The Water Act 2014 allowed for upstream competition, with the aim of encouraging new entrants to offer alternative water resources to water companies or directly to business users or retailers. The benefits identified at the time by Defra were mainly in avoided capital and operational investment – it thought new entrants would introduce cheaper treatment and water resources  and the resulting competition would discipline water companies to make more efficient and innovative decisions in operational expenditure and capital maintenance. 

There are other issues to consider. Bilateral markets might mean abstraction licence holders take more water, but the water regulator says the opportunity to trade water could equally mean abstraction licence holders have more incentive to use water efficiently. Transfers of water can raise  environmental risks such a  the spreading of invasive species in cases where water is exchanged across river basins but the Environment Agency has powers to limit abstractions if it considers these to be unsustainable. Water companies already trade water with each other (known as ‘bulk supplies’). Bulk supplies currently account for approximately 4% of the public water supply.