It flows on solid blocks. Just empty a bucket on land. You can create 1 block deep lakes without a problem.
New water source blocks only generate when solid blocks are directly below. Like in your picture, the water "holes" are only in deep water.
If you clear out the trees, spawning works like expected.
David Liebermann
It flows on solid blocks. Just empty a bucket on land. You can create 1 block deep lakes without a problem.