15 April 2010

California desalination costs over $2,000/af*

(via DW) This report [pdf] by James Fryer makes for interesting reading.

Although Fryer is sponsored by anti-desalination forces and has links to Food and Water Watch, he brings up several good points about desalination -- keeping Poseidon's Carlsbad project in mind.

In particular, he addresses cost figures from the Affordable Desalination Collaboration (ADC, a pro-industry group) that are based on estimates, not operating costs. That means that their numbers are biased:
  • They underestimate energy costs by 32 percent.
  • They underestimate energy consumption by 30-70 percent.
  • They underestimate salinity in the water. (Holy cow!)
  • They underestimate capital costs.*
  • They underestimate maintenance and downtime rates.
  • They underestimate operation and maintenance costs.
Fryer reports that the marginal cost (i.e., ignoring capital costs) of Marin desal should be $2,400-3,600/af and that Tampa desal costs $1,200-1,961/af.

He estimates that Carlsbad would cost from $1,900 to $3,500/af (best to worst case).*

Fryer concludes -- no surprise -- that water conservation and/or recycling are cheaper ways to "solve" the water problem.

Unfortunately, he fails to mention the cheapest way of all. Higher prices would "solve" the shortage problem at no cost at all; in fact, they would increase revenue, which allows for additional spending on reliability, infrastructure repair and/or subsidies to poor people unable to afford higher costs.**

So here's my question. Taking these observations as true, I wonder what Poseidon is going to do if the cost of providing desalinated water rises above the price they receive. Are they going to eat the difference or ask for higher prices? Under their contract -- as I understand it -- they will have to eat the difference. If they ask for higher prices, they should be "declared in breach" and cut off from selling water. Given that they have zero other options for selling their water (because their Carlsbad plant can't be moved elsewhere), they will have to accept contracted prices.***

Bottom Line: Desalination will cost more than pretty much anything else; let's make sure that those who have agreed to pay for desal water know the price they will pay.

* His big assumption in this "study of the marginal cost of desalinated water" is that capital expenses are included in acre-foot calculations. As Fryer observes, "Marginal Cost is the cost of producing one more unit of a good, or in this report the cost of producing or saving and acre-foot of water," and he uses this definition correctly when he looks at the cost of producing water at a facility that is not yet built. If it's built, OTOH, then marginal cost is only the cost of producing water; it does not include principal or interest payments on capital expenses, which economists call sunk costs (since they cannot be recovered). If we use marginal cost in its traditional sense (operating costs only), then Fryer's estimates for Carlsbad would be $1,280 -- 1,670/af. (He's not wrong to include capital costs in marginal cost, just unconventional. Capital costs matter too!)****

** No, I do not favor subsidies to water users -- "some water for free, pay for more" does not take income into account. I say this because others like that idea...

*** Note that CalAm water, which took over operation of the Tampa Bay desal project, just asked for rate increases (after meeting performance targets). I hope that Poseidon's customers have read ALL the fine print in their contract!

**** In response to this comment, Fryer told me:
It is standard practice to include capital costs and O&M in the marginal cost of new water projects. It is also the standard practice for assessing water conservation program marginal costs. As noted below, the capital cost of a desalination facility is a cost that ratepayers will bear that is unique and specific to desalination. Even for facilities already built, the capital cost and its associated debt service must be recovered through rates charged to ratepayers. These costs do not magically disappear. If the capital costs are paid off early, before the end of the 30 year life of the desalination plant, it is only a reallocation of the cost to earlier years of the project life and it is still recovered in water rates or taxes to customers. Also, the 'opportunity cost' of not using that money for other purposes should then be considered. A good economist would also argue that if a facility was built on 'free' land, for example, the 'opportunity cost' of using that land for other purposes should be considered.

However, there are 'sunk costs' of existing distribution system pumps and piping, meter maintenance, billing costs, etc., beyond just the immediate facilities needed to connect a desalination plant to a distribution system that were not included as new costs in the analysis. Of course, by adding additional capacity to the supply, some upsizing of the distribution system may ultimately be needed to support distribution of desalinated water. These uncaptured costs would increase the actual marginal costs compared to water conservation measures that would not require widespread distribution system upgrades for increased capacity, but were beyond the scope of the analysis.
To which I replied:
I agree completely...I only mention the distinction b/c of the traditional use in economics (fixed costs are not included in marginal costs) and the convention of discussing MC_desal as a function of throughput. I agree that ALL costs must be considered as ALL are relevant :)

7 comments:

  1. The one place where desal may make sense is one I never hear about. There is a problem with salt loads (boron and sodium) in the San Joaquin River, especially downstream of Mendota. A recent appeals court ruling is tightening the noose around the people who drain into the river.

    So consider: Municipalities (and not just local ones) could pay to build and operate desal plants for agricultural drain water. They would be paid back by owning the treated water (and probably by collecting additional fees from the dischargers). The desalination process would be much less expensive than treating sea water, since the river water is far, far, less salty to begin with. Two problems get solved at once, and users pay for the solution.
    Yes, there are important details involving carriage water, downstream rights, and other considerations to be hammered out, but this is a comment, not a book. As a practical matter, the treated water would just go back into the river, and the municipalities would take delivery of substitute water from any of the universe of delivery points encompassed by the CVP.

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  2. Kurtz,

    Like you stated, there are IMPORTANT details ... Municipalities (and/or others) cannot simply intercept return flows from agriculture, clean the captured water up and then own/claim the treated water.

    However, on a particular stream that is administered properly under a prior appropriation doctrine, all possible equitable exchanges should be considered.

    Non-tributary water and/or storage water are often they keys to timing and the alleviation of damage to vested water rights, including secondary use(s).

    All grand plans should have a back-up contingency/supplemental solution in case the "best laid plans of mice and men" only look good on paper.

    In many cases, the empty "air space" in existing reservoirs can be utilized to store non-tributary which legally has the flexibility to provide insurance against the failure of the grand plans.

    For example, numerous exchanges are possible because of the diverse water delivery arrangements already in place in CA, let alone massaging the system a bit to include solutions for Nevada & Arizona.

    A book could be written on the possibilities, but most important is to have a definite Plan B in case Grand Plan A is a bust ...

    WaterSourceWaterBank waterrdw@yahoo.com

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  3. @MK -- you heard about it here: http://aguanomics.com/2010/04/speed-blogging_15.html

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  4. @WS: Mr. Kurtz may be right in regards to CVP and SWP drainage from water contractors as they are lowest on the totem pole with regard to water rights. There are no juniors who rely on their return flows. On the other hand, the secondary water rights issue will swallow the solution with regard to drainage from exchange contractors and anyone else with senior water rights Those return flows are likely spoken for by junior rights holders.

    In the end, I just do not see cities paying for desal plants to clean ag water. Cities generally have higher priority rights for one reason (real and senior water rights) or another (MWD paid for the SWP). Cities are more likely to just pay farmers directly for their land/water rights, akin to L.A. buying out Owens Valley farmers. Therefore, the cities are unlikely to help pay for ag desal.

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  5. Yes, there are site-specific issues are around any such pipe dream as I have described. These types of conjunctive projects can be more politically palatable than an Owens-Valley type approach, because the impact in the farm areas are lower. For instance, a group like the Exchange Contractors, with decent but not pristine drain water (which may need to be treated or captured under proposed SWRCB regulations) could, in theory, make a deal with, say, Contra Costa county allowing CCC to take water from Tracy in exchange for building the Exchangers a desal plant near Gustine. If desalination makes any sense at all, it *might* in such a scenario.
    What is going to be funny is to see how salty the San Joaquin will become if they do shut off most of the drainage from the Exchange Contractors. Seems like nobody on the SWRCB knows how to spell "accretions".

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  6. There are numerous problem with using desalination to clean ad tail water, but one that is probably a deal breaker for inland use. The salty tail water is salty because it is being used to wash away salts from the poor quality soil/farmland. With desalination you could recover about 1/3 to 1/2 the water (at very high cost), but you would still have a very large quantity of even saltier brine as discharge. There is no easy way to dispose of or deal with the brine. It would just lead to even greater environmental impacts where ever it went, much like the Kesterson problem.

    Even though this environmental cost tends to be an "externality" not easily handled with present day economics, it is a very real impact and problem. Perhaps leading to a costly new superfund site.

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  7. Right, brine is a problem. There are plausible schemes to deal with it, but no very good ones. But I would like to add, is not only poor quality soils that need salts leached out of them. Many excellent, productive areas have the same problem, partly because they were marine sediments not that long ago, partly because the irrigation water and fertilizers (organic fertilizers in particular) have salts in them as well. All over the world, whether there is agriculture or not in a watershed, rivers carry land based salts to the sea. I was only suggesting treating or impounding tailwater from areas like the Exchange Contractors service area because the SWRCB may order it, not because it is a good idea. It is actually a lousy idea, since it would degrade the San Joaquin watershed, leaving only very salty native accretions to mix with the comparatively small amount of restoration flows.

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