Running Dry: How the UK Can Reverse Decades of Underinvestment in Reservoirs

The UK's reservoir infrastructure has seen minimal investment in recent decades. The last significant construction being the Banbury Flood Storage Area, completed in 2012 and you have to go back another decade to the construction of the Carsington reservoir in 1992 for the previous investment in storage capacity in the UK. This stagnation is concerning, especially considering the National Infrastructure Commission's projection of a daily supply-demand gap of four billion litres by 2050.

Reservoir construction peak in the UK from the 1960s to the early 1980s, a period characterised by significant investment in water infrastructure to meet industrial and population growth demands. However, from the 1980s onwards, there has been a marked decline in new reservoir capacity, with the trend continuing into the 21st century. This stagnation aligns with changes in water demand, increased regulatory barriers, shifts towards alternative water management solutions and of course the changing ownership of the UK water industry.

If the UK is to address its projected water supply challenges, a renewed focus on infrastructure investment will be necessary, learning from international models to streamline planning, secure funding, and ensure sustainable water security for the future. The risks of not developing new water storage capacity are severe. As demand continues to rise with population growth and economic expansion, the UK faces an increasing risk of supply shortages, particularly during prolonged drought periods. Without additional reservoirs, existing water sources will be placed under greater strain, leading to potential water restrictions and supply disruptions. Delaying investment in reservoirs also means pushing the cost of new infrastructure onto future generations while simultaneously dealing with the financial and operational burden of maintaining or decommissioning aging infrastructure that was never designed to meet today’s needs.

In response to these looming shortages, the UK government has expressed intentions to construct six new reservoirs. However, translating these plans into reality faces significant hurdles. The South East Strategic Reservoir Option (SESRO) near Abingdon, Oxfordshire, exemplifies the delays associated with reservoir projects. Proposed over three decades ago, it has yet to commence construction, primarily due to local opposition and bureaucratic challenges. Proposed projects often encounter resistance from environmental groups and local communities. Instead of constructing new reservoirs, the UK has focused on alternative water management strategies, such as improving water efficiency, repairing leaks, and developing smaller-scale storage solutions.

Contrastingly, other countries have successfully expanded their reservoir capacities. In response to severe droughts, Australia invested in large-scale desalination plants and reservoirs, emphasizing swift governmental action and public-private partnerships. With limited natural freshwater sources, Singapore implemented the "Four National Taps" strategy, integrating local catchment water, imported water, reclaimed water (NEWater), and desalinated water. This comprehensive approach ensures a robust and diversified water supply.

The debate over funding critical infrastructure like reservoirs hinges on balancing public interest with financial viability. While water security is a public good, and hence warrants government investment to ensure equitable access and to address long-term planning beyond market fluctuations, a combination of public and private financing is essential to bridge the funding gap. Private water companies, in theory, should be playing a pivotal role in financing new reservoirs, yet the impact of privatization has been a significant obstacle. Many water firms have accumulated substantial debt while continuing to distribute profits to shareholders rather than reinvesting in critical infrastructure. As a result, financial constraints have limited their ability to fund large-scale water storage projects, forcing the government to step in to fill the gaps left in this essential sector.

Despite these challenges, several financing models could be leveraged to deliver new reservoirs in the UK:

1. Public Sector Delivery Model – Similar to transport infrastructure and flood defence projects, this model relies on public authorities to sponsor, finance, and deliver the reservoir.

2. Pure Merchant Delivery Model – A reservoir is developed by an entity independent of water companies, with revenue generated through water trading and non-water commercial activities.

3. Water Company In-House Delivery Model – Water companies integrate reservoir projects into their standard operations and finance them against their regulatory capital value (RCV).

4. Split Delivery Model – A hybrid approach where the public water supply component is delivered using one financing model while other multi-sector components follow a separate model.

5. Joint Venture Delivery Model – A partnership between a water company and other multi-sector participants to secure financing, develop, own, and operate the reservoir.

6. Joint Venture Contracting Model Using Direct Procurement for Customers (DPC) – A joint venture raises equity and competitively procures a Special Purpose Vehicle (SPV) to finance, build, and operate the reservoir.

7. Strategic Infrastructure Provider (SIPR) Model – Following the model of the Thames Tideway Tunnel, a third-party company is appointed to finance, construct, and operate the reservoir under Ofwat's regulation, with direct customer revenue access.

8. Water Company Contracting Model Using DPC – The water company procures an SPV to finance, build, maintain, and operate the reservoir under contract.

   
   

One recent example of blending public and private investment is the newly proposed Havant Thicket Reservoir. Ancala, a shareholder in Portsmouth Water, has helped to secure a £325m financing package that includes £205m of innovative ESG performance-linked financing. This places Portsmouth Water among a leading group of utilities across Europe that are actively integrating ESG metrics into their financing strategies. Ancala has also provided the project with a further £140m of equity funding and has committed to provide future capital. As part of the package, Portsmouth Water has secured £50m from the UK Infrastructure Bank – marking its first investment in the water sector and creating new financing options for the wider industry. See my blog on the role of public development banks in financing the water sector: https://www.bluechainconsulting.com/post/public-development-banks-untapped-potential-in-financing-water-infrastructure.

By learning from this and other examples, that foster collaboration between government entities and private companies, the UK can revitalise its reservoir infrastructure to secure water resources for future generations. The need for an integrated and forward-thinking strategy is paramount, as the risks of inaction could lead to severe water shortages and economic repercussions. Policymakers must create a framework that encourages long-term investment, streamlines the planning and approval process, and ensures that new reservoirs are developed in a way that balances environmental concerns with public and commercial water demands. By implementing financing models that bring together public investment, private sector expertise, and innovative water management technologies, the UK can mitigate the impact of climate change on its water supply and establish a future-proofed reservoir network. Without urgent action, the country risks continued reliance on outdated infrastructure, increasing vulnerability to droughts, and escalating costs that will ultimately be borne by consumers and taxpayers.