Water Resources Optimisation

The objectives of the work are to:

• Identify and understand the nature of optimisation decisions that take place in the allocation of water resources for the public water supply, such as number of potential water resources, role of network optimisation and interconnection required.

• Understand how the nature of optimisation decisions influences the effectiveness of markets to allocate resources.

• Building on the above, to set out the potential options for the allocation of water resources for public water supply. At a high level, this could include the:

o status quo; o enhanced market model; and o enhanced system operator model.

• For the enhanced market model, to identify options for market-based mechanisms, including a bilateral market model with bespoke arrangements between parties and a reverse auction platform - an approach which could be used for water resources around key supply nodes for water, which could be key (strategic) sources, or potentially, key network locations which can feed large areas.

• To explore the extent to which the different options are substitutes, or complements to each other, their relative merits and how these approaches might work in different timescales (short v long term). This should consider whether enhanced markets could coexist with enhanced system operators.

• To explore the effectiveness of the different approaches across different geographic dimensions - local, regional and national - under different water availability (such as drought, normal) conditions. In doing this, the work should explicitly consider the experience of and implications for the south east of England as an area of existing water stress alongside considering the potential impact on more marginally water stressed areas. The potential impact on areas which are potential suppliers to more water stressed areas should also be explored.

• Related to the above, identify and evaluate the options for further developing these options, including assessing how to remove any barriers to implementation.

• Drawing the above together, provide emerging findings for Ofwat on our development of our approach to water resources and to inform our prioritisation of policy development.

The work should take account of the possibilities and constraints that exist under existing legislation but assume that the reforms noted in the background section are implemented.