Thames has identified a tranche of low-grade agricultural land just south west of Abingdon in Oxfordshire where the four-square-mile reservoir would be built.
The company is preparing a planning application and is already working with local environmentalists to ensure it can answer the inevitable concerns arising from the five-year construction project.
Without the reservoir, the company is concerned that London and the Thames region could face acute water shortages by early in the next century.
The area is now suffering a drought that dates back to April 1995, during which time the region has had less than 70 per cent of average rainfall. Last month, rainfall was just 30 per cent of average and there has been no rain this month, which has seen the region basking in 70-degree temperatures.
Even if the plans for the reservoir were implemented in accordance with Thames' current timetable, it would not be operational before 2015.
However, Thames is acutely aware that it needs to improve its record on water leakage if it is to win the argument about the need for a new reservoir.
Thames has one of the worst leakage records of any of the privatised water companies with a rate of approaching 40 per cent. Environmentalists will argue that a reservoir would be rendered unnecessary by better containment of leaks.
Thames has already implemented a comprehensive programme to tackle leakage. Over 800 employees are involved in the programme costing pounds 200m, which is designed to cut leakage by 50 per cent by 2005.
John Sexton, environment director at Thames Water, said: "The reservoir project is premised on us halving our leakage rate. Leakage is the key issue here. It is already the lowest it has been for three years, and we have seen a 15 per cent reduction in the last 12 months alone. If we cannot reach our target, then there will be a very good explanation."
London has particular problems with leaks because of the nature of its terrain, which is dominated by clay north of the river Thames.
Mark Jarvis, head of land resource management at Cranfield University, said: "Around 50 per cent of London is built on clay, which is extremely corrosive for the old iron pipes. Not only does this material damage the pipes it also shrinks or swells depending on whether the clay is wet or dry. This movement puts pipes under enormous stress which can cause fractures."
The problems caused by the natural terrain are compounded by Thames' difficulties in making repairs. Such work is restricted by the disruption it causes to traffic flows.
Even so, the company is determined to make the self-imposed improvements in water leakage containment. However, even if it succeeds in making them, Thames is concerned it will not be able to ensure supplies, particularly to London, in the summer months. Hence the decision to reactivate plans for the new reservoir, which were dropped four years ago.
Thames has gone to great lengths to encourage conservation and has also pioneered natural underground reservoirs in London and Oxfordshire.
"Despite efforts to promote water conservation and work to reduce leakage, demand for water is expected to continue rising well into the next century," a Thames spokesman said. "We believe a major new reservoir will be necessary after the year 2010."
The reservoir would only provide direct supplies to towns in the immediate vicinity. Its primary function would be to increase the water flow of the River Thames during the summer months.
Water would be conserved during the winter then released back into the Thames in the summer and filtered into the system further downstream to support demand in the London area.Reuse content