15 Apr 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 :)