Monday, January 20, 2014

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.