Suspending abstraction trading markets

As a drought becomes more severe should the Government suspend abstraction trading markets, and if so when?

Why the contribution is important

In the reformed system trading of access to water would be facilitated in catchments where there is demand for it.  As a drought develops abstractors would be able to trade access to water between themselves where abstraction has not been stopped by low flow controls; the aim is that a market would allocate water for abstraction to those who value it most.

If the drought becomes more serious the government could decide to suspend the market (e.g. to protect essential services).  For example they could suspend them:

  • If the price of water in the market becomes very high and/or there is very limited trading as there are no sellers (i.e. the market freezes).
  • As soon as low flow controls are imposed on any abstractors at all.
  • If low flow controls reach a certain level of restriction (e.g. 50%).

by abstractionreform on September 05, 2014 at 10:56AM

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  • Posted by DC September 06, 2014 at 12:12

    Great to include the ability to intervene in a market, as water is an essential commodity. Water should not be subject to the excesses of a totally free market, where price goes up as supply becomes scarcer, and demand becomes greater eg in a hot dry summer

    There would need to be clarity about the governance of the market suspension decision. A body independent of political interference would be required.
  • Posted by KeithWeatherhead September 07, 2014 at 11:38

    I cant see when/why you would need/use this power. There are already powers to stop all abstractions in an extreme drought. In future, all licences should include low-flow controls that would be carried over in any trade. So why suspend trading while allowing abstractors to abstract themselves?

    That is economically irrational, and also risks distorting the market whenever a suspension is feared. The high price in a drought is a red herring; no-one forces abstractors to sell, and if trading is suspended, no-one can buy anyway, at any price.
  • Posted by anglianwater September 11, 2014 at 16:29

    Regarding the ability of government to suspend the market, it is important to distinguish between an ‘acute’ problem (extreme drought resulting in a crisis of lack of water) and a ‘chronic’ problem (increasingly scarce water resources).

    It is sensible for Government to be able to trigger a market suspension in the event of an acute crisis (force majeure), such as a drought that is unprecedented in terms of its severity and longevity and is outside the scope of normal drought planning. Suspension should only be contemplated in very exceptional circumstances.

    Generally, markets are a useful tool for dealing with chronic supply problems because they create additional capacity. Water markets should help abstractors to manage the chronic problem of increasingly scarce water resources, as well as less serious droughts, by allowing water resources to be reallocated to those who value them the most.

    Suspending trading as a result of high prices / the imposition of low flow controls could undermine the ability of abstractors to manage their risk in these circumstances.

    Therefore the market should not be suspended if the price of water becomes very high. If the market is intended to provide additional capacity during periods of peak usage, then prices need to be allowed to rise when peak capacity is being used. It is important to remember that, even during a drought, nobody will be forced to buy or sell their water. The price of water will only get very high if people are prepared to pay for it. Why shouldn’t those who are willing to sell their water benefit from the high prices?

    Similarly, the market should not be suspended when catchment-wide flow controls are imposed. Although at this stage no abstraction will be permitted, there will still be water in storage, and this water should be tradable. Allowing stored water to be traded during periods of peak demand for the market price should encourage investment in storage and transfer infrastructure.
  • Posted by Mberry September 15, 2014 at 16:30

    The problem is that water is not a very portable or convenient commodity in most circumstances.

    I think the September 07, 2014 at 11:38 posting
    illustrates why a market solution in the UK circumstances is unlikely to deliver significant benefits (because most of the demand is for public water and power supply and agricultural demand is negligible).

    In dry periods those that need the water and have the finance will purchase all the rights they require to secure their business and are unlikely to sell, those that want water and come too late to market or do not have the resources will get nothing, because the market will be locked, driven by the need for security.

    For organisations purchasing water as insurance, it is just the 'cost of doing business' and the these higher costs will be passed down the supply chain to customers.

    Water will still be available in non dry years, but will have no value - it is only the security of supply that has value, unless you operate a business that can shut down at will.

    So, if a sharing approach is required rather than 'the weakest can go to the wall', market intervention will be needed at critical periods and if that is the case, why bother with market solution at all?
  • Posted by abstractionreform September 24, 2014 at 13:53

    There are some interesting ideas here.

    There is a wide range of opinion so far, with some comments suggesting we should leave the market free to operate and some suggesting intervention in the market is required. What do other people think?

    DC you think the market should not be left completely subject to the free market, do you have any suggestions for when the market should be suspended?
  • Posted by nfomes September 30, 2014 at 10:18

    If the water available to trade by catchment is well-defined and there is a good understanding of linkage to weather patterns, the market would probably become illiquid by itself during severe droughts. And therefore a decision could be taken by the market operator to suspend due to insufficient volumes traded.

    Adoption, or not, of central powers to suspend the market might be linked to our understanding of the catchments and water available within them, which may vary regionally.
  • Posted by WNE October 06, 2014 at 17:08

    how can confidence develop in a market with the threat of market being suspended. the risk though is that the deep pockets of the water companies would force agricultural abstraction into obscurity
  • Posted by DCWW October 10, 2014 at 10:38

    Dŵr Cymru Welsh Water supports licence trading in principle. However, during a severe drought, demand is likely to outstrip water availability and therefore trading is likely to be less useful because there will not be any ‘spare’ water available for trading, potentially resulting in the market freezing. Under such circumstances it may be appropriate to suspend abstraction trading markets.
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