£2.4 Billion Reservoir Opens Up Fresh Battlefront for Thames Water

(Bloomberg) -- Imported icebergs. Tankers filled with water from Norway. Rain cloud seeding. All were investigated as possible ways to avoid drought in London and south-east England in coming decades. All were rejected as too expensive. A tidal barrage, desalinization, and even piping supplies from the wetter west of England to customers in the south have also been considered.

Instead Thames Water Ltd., Britain’s biggest water supplier and among its most leveraged, has plumped for a £2.4 billion ($3 billion) publicly-financed project to build a seven-kilometer-square reservoir near Abingdon, in Oxfordshire. It would be so big — its capacity is set to be 150 billion liters of water — that once built, it will take two winters to fill. But the plan has triggered opposition, with one local MP calling the project, which still needs government approval, a “monstrosity”.

On average, London uses about two billion liters of water every day. Thames estimates that by 2050 that will have risen by another one billion liters to serve a growing population — expected to hit close to 11 million within 30 years — and cope with the impact of drier summers and climate change. 

“We know,” said Cathryn Ross, the water company’s acting co-chief executive officer, “that the biggest share of that needs to come from reducing demand and sorting out leakage and things like that. But that still leaves a massive shortfall and we really do need that reservoir to fill that gap.”

“It will secure the water future for the whole of Southeastern England,” added Ross, “so it is critically important.”

Ross and other senior executives will face an emergency parliamentary hearing on Tuesday called to discuss the state of the company’s finances — its debts have soared to £14.7 billion — after auditors warned that its parent company, Kemble Water Holdings, may run out of money by April if shareholders don’t inject more equity. Kemble has yet to comment on the auditor’s report, but the financial situation at Thames has been raised as a concern by opponents of the reservoir project. 

The reservoir development, on an area that is home to agricultural land, a solar farm and 30 houses, needs government approval and funding. A decision from Steve Barclay, the recently installed secretary of state at the Department for Environment Food and Rural Affairs, is expected early next year. His initial decision will focus on whether the project is feasible. But the proposal — a revamp of an idea that has been around for several years — has sparked public outcry with opponents arguing that Thames has overestimated future water demand.

Opposition has come from conservation groups and local politicians including Layla Moran, the Liberal Democrat MP for Oxford West and Abingdon, who called it a “monstrosity” and has accused Thames of a lack of transparency, something the company denies. 

Aside from the concerns raised over its finances, Thames also faces a mountain of criticism over its failure to deal with chronic leakages and sewage spills, and needs to hire a new chief executive after the last one quit in the summer.

Thames shareholders provided £500 million of funding in March and promised £750 million of new equity by the end of 2025. The company will need another £2.5 billion from its backers to help finance its proposed £18.7 billion investment plan for the five-year period to 2030. This will require raising more debt which would be paid back to bondholders from customer bills. But the company is now facing questions from MPs over whether that first cash injection was actually a loan. Barclay warned on Sunday that he would “take an extremely tough line” on any water company found to have broken regulations.

As a provider of critical infrastructure, the company is seen as too big to fail. But Thames must convince politicians and bill payers — who face paying 40% extra for their water under the company’s most recent proposals to the regulator Ofwat — that it is financially stable enough to make the huge investments needed for the future. And that it has corrected past mistakes that have seen billions of liters of raw sewage dumped into rivers.

Ross has previously admitted that the company’s reputation has become a barrier to engaging with customers on critical investments. “That anger is a problem,” she told a Moody’s water industry conference in October, “and we do need to find a way of tackling that.”

An earlier proposal, for a smaller, 100 billion liter capacity, reservoir was judged to be unnecessary by the government in 2010. Some in Thames fear its latest plan may suffer the same fate, but argue that the need has become more urgent.

“These things are never black and white.” said Martin Young, equities analyst at Investec Bank Plc, who has worked in the utilities industry. “If people want to continue to be able to use what they want when they want, then that ultimately is going to have some kind of consequence for the way that we plan, resource and deliver water.” 

The reservoir project will supply water to London and the south-east, including Oxfordshire. And it promises to include a nature reserve, boating lake, kitesurfing, dog walking and a cafe. If given the go-ahead it would take a decade to build from 2030.Janet Penny, whose home would back on to the proposed reservoir said she's worried that Thames won't be able to deliver the project on time and on budget, given that it's still struggling to reduce leaks and sewage spills, and the uncertainty around its future funding.

“Its track record is appalling,” said Penny, a retired police officer who grew up in the area. “That makes me even more anxious that something of this magnitude is being constructed so close to our home.” 

‘Stop the Taps Running Dry’ 

The UK’s privately-owned water companies are under intense pressure to spend money on upgrading infrastructure without adding to consumer bills. Thames, criticized for failing to invest enough in aging pipes and networks, estimates that it will lose 587 million liters of water daily this year through leakages — enough to fill 235 Olympic-sized swimming pools every day, according to analysis by Investec. This figure has angered the Abingdon campaigners, who say that if the company fixed the leaks there would be no need for the reservoir.

Nevil Muncaster is the public face of the Thames efforts to reassure the locals. “Our job is to stop the taps running dry,” said the company’s strategic resources director. An industry veteran who most recently worked at Yorkshire Water, Muncaster spoke to Bloomberg on the sidelines of a community event designed to win local backing for the reservoir which will be sandwiched between six villages: East Hanney, Steventon, Drayton, Marcham, Garford, Sutton Wick and the market town of Abingdon.

Along with Southern Water, which will also access the reservoir, Thames has the worst performance record of any of the UK’s 16 water and sewage utilities, according to Ofwat which in September fined it £101 million for missing targets on everything from leaks to sewage spills.

Muncaster said Thames is only directly responsible for a third of all leaks in its area. But the company has promised to halve leakages by 2050 compared to the 2017-18 levels.

Part of the problem is the UK’s aging and outdated infrastructure. There has been no new purpose-built reservoir opened in the south of England since the 1970s and none at all in the country since the 1990s. Water companies have previously relied on being able to take ever more water out of rivers, including England’s unique chalk streams. But rules are now in place to prevent over-abstraction, to protect wildlife.

The original reservoir plan in 2010 was dismissed by the government on the grounds that there was no immediate need for such a site. Instead, Thames was offered the chance to build a smaller reservoir. It declined. Muncaster, who only joined the company in 2021, said the challenge with a smaller reservoir is that it is difficult to expand it later.

Defra didn’t give a timescale for a decision over the feasibility of the project. But Richard Benyon, a junior minister in the department, was more forthright saying the reservoir is likely to be crucial to the company's hopes of meeting government long-term planning requirements. 

“The 25 year water resources plan will undoubtedly show that with a change in climate and the increased demands of the south-east of England, that we're going to need to do this and we’ve got to find better and quicker ways of delivering infrastructure of this kind,” said Benyon.

“We think Thames Water's difficulties add to the pressure to cut unnecessary expenditure from the water company plans,” said Mike Greig, a retired accountant who is leading local efforts to block the reservoir. “Shareholders don’t want to fund all the expenditure, Thames Water can’t borrow the money, and neither politicians nor consumers want bills to go up to pay for it.”

"The reservoir is a great candidate for the chop,” he added, “it is not necessary and is very expensive.”

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