I'm sure the dam could have been relocated a little further down the valley, or even another dam on the tunnel end of the lake with the stream carried over on an aqueduct, but I guess the CEGB wanted it their way. The power station itself is on the old formation. In a way, they did the railway a favour. The tunnel would have severely limited the size of any rolling stock, was unpleasant to work through in a train not to mention dangerous.
I'm always amazed that people think the pumped storage system is environmentally friendly. I was told by somebody that worked there, that for every 3 units of electricity they generate, 4 units from conventional power sources are used in order to pump the water back up to the upper reservoir. The station merely allows the grid to cope with surges in demand, as Manicminer says, the bottom reservoir often fills up around tea time, and is empty almost every morning before the world wakes up and turns their appliances on!