Phony Experts Must Wake Up to Water Pricing

I have the distinct privilege of hearing self-styled sustainability experts claim it is impossible to price water.  These people are all over public forums and business events pushing their nonexistent thought leadership.  They say this stuff with a straight face.  The claim is nonsense.

Water pricing methods are different all over the world and have much to do with the health of local watersheds.  Waterfund's Global Composite Water Cost Index may be the first true attempt to establish a comprehensive global water price.  The OECD Observer has some good background information on how public water services and subsidies affect water availability.

Major commercial water users like Coca-Cola know exactly how much they pay for water inputs at all of their facilities worldwide.  The US Bureau of Reclamation knows exactly how much revenue it can earn by releasing an acre-foot of water through hydroelectric turbines at any of its dams.  It really is that easy to put a dollar figure on water.

Self-serving claims that ignore facts are easily disproved.  Anyone who claims water cannot be priced without some magical intervention needs to study basic economics or they will quickly lose credibility.  They should especially study the efficiency tradeoffs underpinning water trading regimes.  Water is a supply chain component all over the globe.  It has a very visible cost.  

US Inland Waterways Investments Support Ocean-Bound Economy

America often shortchanges its infrastructure needs.  That may change since the President signed the Water Resources Reform and Development Act (WRRDA) of 2014 into law.  The details on the WRRDA include a revised formula for funding lock improvements that do not hold the Inland Waterways Trust Fund hostage to a single installation.  The relevant House committee helpfully provides the bill's highlights.

The nation's waterborne commerce is vital to the economy, despite this report from Taxpayers for Common Sense that bemoans a decline in traffic volume on our waterways.  It may not have occurred to that group that traffic declines as waterways become less navigable and locks fall into disrepair.  This forces shippers to move by road and rail, which are more expensive per ton-mile than barge movements.   Lack of upkeep may very well be the reason waterborne commerce suffers.  The Congressional Research Service's May 2013 report on inland waterways provides a more balanced view of the cost-sharing funding arrangements for the Inland Waterways Trust Fund (IWTF).

Data from NOAA's ENOW series show the economic importance of ocean-bound commerce.  The IWTF's primary arteries connect the Great Lakes and Gulf Intracoastal Waterway.  Substandard locks and dams on those rivers jeopardize a significant amount of barge traffic in grains, coal, and petrochemicals.  Try running a modern economy without affordable access to those feedstocks.

Public infrastructure is expensive.  Highways, ports, and waterway systems must be serviceable for commerce to proceed.  The Waterways Council noted how multiple stakeholders, from the public and private sectors, recognized the need for waterway infrastructure modernization.  The new funding and management mechanisms under WRRDA came just in time.  

Profiting From Drought

The California drought is real.  The US Drought Monitor presently shows an alarming concentration of red in the Golden State.  The US cattle herd count is at its lowest since 1951 and drought-impacted ranchers will probably overwhelm the USDA Farm Service Agency with disaster requests under the Livestock Forage Disaster Program (LFP) and other forms of disaster assistance.  The US Drought Portal is going to stay busy for a while.  Exogenous shocks that make markets unstable provide opportunities for entrepreneurs to solve problems.  The shock from drought can force transformations in agribusiness.

The USDA Agricultural Research Service (ARS) operates an Office of Technology Transfer.  Entrepreneurs should start there and cherry-pick (pun intended) innovations from the USDA National Agricultural Library that apply directly to agriculture.  The USDA Agricultural Technology Innovation Partnership (ATIP) is an umbrella initiative to share the government's technical knowledge with multiple private sector partners.

Resources for tech startups in the food sector are rapidly proliferating.  Kitchen incubators are all over the place, like La Cocina in San Francisco.  I like niche incubators because their focus attracts industry-specific expertise.  Incubators serving the broader tech sector have become victims of their own success.  Attracting applicants from mobile, social media, and gaming means the most popular incubators have quickly lost focus.  Maintain the niche focus means food incubators have the luxury of dealing only with food technologies.

Large enterprises can also jump on the drought mitigation bandwagon.  California's drought may lead to significant shortages of popular fruits and vegetables, so agribusiness from the rest of the country now has the opportunity of a lifetime to capture market share.  Activists will have to rethink their opposition to genetically modified crops if drought resistant crops can prevent food shortages in North America.  Desalination is a long-term pipe dream (again, pun intended) for solving California's water problems but it will consume billions of dollars in capital.  Water utility stocks may finally get their time to shine.

None of these options will go anywhere without backing from investors.  The persistence of drought from climate change means a persistent need for market-based solutions.  Investors focusing in the water-energy-food security nexus will find tons of opportunities to make a buck.  They may also find a ton of risk if they focus exclusively on backwardation in the commodity futures markets.   Profiting from drought is a moral good if it drives capital into technological innovations that enhance human quality of life during resource scarcity.

Business Opportunities In California Water Problems

I recently wrote a Third Eye OSINT study of potential water supply impacts on global stability.  California is not immune from water supply problems.  The state Department of Water Resources (DWR) reports that California is currently experiencing one of the worst droughts in its recorded history.  Every problem presents opportunities for business solutions.  Studying policy trends will point the way to opportunities.

The state government has made the California Water Action Plan an interagency effort.  The undated draft makes it clear that water supplies are stressed and California must manage demand more carefully.  The plan states that over seven million Californians live in a floodplain, and later states that large amounts of floodplains and other natural habitats have been lost in modern history.  The connection is obvious to me.  Development in floodplains puts humans and habitats in danger.  IMHO the state government is in dire need of a UN Agenda 21 smart development plan that will prohibit further residential development in floodplains and gradually unbuild legacy development.

The Bay Delta Conservation Plan is a comprehensive attempt to preserve an ecosystem that sustains California's agricultural might.  Without this plan, I believe there will not be enough water available in Northern California to support both agriculture and the need for eventual oil and gas drilling in the Monterey Shale Formation.  Southern California developers and residential property owners are probably going to be very disappointed that their fantasies of comfortable life in the desert can longer be sustained by intrastate water transfers.  Metering and rationing mean the California golden age of lush front lawns and leisurely car washes is closing for good.

Note that California's credit ratings are still in the basement.  California voters won't tolerate any more bond issues for much of anything, including needed infrastructure.  The Governor's plan to build huge tunnels through the Delta gets more expensive every time someone turns over a rock.  This means that privately funded infrastructure has a golden opportunity to capture revenue from future projects derived from managed hydrology.  There is simply no constituency outside of inland SoCal for further incarnations of intrastate projects on the scale of the long-proposed Peripheral Canal.

It's really funny to hear SoCal politicians talk up the fairness of charging ratepayers for new water development.  Any further infrastructure development that diverts freshwater to SoCal will move the saltwater gradient so far inland as to make much of California's agribusiness nonviable.  It makes zero economic sense to invest in infrastructure projects that benefit agriculturally poor land at the expense of agriculturally rich land.  SoCal ratepayers would eventually face a death spiral of higher water rates to sustain more expensive crops, while those crops are gradually priced out of world markets.  Adding water infrastructure in Kern County will be wasteful investment as more farms in that region become untenable and cease operations.

I see the following business opportunities based on this emerging regulatory framework.

Hydroelectric development.  Any policy planning guidance that calls for more groundwater storage and flood control inevitably means more dams on rivers.  More dams mean more hydroelectric installations and electric transmission lines.  This opens investment opportunities in undeveloped real estate that could serve as rights of way for transmission lines.  HydroWorld notes that the California drought is reducing the amount of hydropower available from larger dams, forcing more reliance on other energy sources.  Always remember the water-energy-food security nexus.  I think the potential for smaller-scale hydroelectric installations deserves study.

Water utilities.  I have never been impressed with the financial performance of US publicly traded water stocks.  I may have to reconsider this stance, at least for companies that serve the California market.

Disruptive water technologies.  Cleantech entrepreneurs can make a difference with new solutions in water delivery, recycling, and decontamination.  SoCal's soil and climate may not be suited for water-intensive agriculture.  This is one reason why drip irrigation will address a much larger market than flood systems.  Oh BTW, water rationing implies that flooded crops like rice will play less of a role in California's economy.  GMO crops may have a future if more independent research helps paranoid people get over their hysteria.

Smart metering.  This one's a no-brainer.  Any unmetered residential parts of California - aside from those suburbs that will eventually become uninhabitable and marked for deconstruction - will soon be metered.  Any vendor of smart meters for water delivery can expect large orders from California utilities.

Desalination.  Making fresh water from seawater along the California coast has long been a policy pipe dream.  The state DWR has a desalination plan for grants and small experiments.  Desalination plants on a scale to meet SoCal's needs will require a huge investment.  The opportunity exists for visionaries with deep pockets and giant visions.  The market for water in SoCal is huge and water from the Delta won't supply its needs forever.  Use your imagination.  If you build it, they will come.

I foresee more regulatory control and microeconomic changes in the future, regardless of whether the private sector steps up to the water opportunity.  Here are my predictions for California.  New residential developments will minimize or prohibit front lawns and private swimming pools.  Existing homeowners will remove lawns and replace them with local native plants or drip irrigation gardens.  Some suburbs will cease to exist and be unbuilt, either because their municipalities are bankrupt (Bell, Stockton, Vallejo) or because they are environmentally untenable.  Many golf courses, especially in SoCal, will cease operations.  Those courses occupy space that will be more valuable as farmland or watersheds.  I don't like making bad investments.  Much of suburban California is malinvestment that will come undone in prolonged periods of water austerity.

One thing will not change in California's future hydrology cycles.  I will find a way to make money from the state economy's transition to more strictly controlled water use.  That is why Alfidi Capital exists.  Water and money both seek the path of least resistance.  

The Haiku of Finance for 12/25/13

Water, energy
Mutually dependent
Both demand money

Water-Energy Nexus Can Drive Infrastructure Investment

I heard an oblique mention of the water-energy nexus at one of the many public events I attend.  These two resources are indispensable to civilization and we can't obtain one without using the other.  There's money to be made in the green infrastructure that countries must build to get access to both.  

The IEA incorporates the water-energy nexus into its World Energy Outlook.  One simple lesson is the effect of climate change on energy availability.  Delayed monsoons and droughts decrease the amount of runoff available to hydropower production.  Other energy sources must then substitute for lost hydropower, including fossil fuel power plants.

Sandia National Labs studies this nexus.  Their multi-lab committee published a final report in early 2007 but I'm not clear on whether the US has made progress developing the technologies the report says we need.  The NSTC's CENRS Subcommittee on Water Availability and Quality (SWAQ) was supposed to pick up where this report left off.  Those of us familiar with Uncle Sam's interagency process know how hard it is to make progress with something this broad.  State government coordination isn't much better; the NCSL hasn't updated its water-energy nexus legislation tracker since 2009.  America can't wait for a government-directed solution.  I see pain points that entrepreneurs can disrupt.

Pain Point 1:  Advanced cooling systems in power plants.  The report is clear on the tradeoff between wet cooling and other systems.  Wet cooling uses more water but is more efficient for energy production.  Dry cooling is less efficient but saves water.  There is obviously room for disruption with hybrid systems that improve the efficiency of water management in power plants.  I believe energy utilities would pay for tech that reduces water consumption while maintaining a plan't efficiency.  

Pain Point 2:  Water use in shale and biofuel energy production.  I've blogged before about how water wars over shale oil and gas formations will probably crowd out the concerns of agribusiness and environmentalists.  Energy companies have the money to win any water war but legal delays will be costly.  Alternatives to the high water requirement in shale injection would be very lucrative if energy companies can avoid the legal and regulatory delays of fighting water wars.  The US government subsidizes biofuel at extremely high cost.  Ethanol production on land that is irrigated and fertilized exacerbates the waste of water and energy but this is politically popular in Corn Belt states.  Water innovation will thus need to start somewhere other than the Midwest.  The GAO has prepared several reports on water management in both shale and biofuel production.  

Pain Point 3:  Urban development.  New technologies can alleviate waste of energy and water in urban areas.  I do not know whether the ARRA stimulus building program took this into account before it dumped billions of dollars into shovel-ready projects.  Building materials for roads and sidewalks can now return more rainwater to soil, thus capturing more freshwater locally and reducing stress on urban wastewater systems.  Federal and state governments aren't expected to vet the materials in every infrastructure project but they can specify energy and water impacts in the environmental impact statements (EIS) they must approve.  It follows that builders using green materials will fulfill EIS criteria and stand a better chance of winning those project bids.  

I do not know the market opportunities for these pain points because they each intersect more than one vertical.  Multiple technologies can apply to solutions and projects will differ in size, capability, and geography within the US.  I'm optimistic that the convergence of Big Data with utilities' smart grids will reveal inefficiencies in water and energy use that demand optimization.  Black and Veatch's 2013 Water Utility Report shows huge demand among water utilities for energy efficient solutions.  The US EPA knows that green infrastructure is a big opportunity and it will not disappear.  California's CPUC has a very detailed approach to the nexus that utilities can use.  Like I said up at the top, there's money to be made.