The notes of the latest meeting of the Ofwat Water Resources Working Group set up to examine how water trading can be further developed has outlined two approaches currently under consideration as a possible way forward.

The group is charged with exploring how to further develop markets where there is potential to unlock substantial benefits for customers, companies, investors and the environment. This includes developing an access pricing framework to facilitate entry by companies who can supply raw/treated water at least as efficiently as the costs of incremental capacity provided by the incumbent water company.

According to the access pricing sub-group, which is made up of five companies plus Ofwat, in relation to water resources, trading is below its optimal level and taking steps to reduce identified barriers to this could result in significant benefits for customers.The group envisages two possible markets for water resources, consisting of:

1, Bidding Markets in England and Wales - whereby  third parties (new entrants or out of area incumbents)

• bid to address demand/supply deficits.

• can provide water, leakage solutions or demand reduction measures

• Typically long-term solutions – third party providers likely to commit to long-term contracts

2, Bilateral Market in England – the Water Act 2014 makes changes to allow third parties to introduce water whereby third parties

• can contract directly with independent retailers

• will pay for access price to incumbent to use network and, if needed, treatment facilities

• need not enter into a long-term contract with the retailer

• incumbents may choose to enter into longer-term ‘call-off’ contract to ensure continuity of supply

According to the notes of the latest meeting, the two potential markets complement one another. An alternative water provider can enter either through the bidding process and achieve long term certainty or agree terms with an independent retailer which may provide less certainty.

They also suggest that the bilateral market may incentivise retailers to search out more efficient water resources in order to compete more vigorously in the retail market. The legislative changes enabled by the Water Act 2014 will help to realise bilateral market opportunities via a new water supply licensing regime to allow alternative providers to introduce water. The regime will also extend third party options to draw on the facilities and systems of incumbent water companies.

Commenting on the aims of setting access prices which are currently under consideration by the working group, the notes say that access prices and the markets they support are a means to an end, describing markets as desirable because they provide incentives to innovate and search out new and more efficient or more desirable solutions.  

“The aim of the bilateral market is to deliver benefits for customers in the form of more efficient and resilient water resources. By enabling the bilateral market, new retailers, and not just incumbents, will have an incentive to seek out cheaper or better water resources”, the notes say.

Bilateral market is about allowing access – not about buying of capacity

Key messages outlined include the comment that the bilateral market is about allowing access, not about the buying of capacity like the bidding market and the need to avoid arbitrage between bilateral and bidding markets. The new approach would involve aiming for the best (or least-worst) fit,not perfection with the encouragement of efficient entry as the priority.

Market information – Ofwat’s initial focus will be on stimulating conversations between potential suppliers and buyers

The meeting also heard a presentation by Ian Pemberton,  Principal Engineer at Ofwat on the possible requirements for the provision of market information and the bid assessment framework. In December 2015 Ofwat’s outline proposal included a market information database, managed by a third-party organisation, which would also provide a platform for bid assessment on an ongoing basis.

Ian Pemberton said that stakeholders were generally supportive of the overall policy proposal to improve information provision and encourage trading but some had raised concerns including:

• Risks to resilience, water quality and environmental impact
• Cost and complexity of the proposed design
• The sharing of sensitive data such as cost information and intellectual property with value
• The model of third party design which most supported but some saw as overly complex
• The need for a bid assessment frameworks given existing legislation and controls to ensure fairness
• Alignment with WRMP19

The input Ofwat had received underlined the importance of taking a targeted and proportionate approach to information provision, according to Ian Pemberton. The notes state:

“In the first instance our focus will be on stimulating conversations between potential suppliers and buyers rather than setting out all information required to determine a trade. This puts greater emphasis on commercial negotiations and means complex issues such as resilience, water quality and environmental risk will be determined off-line.”

“International experience suggests that third-party brokers may play a significant role in aggregating and analysing data to identify opportunities. “

According to Ian Pemberton, Ofwat had made a revised policy decision based on the feedback as follows:

• We will require incumbent companies to make data available on supply-demand deficits and water resource costs in a consistent format on their websites with Ofwat providing a signposting page
• We will require companies to allow reasonable use of published information
• We will require companies to publish a bid assessment framework setting out polices and process for assessing bids to supply water resource or demand management/leakage services

Click here to download the Water Resources Working Group 13 December 2016 meeting slides of presentations and speeches