Thirsty Work: Business in a Drought

by | Mar 30, 2012

World Water Day marks just 24 hours in more than 8,700 in what is fast becoming the Year of Water. Right now, the lack of it is grabbing headlines – “Drought and oil prices set to drive inflation,” the FT warned last week. Droughts across England (and parts of France and Spain) are expected to push up food prices. The UK Environment Agency is urging businesses to cut water use. Industries could be affected by disruptions to operations and higher water costs. Energy companies are among the biggest water users, and Trucost research for ratings agency Standard & Poor’s found that water stress could affect water-intensive power plants in Eastern England.

Water scarcity costs* are a useful business tool to quantify water risk and compare exposure to water stress among companies in supply chains or investment portfolios. Take RWE Npower Plc’s power station in Essex, Tilbury B. The plant has a capacity of 1,063 megawatts (MW) and is located in an area that is very short of water. Water scarcity costs for the plant could total more than £51 million annually, based on the power station’s estimated water use in 2010. In comparison, EDF Energy Plc’s Sizewell B, a nuclear pressurised water reactor and the largest power station on the east coast in Suffolk, is likely to be less exposed to water shortages than Tilbury B. Our research found that the Sizewell plant, which has the capacity to generate 1,191 MW, could incur water scarcity costs totalling £1.7 million per year. Rising water stress in the east could increase the plant’s scarcity costs to almost £2 million a year by 2025.

Water Shortages Could Lead to Higher Electricity Tariffs

Different fuel and cooling technologies are a big driver of variations in the water intensity of individual power plants, and the costs of their combined water consumption can have ripple effects on electricity users. Trucost applied water scarcity costs to the estimated water consumption of a further seven power plants, based on average water use for the different processes used in 2010. Together with Sizewell B and Tilbury B, the power stations account for 94 percent of electricity generated in the east. If all nine power plants analysed in the region were to internalise water scarcity costs and pass them through in higher power prices, median industrial electricity prices could increase by 5.7 percent from 2011 levels.

Tilbury B power station has switched from coal to operate on 100 percent biomass fuel between 2012 and 2015, which could increase water use. With the switch in fuels at Tilbury B and higher future water scarcity costs for Sizewell B and RWE Npower’s Great Yarmouth power station in 2025, Trucost believes that water scarcity costs for all nine power plants analysed could push up future power prices by more than 6 percent. RWE Npower might continue operating the Tilbury biomass plant beyond 2015, but if it reverts to an earlier plan to replace the biomass plant with a less water-intensive combined cycle gas turbine (CCGT) alongside a small open cycle gas turbine (OCGT), the average industry-wide electricity price rise driven by water scarcity costs could be limited to less than 6 percent. Such a move, however, could increase GHG emissions from the plant and lead to higher carbon costs instead.

Chart 1 below shows the estimated range in water scarcity costs per cubic metre (m3) per MWh across the nine power plants in 2010, and potential changes in exposure to water stress if Tilbury B generates power from biomass or CCGT/OCGT. The analysis does not take account of planned changes in fuels or cooling technologies at the other plants analyzed.

Trickling On to Balance Sheets

The water scarcity costs could be incurred in several ways, including through higher water pricing by water utilities, and higher fees/rates for water abstraction. But the majority of these costs are likely to be internalised through lower power generation capacity or changes in licensing conditions for water withdrawals, restrictions on water discharges, and through infrastructure or maintenance costs. Other sectors could see water scarcity lead to production or supply chain disruptions, or feed through in high and volatile commodities prices.

Low Carbon, High Water?

Infrastructure that locks in high levels of resource dependence and pollutants could face higher-than-forecast costs, and factoring these risks into capex and procurement decisions is becoming more important to maintain future cash flows and returns on investment. No more so than in investments made now to develop low-carbon infrastructure. According to the US National Renewable Energy Laboratory, low-carbon technologies such as carbon capture and storage could make power generation more water intensive. Understanding exposure to water stress in investments, operations and supply chains is vital to set course for a resilient, water- and carbon-efficient economy.

The joint research project on How Water Shortages in Eastern England Could Increase Costs for UK-Based Utilities was in collaboration with Michael Wilkins of Standard & Poor’s Ratings Services and Aled Jones and Candice Howarth of the Global Sustainability Institute at Anglia Ruskin University. The full research is available to download at Credit FAQ and features in S&P’s CreditWeek Special Report – Water: The Most Valuable Liquid Asset?, 7 March 2012

* Water scarcity costs reflect the financial impact of each cubic metre of water extraction on freshwater replenishment, ecosystem maintenance, and the return of nutrients to the water cycle. Trucost estimates this by modelling standardised cost data relative to water scarcity, to reflect local water use as a percentage of annually renewable freshwater resources.  This study assumes 95-100% take-up of water availability in the catchments analysed. Calculations are based on process water (cooling water is excluded, in this instance).

Liesel van Ast is a research editor for Trucost. This article is reprinted from the Trucost blog with the permission of Trucost.

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