Water pressure: the race is on to plug the leaks and quench London's thirst

It's hard to imagine 780 million litres of water. It's even harder to imagine that this is how much - give or take the odd million litre here or there - Thames Water leaked every day on average between April and March of this year. That means that for every four litres of water that make it to a Thames customer's tap, more than one litre is lost en route.

Yet this staggering amount of leakage still represents a huge improvement for the UK's largest - and most maligned - water company. It will be the first time since 2000 that Thames has met its targets in this respect.

A source close to the company says it won't be celebrating when it announces the figures later this month, to be audited by the water regulator, Ofwat. "From a company perspective it's hugely gratifying for all involved. It's nice to know Thames has done it, but there won't be champagne corks popping. Now the company needs to hit this [forthcoming] year's target."

You could forgive staff at Thames a little celebratory tipple after last year's annus horribilis. The second worst drought in the UK in a century forced Thames to impose a hosepipe ban on its eight million residential customers. But the water company earned opprobrium from consumer groups, MPs and the media alike when it was found still to be missing its own leakage targets - at the same time as telling consumers to use less water.

Reporting an almost one-third increase in profits - as it pushes through a 24 per cent price rise between 2005 and 2010 - hardly helped either. A threatened fine from Ofwat for poor customer service and its leakage record (later commuted to the requirement to spend an extra £150m on maintenance) capped it all off - but not before the Australian bank Macquarie had bought Thames from its German owners, RWE, for £8bn. That sale, last October, was at a 20 per cent premium to the regulated asset value of the company and, despite its failings, served only to underline its value.

There's no doubt that Thames's recent record is dismal. The company has come up with all manner of excuses to explain its poor performance, including "it's the wrong type of rain" and "London has the wrong type of soil".

It is true, however, that many of Thames' problems are not of its own making. Like other water companies serving the South-east, it is grappling with two huge issues outside its control - population growth and climate change. London's population will increase by a a fifth over the next 20 years, according to government figures, while summers are becoming drier, in southern England in particular. When it does rain, it rains more heavily and in a shorter period of time, meaning companies need to have bigger reservoirs to store the water so it can last through the summer.

John Devall, the director of Northumbrian Water (which owns Essex & Suffolk Water) with particular responsibility for the South, says: "Especially with climate change, it's clear we need more storage. We have more very dry periods followed by heavier rain, and need to be able to capture and store the water when it is there."

Water scarcity has become such an issue for the South-east that One NorthEast, the regional development agency, has begun a campaign to try to encourage companies to relocate to the North, where there is more water.

Thames has been in "supply deficit" for many years, meaning it does not have enough spare water for dry years, such as last year. This is partly due to the antiquated network of pipes, which leak more water than anywhere else in the country. These are gradually being replaced - but to do so in one fell swoop (even if it was possible on a practical level) would cost billions of pounds.

However, unless Thames takes action, the water shortage will get even worse, and soon. According to the company's last estimates (now being revised), within 10 years demand for water will outstrip supply if nothing is done. The company wants to build a £200m desalination plant in east London to turn salty water from the River Thames into drinking water, which would increase its supply by about 5 per cent. But following opposition from the Mayor of London, Ken Livingstone, the project has been mired in planning limbo for the past two years. After a public inquiry ministers are deciding whether to give the go-ahead but a spokeswoman for the Government had no idea when that decision would be made.

Of more significance - and far more contentious - is Thames's proposal to build a new £1bn reservoir in Abingdon, near Oxford. This would increase the company's storage capacity by 70 per cent and, although not a permanent solution, would help to stem the area's supply shortage. It could be built by 2020 - assuming it gets the go-ahead.

Mr Devall says environmental legislation is making it harder for companies to build new projects such as the Abingdon reservoir or to extract water from rivers: "The challenge is getting the right balance between the social demands of housing growth and the environment. The emphasis has been on the natural environment - well-intentioned legislation will put in place hurdles for developers to overcome. But if legislation becomes over-cautious, nothing will ever happen."

Rival water companies in the South-east may not be happy at having to depend on Thames' new reservoir for extra supplies.

"In these days of competition, is it appropriate for water companies to be beholden to a rival company?" asks Mr Devall. "If I was running one of those companies, I would want very tight agreements to ensure we always had access to that water. I would rather be self-sufficient."

In April, the regulator Ofwat was criticised by the House of Commons Committee of Public Accounts for not requiring companies to use the same standards for estimating consumer consumption. For example, Three Valley Water puts the average amount of water each individual uses at 177 litres per day, while nearby Tendring Hundred Water Services estimates it to be 124 litres per day.

But measuring water is much harder than measuring a supply of electricity. Richard Aylard, the director of external affairs at Thames, admits: "Calculating leakage is not an exact science. We know how much water we put into supply, but more than two-thirds of our customers don't have water meters, and we don't know how many people live in each home, so we don't know exactly how much is being used.

"We do a lot of detailed research to get our estimates as accurate as possible. We've discovered that customer wastage is 30 million litres a day (mld) higher than we thought, which is why Ofwat has reduced both our leakage figure and our leakage target by 30mld."

The slow rollout of water meters is also a bone of contention among the committee of MPs. Research shows that households who have a meter use on average 10-15 per cent less than those without, because customers are charged for the water they use. But only around 28 per cent of British homes have them, whereas in some countries overseas, all houses are fitted. A report by the think-tank the Institute for Public Policy Research, published last autumn, recommended that the Government introduce a "water efficiency commitment", eventually to become mandatory. This would force companies to conserve water, for example by installing meters in customers' homes. The current regulatory regime does not provide enough incentives to tackle water conservation, instead rewarding those companies that expand by selling more water and treating more sewage.

Thanks to high rainfall last winter, it's unlikely that Thames will impose another hosepipe ban on its customers this summer. Consumer groups and the media will focus on whether Thames and other water companies meet their leakage targets - most of the industry is either hitting or exceeding them.

And it is important they do. But it won't be enough on its own to make sure the water keeps flowing. New reservoirs such as that proposed at Abingdon are needed. At the same time, water conservation measures - promoting the use of meters, for example - need to be given far more attention. The Government and Ofwat must get their act together to make sure this happens.

The Utility: 'Repairs should have started in the Fifties'

Richard Aylard is Thames Water's director of external affairs...

"There has been a supply demand deficit in London for many years. There isn't enough water to get by without restrictions if we have a very dry year.

"It's important to remember that, in the end, we got through the second worst drought in 100 years last year with no more than a hosepipe ban. But we can never predict accurately when we will get rain, or how much, so we have to take a cautious approach.

"One-third of the water pipes in London are more than 150 years old and, until four years ago, a comprehensive programme of replacement was not agreed to be necessary. With the benefit of what we know now, mains replacement should certainly have been started earlier, ideally in the 1950s, but it is all too easy to be wise with hindsight. Even when we had agreement to start replacing pipes, we couldn't go flat out on such a huge programme from a standing start. But our new owners have brought a more intense focus to this area."

The Watchdog: Thames must put its house in order - fast

"The scale of Thames Water's failure is staggering. If we look at Ofwat's latest figures, they are leaking 200 million litres of water per day more than at the beginning of the last five-year period."

Martin Horwood, Liberal Democrat MP for Cheltenham, speaking last summer

"We expect Thames Water to set a good example by controlling its leakage. Its poor leakage performance is not only inefficient, it is contributing to water shortages that have led it to impose a hosepipe ban and seek a drought order."

Ofwat in June on Thames missing its leakage targets last year

"We hope Thames has got its house in order. If it has, we won't give them an easy ride but will give them credit where they have improved. We will still be on their case.

"Thames is saying the right things. We want to see them deliver now. Thames has got to up its game.

"It's important for the regulator to act quickly [too]. It could have acted more quickly over Thames missing its leakage targets."

Tony Smith, the chief executive of the Consumer Council for Water, speaking to 'The IoS' last week

Further reading: See 'London's Thames' by Gavin Weightman

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