Transforming water scarcity through trading

Lead Research Organisation: Cranfield University


Water scarcity is widespread and increasing worldwide. Many areas of the UK are increasingly short of water resources. Yet typically only half the available water is abstracted even in dry summers, and much of that is for low value uses. Climate change, population growth and increased water demand require a dynamic reallocation of the water resources that the present water allocation and licensing system in England and Wales cannot provide. More flexibility in transferring and sharing water resources would decrease water scarcity by encouraging the development of the most economical new supply options, and would increase the benefit obtained from the existing water, by encouraging transfers to higher value uses. The potential of water abstraction licence trading to bring about more efficient allocation of water, the development of new resources and environmental improvements in areas of water scarcity has been recognised by government, but so far regulatory problems and environmental constraints have limited progress.

Water markets already exist elsewhere (e.g. Australia, Western USA, Chile) but have often had negative impacts on vulnerable groups and ecosystems. Within England and Wales, trading of water rights has been encouraged by government since 2003, but only about 60 trades have occurred. More flexibility is now being promoted, as a solution to water scarcity and allocation (e.g. OFWAT, 2010). However, it is imperative that the impacts of different market rules and regulation are better undestood.

The objectives of our project are to :
- inform the current move towards water markets;
- show how active markets could transform the current water management system;
- value the available water spatially and dynamically, revealing its opportunity cost;
- identify the economic benefits of trading water licenses at basin scale;
- research the opportunities for novel engineering options for increasing supplies, such as distributed reservoirs, enhanced aquifer recharge, and rainwater harvesting, and how/whether they might be funded by downstream buyers;
- investigate the rules and restrictions necessary to protect the environment and avoid unwanted consequences;
- investigate options for incorporating Payment for Ecosystem Services (PES), to enhance environmental benefit.

The project team brings together a strong set on complementary research skills in water management, from four universities active in water management research, Cranfield, Leeds and Herriot-Watt Universities and University College London.

The project will first review the experiences of water trading systems in other countries, and the experiences of trades that have already occurred in the UK. Alternative methods of sharing water resources, eg through pooling licenses, will also be reviewed.

The core of this project is the development and use of a market simulator, modelling how water suppliers and users behave under various market structures. The novelty in developing the Market Simulator is to study the potential operation of markets and trading at catchment and abstraction licence level. The model will be applied to selected water-scarce catchments in East Anglia, using a weekly time step. Meetings with regulators and water managers will be used to ground and focus the modelling.

Three PhD research projects will supply data for the model and subsequently use the model to investigate specific aspects of the problem. They will look respectively at: the potential for engineering options in the UK; land management options in an international context; and quantification and valuation of ecosystem goods and services for multiple purposes. Co-supervision of the students and regular team meetings and workshops will help reinforce integration of the academic team and the students.

Planned Impact

The most immediate users for outputs from this research are the regulators and government departments, including the Environment Agency, Ofwat and Defra. Information on the range of market values of water, the extent of potential economic benefits from water trading and/or abstraction licence trading, the potential environmental disbenefits, and guidance on the impacts of different regulatory frameworks will contribute to the effectiveness with which they manage our national water resources.

The information will similarly be of direct use to existing and potential water users, indicating the value of existing water resources and the costs of additional sources that involve trading, whether by buying existing resources or financing development of alternative sources elsewhere. Any resulting improvements in regulation are also likely to benefit users, particularly potential new users whose development is currently constrained by water scarcity.

Environmentally-concerned individuals, regulatory bodies and non-governmental organisations will benefit from increased clarity in identifying the potential disbenefits and limits of water trading, allowing them to target their concerns about the environmental impacts of over-abstraction more accurately and highlighting the regulatory controls required. The identification of neutral or even positive impacts will be helpful, e.g. for identifying environmentally acceptable water sources for maintaining managed habitats (the RSPB for example is a water abstractor in its own right).

The economy in water- stressed areas will benefit from better use of water resources, enhancing wealth creation and employment. Adequate and reliable water for electricity production and reliable public water supplies are clearly essential for sustainable economic growth. In the East of England, irrigated farming is a significant rural employer, both on-farm and downstream in the packaging and distribution industries. Home-grown irrigated crops contribute to the national balance of payments, and will become increasingly important under climate change as alternative sources such as Spain become hotter and more water scarce. Increasing the proportion of fruit and vegetables in the UK diet is a stated government priority; much of this will have to be home-grown and will require reliable water resources.

The wider public will benefit from gains in economic efficiency from improved use of scarce water resources and the movement of water from low to high value users, and from the better protection of the water environment it rightly values highly.

The international community will benefit from the information obtained from the UK, from the application of the model to a third-country example, and from the potential to adapt the model to other contexts.

The further development of the innovative geo-referenced open-source software platform will be of benefit elsehwere within the water sector; the existing model is already bing used in a joint University-regulator-water company policy simulation platform. The deliberate choice of an open-source platform ensures that this model can be adapted to other UK and international contexts with minimal software licensing constraints.
Description The UK Government has committed to the reform of the abstraction regime in England and Wales. We studied the impacts of alternative licencing systems applied to the Great Ouse River basin in eastern England, a water-short catchment with public water supply, agricultural, energy and industrial water abstractors. Trading of abstraction licences and derivative water rights, could play a key role, with resulting impacts on low-flows, water availability and livelihoods.
We tested a multi-commodity network flow node-arc optimization modelling method capable of tracking trade transactions in complex water resource systems, and compared this with an existing arc-path (flow path) formulation. The new model simplifies modelling large or complex networks. We built a river-basin-scale hydroeconomic agent model that represents individual abstractors and can simulate a spot market under both licensing regimes. We populated the agents within the model based on an irrigation abstractor typology derived from a survey in the study area, to capture individual behavioural intentions under a range of water availability scenarios, in addition to farm attributes, and demographics.
We worked with stakeholders to document their response to two innovative water trading systems, "improved pair-wise" trading and the "common pool" approach. The stakeholders were cautiously interested in the benefits offered by both methods, especially the ability to trade water at short notice. However, the research showed that for these trading methods to play a key role in the reform of abstraction licensing the abstractors must have sufficient confidence that the underlying methods are sufficiently equitable, reliable and accurate.
We investigated how a short-term spot market manifests within each proposed licensing regime. Results showed that the proposed shares with dynamic environmental flow licensing system protects river flows more effectively than the current static minimum flow requirements during a dry historical year, but that the total opportunity cost to water abstractors of the environmental gains is a 10-15% loss in economic benefits.
We investigated how power is shared between farmers and government in England and the balance between competition, conflict and cooperation. We investigated the potential role of adaptive comanagement to achieve the dual objectives of ecosystem protection and livelihood sustainability under conditions of change and uncertainty; results revealed discrepancies between the conditions needed for adaptive comanagement and current water policy.
We studied how farmers respond to water pricing, rationing and subsidies, and investigated the economics of irrigated wheat production in East Anglia; we showed that widespread irrigation of cereal crops, which would have greatly increased water demand, was very unlikely. We studied the costs and benefits or on-farm reservoir storage, which provide an alternative to water trading; we concluded that reservoirs would be preferred to water trading via river transfers due to reliability considerations, but that some interactions could provide benefits.
We studied the impact and interactions of low flows, abstraction and water trading on freshwater ecosystems in the catchment, on macrophytes and macro-invertebrates, and on spawning brown trout habitat availability. For the Nar catchment modelled, the impact of trading on the environment was negligible and well within natural variations. The hands-off flow requirements in the licences were more than sufficient to protect the components of the environment modelled.
Exploitation Route Contributing to regulator and farmer understanding of the implications of the forthcoming Defra reform of water abstraction licensing system;

Contributing to the forthcoming Water Resources East Anglia (WREA) study and later studies elsewhere;

Contributing to drought management planning. Through meetings of professional/trade organisations including ICE, CIWEM, UKIA, NFU;

Through Knowledge Exchange Programmes such as WSKEP;

Through further academic papers;

Through teaching at the 4 universities and the 3 doctoral projects underway;
Sectors Agriculture, Food and Drink,Environment

Description The project provided a precursor for understanding the implications of trading within the proposed water abstraction licencing reform (Defra); it influenced the Water Resources East Anglia (WREA) study to include a multi-sector analysis; and it helped develop the modelling software used in that study. Significant licence reform is currently on hold, partly due to more immediate government priorities, but the topic remains highly relevant, as evidenced for example by the 2019 formation of Water Resources East, addressing Eastern England's finite water supply, by OFWAT's new (2019) RAPID group, which aims to encourage cooperative investment between neighbouring water companies, and the UK Irrigation Association's 2020 "Irrigation water strategy for UK agriculture and horticulture".
Sector Agriculture, Food and Drink,Construction,Environment,Other
Impact Types Policy & public services

Description J Harou on peer review committee for Defra's water licensing reform programme
Geographic Reach National 
Policy Influence Type Membership of a guideline committee
Impact Prof J Harou advises government (Defra) on how to evaluate different policy proposals in the area of water allocation and water licensing. Water rights are currently being considered for reform throughout England and Wales.
Description Weatherhead - Membership of National Water Resources Group (Defra/Environment Agency)
Geographic Reach National 
Policy Influence Type Participation in a guidance/advisory committee
Description Weatherhead - Membership of national Water For Food Group
Geographic Reach National 
Policy Influence Type Membership of a guideline committee
Description EPSRC Research Internship University of Leeds
Amount £8,500 (GBP)
Organisation Engineering and Physical Sciences Research Council (EPSRC) 
Sector Public
Country United Kingdom
Start 11/2011 
End 06/2012
Description EPSRC internship for Chibi Takaya at Leeds University
Amount £6,000 (GBP)
Funding ID REC06 
Organisation Engineering and Physical Sciences Research Council (EPSRC) 
Sector Public
Country United Kingdom
Description IAA-EPSRC Secondment with Anglian Water Services
Amount £104,680 (GBP)
Organisation Engineering and Physical Sciences Research Council (EPSRC) 
Sector Public
Country United Kingdom
Start 11/2015 
End 03/2017
Description UKWIR 'Value of Water' project PR37
Amount £58,600 (GBP)
Organisation UK Water Industry Research Ltd 
Sector Charity/Non Profit
Country United Kingdom
Start 03/2012 
End 12/2013
Description Water Resources of East Anglia project
Amount £263,000 (GBP)
Organisation Anglian Water Services 
Sector Private
Country United Kingdom
Start 03/2016 
End 03/2018
Title Pywr (open source water management model) with Atkins 
Description Pywr (on Github) - collaboration with Atkins Llimited, an open-source water resource system simulation model 
Type Of Material Computer model/algorithm 
Year Produced 2015 
Provided To Others? Yes  
Impact Building models of between 7 and 12 water company areas with water company staff to enable them to efficiently plan their infrastructure systems. 
Description Talk given at Environment Agency event: WRMP24- Setting the Direction 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact WRMP24: Setting the Direction

Wednesday 29th November 2017 12:30 - 15:30

Venue: Broadway House Conference Centre, Tothill St, London, SW1H 9NQ

Background: The prospect of droughts worse than previously seen, a changing climate and population growth all present significant challenges to security of supply. We must face these challenges and do so in a sustainable manner that doesn't put the environment at risk.

Water resources management plans have already evolved in some ways to meet these challenges and now is the right time to enhance the work we have done for WRMP19 so that we are ready for WRMP24 and for an uncertain future.

We welcome you to this round table discussion to explore our direction of travel for WRMP24. We intend to use the outputs of the day to create a set of principles by which we will work towards WRMP24 guiding the necessary research and development together with the government, fellow regulators, water industry and partners.
Year(s) Of Engagement Activity 2017