California is in the midst of an epic drought. It is one of 11 western states (Texas, Colorado, Oklahoma, New Mexico, Nevada, Utah, Arkansas, Hawaii, Idaho, and Kansas are the others) that the U.S. government declared to be “primary natural disaster areas” due to drought. The historical approach to water use – if you had rights to it, use it – is being revised as absolute limits on available freshwater supplies are becoming severe.
As governments rethink usage priorities and consider limits on uses it has become clear that freshwater is an undervalued commodity. It is a limited, but vital, commodity without a price. In nearly every region the price of water is the cost of water access rights, treatment costs, and transportation costs. There is no price or market for the water itself.
That will begin to change. Prolonged drought and overuse have depleted freshwater reserves at the same time that demand is rising rapidly. The resulting imbalance has some projections of demand for freshwater exceeding supply by as much as 40% by 2030. Water starved regions must to look to ways to both reduce overall use and to prioritize different uses. Ideas like regional exchanges where water could be priced (with adjustments for preferred uses) and sold are gaining mainstream support.
The implications for the energy industry can’t be understated. Fuel extraction is water intensive, especially for mining and fracking extraction – for fracked natural gas, about a gallon of water is required to extract one mmbtu. Electric generation from fossil fuels also requires large amounts of water. The average kWh produced from coal-fired electric generation uses a gallon of water, and while natural gas averages less water use, nuclear uses significantly more.
Initially, reduction in use will focus on eliminating waste and high-use-low-value activities (like watering a lawn), but as the limitations become more acute some uses will simply cease to be provided for, or the cost of use will increase, forcing a rebalancing of the ways water gets used.
Currently, agriculture is the single largest use for freshwater, globally roughly 70% of freshwater use is for agriculture – upward pressure on food costs has already been pointed to as a significant source of political destabilization, so in water limited areas adding to food costs will not have political appeal.
Direct water use by individuals is typically less than 10% of total water use. The remainder is industrial use – the majority of which is energy related – which uses roughly 23% of fresh water globally and reports peg energy related water use as high as 40% of total water withdrawals here in the U.S. Pricing structures could be designed any number of ways, but against the current use mix, it is reasonable to think that energy and industrial uses (along with specialty agriculture) are likely to be the most politically viable place to increase costs in hopes of influencing use.
The impact of water prices on energy activities will, of course depend on how high the cost. Historically, the prices paid for water are so low as to be of little concern to most energy businesses – even if they were to double. However, given the high cost of disruption from shortages, real, significant increases in prices are a possibility in the future. Pricing cuts both ways, it will add to the cost of energy, but it would also provide certainty as to availability. There are already markets in which doubts about the absolute availability of water has undermined financing for new power generation projects.
Over the longer term the value of low-water use (or saltwater viable) energy generation will increase relative to high water demand energy sources. Wind, solar and natural gas (especially conventionally sourced gas) will gain some advantage relative to coal and nuclear.
Energy projects built around desalination – both seawater and brackish ground water – will increase, and already several groups are looking at desalination as synthetic energy storage for intermittent renewable power.
Another area to pay attention to are technologies and processes that can reduce or eliminate water use from the energy process – these types of technologies have been underfunded to date because of limited market value. We are seeing increased interest by investors in building positions because with a clear view on the economic value associated with water savings these companies can become extremely valuable.
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