section 4.6 (p41 ff) does not
appear to address this, though the wording of p20 relating to the retention of ‘current tools’ may
be read as suggesting it. Given that it is proposed that under both CSP and Water Shares all
future rights will not be time-limited, the scope of the ‘catchment review’ process needs to be
much better defined. Whilst the consultation implies that risks due to changing water resources
(in CSP) and in means of defining appropriate environmental protection (both CSP and Water
Shares) are within scope of the ‘catchment review’, there is little guidance on what other issues
might be in scope (e.g. the difference between actual use and right, continuing need and
efficiency of water use). We expect that the grounds for review (leading to review of the basis of
rights allocations) would be very limited in Water Shares as otherwise it would be impossible for
a share owner or prospective purchaser to ‘value’ the traded right. There should be more
grounds for review in CSP, particularly in fully allocated catchments, but again, these grounds
should be clearly defined within the scheme rules in order that investors in water-dependent
4
Inferred from description of CSP on p20 detailing EA/NRW’s continuation of the use of tools currently
applied to … reduce or stop abstraction …
Energy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
www.energy-uk.org.uk
Page 15 of 22
infrastructure can adequately assess the range of water rights related risks they run through the
life of the asset.
We note (p42) that Defra intends to review abstraction ‘permissions’ and abstraction
‘conditions’. The link between ‘permission’, ‘conditions’ and water rights allocation is unclear.
The relationships between these should be clarified.
It is clear that the perception of appropriate flows to provide environmental protection changes
from time to time, both due to changes in science but also through changing societal views on
the appropriate balance to be struck between environmental protection and responsible use of
water. Where the level of protection to be afforded to the environment is determined by WrFD,
the balance to be struck between environmental protection and water use should be explored
within the RBMP process having regard to the costs, benefits and consequences of changing
that balance. It should not be assumed that if the flow regarded as consistent with a given status
changes (e.g. in response to scientific development), the balance between environmental
protection and water use should necessarily remain the same. It may be that when the costs
and benefits are explored, the appropriate outcome is to maintain the level of water use,
implying a reduction in environmental protection (relative to the new status boundaries)5. Thus,
in both CSP and Water Shares, where environmental protection is linked to WrFD, a change in
science should not change the environmental allocation (and hence the allocation to societal
use) without full consideration of the costs and benefits of so doing (along the lines of the WrFD
objective-setting principles, including the range of disproportionate cost testing.)
We are sympathetic to the principle that any revisions to licences, allocation principles and other
scheme rules should take place on a catchment-wide (i.e. allocation scheme-wide) basis.
However, we do not accept the principle that a desire to increase the environmental allocation
should necessarily trigger reductions in water rights allocated to users. Firstly, the proposed
change in environmental allocation should be reviewed to establish the balance of costs and
benefits (WrFD principles, if applicable). Secondly, the detail of the proposed change in
environmental allocation should be considered in the context of the reliability of rights held by
abstractors (either with respect to HOFs in CSP or reliability groups in Water Shares). It may be
appropriate that the consequence of the change in environmental allocation is borne entirely by
those with less reliable existing rights. Any proposed change to the high reliability rights should
be carefully reviewed, as it may affect the security of some other societal service (e.g. electricity
supply, for power station operators with abstractions).
The idea (p43) of defining ‘review thresholds’ and regular risk assessments giving abstractors
some ability to anticipate future review timing and direction is welcome, although the details are
unclear. As above, we would expect WrFD disproportionate cost considerations to form part of
the review.
13) What notice periods do you think would best balance the needs of abstractors and
the environment?
Given the overarching role of RBMP within WrFD, we agree that integration of the notice period
into the RBMP cycle is appropriate. Whilst six years may be appropriate for many abstractors,
we consider that a longer notice period would normally be more appropriate for long-life, waterdependent infrastructure assets such as power stations. The minimum notice period for rights
5
Careful consideration of the implications of the ‘no deterioration’ provisions of WrFD would be required
in such circumstances, including the possibility of revisiting the appropriate past, current and future target
status.
Energy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
www.energy-uk.org.uk
Page 16 of 22
revisions underpinning such assets should be 12 years, with the ability of the operator to make
a case for a longer period (e.g. for a new water-dependent power station with a design life of
perhaps 30 years, if it is proposed to review and restrict rights early in the plant’s life.) It is
important to note that, in this case, the new plant would have been constructed in response to a
wide range of market signals, including energy and carbon prices, and with an eye to
government policies on energy, carbon, climate change, infrastructure resilience, etc.
14) Do you support the proposal to remove the payment of compensation for changes to
abstraction conditions and to phase out the collection of the Environmental Improvement
Unit Charge through abstraction charges?
Yes. We doubt if any power plant would benefit materially from the existing provisions for
compensation. We also understand that the money that continues to accumulate from the EIUC
has not been used recently.
15) Do you agree it is important to take measures when moving licences into the new
system that would protect the environment from risks of deterioration?
In principle, we would not support implementation of the transition to the new system in such a
way as to lead to an artificial distortion of the playing field, either within a sector or between
sectors (competing for scarce water). We understand Defra intends not to use the transition to
the new system to address current unsustainable abstraction. We therefore consider it is
important that, should issues of timing mean that some licences have not been reviewed prior to
the need to transition them to the new system, care should be taken to not assign rights in the
new system that would not have been granted had the review taken place prior to transition. In
practice, this might well mean that the reviews must take place prior to transition. Hence, the
Defra statement,
‘there may be some currently unsustainable abstractions that would have to be
moved into the new system’ (p47)
gives concern.
Equally, for a national sector such as power generation, there is the potential that a phased
transition could lead to market distortion through the phased timing of pre-transition reviews, but
this is not an issue introduced by the abstraction reform process itself.
We do not support any measure tantamount to creating an ‘environmental allocation reserve’
through transition in order to give enhanced protection to the environment from future nondeterioration risk (e.g. in WrFD status). This would frustrate one of the intentions of the reform to
‘make the most of every drop’, by denying water to potential users of it in order to give additional
comfort regarding environmental status. The environmental allocation should be determined to
reflect the appropriate societal balance (as established through WrFD RBMP) and legal
requirements (e.g. the requirements of water-dependent Protected Areas). Indeed, one
consideration in establishing the appropriate WrFD target status and individual element
outcomes is when a water body ‘just’ meets “good” status (with little margin) having previously
been at ‘moderate’. With current EFIs, this would lead to a reduction in allocation for societal
use (a consequence which should be considered prior to the setting of the target, not assessed
afterwards as a consequence). Establishing the new status as ‘good’ may increase the risk of
subsequent no-deterioration.
Energy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
www.energy-uk.org.uk
Page 17 of 22
We appreciate the risk that ‘sleeper’ elements of existing licences could, after transition, lead to
additional actual use as a result of the increased trading opportunity. We appreciate therefore
that part of the transition process should be to link the transitioned right with the licence holder’s
current rights, their actual use and the business significance of recently unused rights in an
equitable way, which also does not result in subsequent undue risk to the environment. It is
important that the process has full regard to the licence holder’s reasonable expectation of the
future exercising of currently held rights (i.e. future actual use of water) as for some activities,
including those of the power sector, the ‘life’ and business significance of a site, which can be
profoundly influenced by the water rights associated with it, can extend considerably beyond the
life of an existing asset on that site. We note that in the stakeholder engagement process and in
the supporting modelling, Defra’s consultants (AMEC, 2013) have used an approach in which
the annual abstraction volume is set as the
MIN {recent annual actuals + 20% of the current licensed right, the current annual
licensed right}
We think this may be a reasonable structure for an approach in some cases, though not
necessarily the power sector. We discuss this further in our response to Question 17.
However, we do appreciate that there may be circumstances where the existing licence holder

does not have need for the full amount of the currently licensed right

and/or does not use water efficiently

and does not have reasonable future need for the full amount of currently licensed right
and in such cases the basis of transition should be less than currently licensed right.
It is important that there should be an effective appeal process for licence holders who consider
that the basis of transition for them is inappropriate. Depending on the detail and timing of new
legislation, it is not clear whether the existing appeals process under the Water Resources Act
will remain in force and/or be of sufficient scope to cover the valid needs of affected licence
holders. We therefore request that Defra gives consideration to a suitable appeals process
remaining in force and available to all from now at all times until and including full transition in a
catchment to a new regime.
16) Would you prefer us to consider the risks in each catchment when designing the
rules for moving licences into a new system, or should we treat all abstractors in the
same way regardless of water availability?
We understand that Defra’s intention is to not use transition to the new system to address some
‘risks’, so the basis for the question is not entirely clear. However, Defra appears to recognise
the possibility that some licences will not have been reviewed prior to transition. We have
addressed this within our response to Question 15, above.
We consider that any transition methodology that did not recognise the circumstances of a
specific catchment would be unworkable, in that even if the initial transition were done on the
basis of a national rule, if this led to over allocation to users or other ‘risk’, a further review at
catchment level would be required anyway. It is preferable to deal with the complete transition
basis once, nationally, recognising that the national approach must have a catchment-specific
dimension.
Energy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
www.energy-uk.org.uk
Page 18 of 22
We support the view that the best basis for transition is to address ‘risks’ under existing law prior
to transition.
17) What would be the most effective method to calculate the new annual limits to be
transferred into the new system (for example average annual, average peak or a
combination of actual and licensed volumes)? And what assessment period should be
used to calculate them?
We do not regard either ‘annual average’ or ‘average peak’ actual water use as a suitable basis
for transition. We consider that the basis of transition should, in some circumstances, be
strongly linked to current licensed rights and/or reasonable future need, at least in the power
sector.
For the thermal power sector, it is important to note that actual annual water use may vary
considerably within year and from year to year because of variations in market conditions and
possible changes to the plant (e.g. retrofits which may change plant competitiveness and/or
water consumption needs). Thus, it is important that the period covered by ‘recent actuals’ is
sufficiently long. The length of a suitable reasonable period may vary between sectors. For the
power sector, we consider 10 years to be a reasonable starting point (i.e. for a default
assessment) for ‘need’ based on an existing plant (covering a reasonable period prior to the
2008 economic crisis as well as the last few years). However, there may be reasons why a
specific plant was not operating as expected in a given year (e.g. as a result of planned or
unplanned outages). This will be particularly relevant where specific plant has been mothballed
for a period of time within the assessment period.
Moreover, it is possible that it can reasonably be foreseen, and the licence holder may have a
reasonable expectation, that future need will be greater than need in the last 10 years (e.g. as a
result of plant upgrades and/or changes in market conditions and including, but not being
restricted to, the recovery of a plant from mothballing). We therefore suggest that, should
operators consider that the 10 year historic period does not adequately cover their potential
needs in the future for the existing plant, needs which would be covered by the existing licence,
there should be an opportunity to make a case for transition of existing rights based on
reasonable expectation of future need rather than ‘recent historic’. It should be recognised that
the detail of such a case might be commercially sensitive and appropriate provision made.
Further to this, as discussed in our various stakeholder engagement documents previously,
power station sites have a life beyond that of the plant currently placed there. This offers various
societal advantages including better exploitation of sunk investment (e.g. in electricity, fuel and
by-product infrastructure) as well as development of a skilled workforce, local community
conditions etc. The availability of water resource is a key consideration in developing new waterdependent strategic infrastructure such as power plant. Thus, the existing licence should be
seen as linked not only with an existing plant but also in the context of potential new plant or
major existing plant upgrade opportunity. It may be that, in the run up to transition, at some
existing power station sites the operator has plans to carry out major upgrades or develop new
plant either of which would result in an increase in water use compared with ‘recent actuals’ and
possibly more than ‘recent actuals + 20% of current licence’. We therefore consider that, in
those circumstances, the operator should be able to make the case for a basis of transition,
potentially up to ‘current licence’, on the basis of reasonable future need based on anticipated
developments within a defined timescale. Such a timescale should be established with respect
to the development characteristics of the development process for the industry concerned and,
in the case of the power sector, should take account of all of the planning, permitting and
construction phases. It should be recognised that investment in nationally-significant, waterEnergy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
www.energy-uk.org.uk
Page 19 of 22
dependent assets such as power stations, cannot take place in circumstances where sufficiently
reliable access to sufficient quantities of water cannot be guaranteed.
18) Do you support the establishment of a water reserve to support economic growth?
Whilst the creation of a water reserve might appear to be an attractive policy measure for Defra
to provide ease of access for new entrants to a pool that is already fully allocated (e.g. a CAMS
area which is over licensed/over abstracted) when there may be a reluctance for incumbents to
trade, we consider that there are several aspects of it that could lead to undesirable outcomes.
In particular, the water reserve could represent a significant economic penalty for existing
abstractors if formed, as has been suggested, from currently ‘unused’ rights held by existing
abstractors (see our comments on Questions 15 and 17) which nonetheless formed an
important element of the abstractors’ future expectation. [Here the definition of ‘unused’ is
uncertain and is effectively an element of the current consultation.]
It has been suggested that water reserves should be allocated to applicants at no cost. This
does not appear to be an economically rational approach and is inconsistent with some of the
economic principles underpinning the reform initiative relating to inadequate price signals in the
existing arrangements.
Overall, we consider that the route for possible new entrants to acquire rights in a fully allocated
catchment should be via a suitable market-based mechanism rather than a ‘reserve pool’.
Within Water Shares, the ability to trade both entitlement and allocation should be sufficient to
provide new entrant routes where the economic activity of the new entrant is superior to that of
existing rights holders.6 There may be a more compelling prima facie case for a new entrant
mechanism in a fully allocated catchment operating CSP. The potential for a new entrant to
trade for an existing right is still present under CSP but may be harder to achieve, especially if
the existing licence holders are unwilling to trade. The consultation material is unclear on quite
what the scope of periodic reviews of licences under CSP may be (e.g. consultation p20).
Periodic review of need and efficiency of water right allocation under CSP, subject to
appropriately defined rules and principles, in order to ‘free up’ rights for which there is no
continuing/future valid need, may be preferable and be more efficient than the creation of a
water reserve.
Water reserves should not be used as a mechanism for increasing the effective environmental
allocation. Thus, if set up and not drawn upon, the reserve should be re-allocated to existing
abstractors rather than retained as additional environmental flow.
Should a reserve be set up, existing abstractors should be allowed to bid for the reserve (e.g.
covering the case where the existing entitlements do not satisfy the abstractors’ needs).
One key principle underpinning the decision on whether or not to adopt a ‘water reserve’ is not
to build in the assumption that new entrant use is necessarily a more economically efficient
(from a societal perspective) use of scarce resource - the existing allocation could be more
efficient. Artificially enhanced diversity of abstractors does not necessarily lead to improved
economic efficiency.
6
It may be appropriate to have provision for overarching supervision of the operation of markets to
prevent abuse of position.
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Establishing a mechanism which artificially reduces existing rights could undermine confidence
for new investment at a site. It could also result in reduced ability to exploit already sunk
infrastructure expenditure (if a plant's water constraint increases simply as a result of the new
entrant mechanism). These effects may not be economically efficient outcomes.
Other comments not related to specific Questions 1-18.
Impact Assessment
The impact assessment states that the effect of both CSP and Water Shares on carbon dioxide
equivalent greenhouse gas emission is ‘minimal’. Concerns about the availability of water rights
in both schemes may act as a barrier to investment in new thermal power plant operating on
freshwaters, or to major upgrades for such existing plant, and hence lead either to reduced
investment (with consequences for security of electricity supply) or a bias towards coastal
locations (though there are non-water resource related barriers to this) or air-cooled plant (with
an intrinsically and materially reduced thermal efficiency compared with otherwise identical
water-cooled plant). The latter case would result in increased carbon dioxide emission per
MWhe produced.
We are concerned about the evaluation of the benefits of the reform options. We recognise that
it is not straightforward to define benefits in this case and it is not clear what the ‘baseline’ for
benefit evaluation is. In particular, are benefits in the CSP and Water Shares cases compared
with the ‘do nothing’ option? If this is the case, the basis for benefit evaluation for the power
sector contribution to non-public water supply business is not clear. One of our key concerns is
the potential reduction in water rights in either or both schemes, which would result in
substantial negative benefit to the sector both for existing plant and with respect to investment in
new plant. Improved trading potential might allow a mechanism to better manage a constraint,
but overall this would appear more likely to offset some, but by no means all, of the disbenefit of
the greater constraint. We do not see scope for our sector to exploit greater access to water at
high flows. The work we expected to be carried out in advance of the consultation by Defra’s
consultants on the way that the power sector agents may behave in the “new world” has not
been done. This therefore reduces substantially any informed discussion of possible behaviours
that may assist in identifying benefits and disbenefits.
We take the view that the position often appearing to be held by Defra throughout the
stakeholder engagement process, that environmental allocation consistent with WrFD ‘good’
status has priority, is not necessarily sound and should be tested within WrFD disproportionate
cost methodology prior to establishing water body objectives. A premature and ill-informed
choice of ‘good’ status as the environmental target may represent a substantial disbenefit for
existing users and an opportunity cost with respect to the preclusion of potential future uses.
Despite our full engagement throughout the process, it is disappointing to see (p10) that the
power sector is described as ‘almost totally non-consumptive’. As we have stated many times,
depending on how the statistics are prepared, this may appear so in some aggregations.
However, by far the majority of the thermal power plants sited on freshwater in England are wet
tower-cooled. These plant will consume typically between a third and a half of their gross water
abstraction and cannot function without such consumptive use. For example, according to the
Table (p11), 97% of the abstraction for thermal power plant is from tidal waters. Thus, the
consumption of freshwater tower-cooled plant will almost vanish in this aggregation.
Nonetheless, sufficiently reliable access to sufficient volumes of freshwater underpins the
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operation of much of England’s thermal power station capacity and is a vital consideration in the
current security of electricity supply. Hence, it is essential that this is properly considered in the
abstraction reform process.
That is not to say that the power sector’s net abstraction is the whole story. For tower-cooled
thermal power plant, gross use for cooling purposes is a vital consideration because operation
of a plant would be impaired if it were unable to abstract the design gross amount for a given
net abstraction. It is important not to lose sight of this potential to affect power plant operations
in water resource management decision-making.
Integral to CSP is that all licences, though now not time-limited, would become subject to
periodic review. This is a key feature. From the perspective of the electricity sector, the use of
perpetual licences is supported as time-limited licences of duration of 12 or even 24 years are
not a good fit to water-dependent power station assets with commercial lifetimes of 30-60 years.
Moreover, a power station site has a life and value beyond the life of any particular plant sited
upon it. However, the review provision is a source of uncertainty and risk. Whilst we recognise
that some review process is necessary in CSP, it is essential to bound the scope and define the
rules for such reviews, thus limiting the scope for subsequent unexpected intervention. Without
such clear scope definitions, even the perpetual licence offered within CSP may not give
sufficient confidence for investment in long-life assets. Whilst the 12 year period from
commencement of review to implementation (p47) gives some comfort, this is not expected to
be sufficient to cover the payback period of most thermal plant. Thus, a special dispensation for
an initial grace period for new thermal power plant against routine review would be welcomed.
We note that the revision period in Water Shares is seen as less frequent than in CSP (p49). In
order to be able to value water shares, the scope for intervention must be suitably limited and
we urge definition of such scope to be a high priority activity in the market design workstream.
Andy Limbrick
Environment Consultant
Energy UK
Charles House
5-11 Regent Street
London SW1Y 4LR
Tel: 020 7747 2924
[email protected]
www.energy-uk.org.uk
Energy UK, Charles House, 5-11 Regent Street, London, SW1Y 4LR
www.energy-uk.org.uk
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