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By Quinn McKew
The powers that be are waking up to the fact that the world is running out of fresh water.
Recent reports by General Electric, Goldman Sachs, and JP Morgan have all highlighted the problem of increasing demand for a finite resource. The G.S. report calls water “the petroleum of the next century” and states: "Demand for water continues to escalate at unsustainable rates. At the risk of being alarmist, we see parallels with Malthusian economics. Globally, water consumption is doubling every 20 years. By 2025, it is estimated that about one third of the global population will not have access to adequate drinking water.” JP Morgan’s report points out that “in 2025, on recent trends, river basins important to major economies, including the US, Mexico, Western Europe, and China, will likely experience significant water problems as consumption outpaces supply replenishment.”
But, as noted in the JP Morgan report, while companies and investors have a good idea of the business opportunities associated with increasing water scarcity (mostly through investments in water infrastructure), understanding of the risks is in its infancy.
I suggest a new way of thinking about these risks that will help crystallize the associated costs: water = energy. People talk about water scarcity and energy challenges as if they are separate issues: they are tightly linked. And much like energy prices, the era of cheap water is most likely coming to an end.
This shorthand isn’t perfect, but it will go a long way in fostering a clearer understanding of what the world faces in the coming century. The Goldman Sachs report comes the closest to realizing the extent of the link when it states: “In water markets, there is gathering scientific consensus that water is the key conduit through which climate change impacts energy and agricultural markets, reinforcing the structure of rising prices.”
So, what about this link between water and energy? To start, take a look at desalination, the first solution to water scarcity that people usually throw out, but certainly not the best. Plenty of water in the ocean; we just got to get that salt out, and problem solved, right? Well, not so fast. Large-scale desalination requires an immense amount of energy to achieve. The required amount of energy is so high that cities in California seriously looking at desalination are concerned that the added CO2 emissions generated by the operation of the desalination plants will wipe out other CO2 emission reductions. And this is just in the CREATION of the clean water. MOVING it away from coastal areas inland requires additional energy inputs since water is a heavy material. All of this energy has a cost that will need to be priced into the delivery of water.
Let’s follow the link further. Energy production in itself is also water intensive. For every kilowatt-hour of electricity, an energy plant (fossil or nuclear) consumes 140 to 180 litres of cooling water and requires significantly more than that to operate (power plants return a portion of their water to the environment unconsumed). While energy plants can use ocean water for cooling, the majority of them are not located on the coast.
Ethanol and biodiesel are the most water-inefficient sources of power generation. Here’s a fact about biofuels to make you pause: a single plant producing 378.5 million litres of ethanol a year uses as much water as a town of approximately 10,000 people, the Iowa Department of Natural Resources reports. That's 1.5 billion litres of water a year for one plant.
This is where the water linkages become really interesting. Guess who is the biggest consumer of water? Agriculture, clocking in at a whopping 70% of global water consumption. So if you are an agribusiness, biofuels producer or food and beverage company, you probably want to take a hard look at your supply chain to evaluate potential future cost increases for factor inputs that are water dependent and ascertain your exposure risk to likely water price increases.
As we’ve seen, you need energy to produce and move water where it is needed, and you need water to produce the energy (unless you are talking about wind power or solar photo-voltaics). What this means for business is that you now have quantifiable costs and risks associated with your water consumption. Some examples:
Factor in costs of water treatment. Do you operate in an area of increasing water scarcity? If you are, you may soon be required to treat your wastewater. A study by the insurance giant Marsh found that companies’ water-related costs are climbing, as manufacturers increasingly have to treat their output water as well as the water they use as inputs to their production processes.
Include shut down costs for power plants. Any power company or investor in power generation should evaluate the risks of shut down due to lack of sufficient water and include that in their ROI analysis.
Look closely at where you get your power and water. What would be the cost to your operations if you lost access to water or power due to water scarcity or a pollution event? What is the likelihood of this given hydrologic predictions for the area?
Evaluate your supply chain and factors of production for water pricing vulnerability. Marsh found that “Even non-water-intensive businesses are being affected as suppliers pass on their own water-related costs.”
To quote a fortune cookie, at the heart of every risk lies an opportunity. Evaluate your water and energy risks and I guarantee you will find a business opportunity lurking, whether it lies in increased efficiencies or new product. As for the policy implications, well, we will all have to start paying more respect to water issues and start creating a pricing mechanism that reflects the true costs of our water usage in the future.
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