The water regulator, Ofwat, has published its draft decision on the proposed 'Severn Thames Transfer' project, saying that it should continue to be developed.
The proposal would see water taken from Wales and the borders to the South East via new pipelines for use in times of drought.
Thames Water is looking for alternative supply sources, with predictions it will need one billion extra litres of water a day by 2075.
Documents outlining the plan show it has three major elements – a River Vyrnwy bypass pipeline, redeployment of 25 million litres of water a day from Shrewsbury and a pipeline from Gloucestershire to Oxfordshire.
Under the plan the pipeline could go from Deerhurst to Culham, or water could be transferred via the Cotswold canals network.
Previous documents have shown that planning permission for the scheme is planned for 2040, with the system being ready for operation in 2050.
The paper drafted by Ofwat also outlines how there will need to be extra sources of water identified in case of "concurrent droughts in both the River Severn and River Thames".
In its report, Ofwat said: "The evidence suggests that the solution is a potentially valuable way of supplying water to customers."
The companies involved, Severn Trent, United Utilities and Thames Water, are now set to continue to develop the scheme, with the current work expected to cost anywhere up to £40 million.
The next stage of the plan is expected to be completed by 2025 – with a review in December this year.
Ofwat's report details that engagement should take place and address 25 per cent of previous stakeholder feedback which was opposed to water transfer schemes.
It also says it has specific concerns over "stakeholder engagement for Wales".
The scheme is just one of a number being looked at across the country.
They are overseen by the Regulators Alliance for Progressing Infrastructure Development (RAPID), a group of water regulators in England and Wales, with support from CCW, Natural England and Natural Resources Wales.
RAPID managing director Paul Hickey said: "The water sector needs to act now to secure future needs of customers and the environment. Finding new sustainable and resilient ways to maintain water supply across the country is vital, and all the more pressing given climate change, the increase in population and economic development.
"These schemes we are moving to the next stage of planning could meet the needs for millions of customers while safeguarding the environment."
There has been a long and controversial history of water being piped from Wales to customers in England – including the loss of villages flooded to make way for reservoirs.
United Utilities currently takes water from Lake Vyrnwy and pipes it to serve customers living in Merseyside and Cheshire.
The Vyrnwy Dam was built by the Liverpool Corporation – with work starting in 1881, and finishing in 1888.
The lake was created by flooding the old village of Llanwddyn.
Last summer, levels of drought were so severe that portions of the old village became visible for the first time in years.
Old stone walls, foundations, and the remnants of a bridge all emerged as the water levels dipped.
As well as the work to create the lake a pipeline was also created to allow water to be taken to its new destination in Merseyside.