1 Dec 2015

I told you so San Diego

Just over three years ago, I wrote a short analysis for the Surfrider Foundation on the Carlsbad desalination project in San Diego. My report [pdf] started with this:
The San Diego County Water Authority (SDCWA) should not sign the water purchase agreement (WPA) with Poseidon Resources, due to its economic, social and logistical flaws. The first flaw is cost: water costing $2,000+ per acre foot will either be sold at a lower price (due to average cost pricing), such that SDCWA “buys high and sells low” or it will be sold at its marginal cost. In this latter case of setting the price of all water to reflect the most-expensive source (marginal cost pricing), we can expect that quantity demanded will fall to a level at which the desalinated water would not be necessary.* The second flaw is social: the desalinated water will only improve local reliability if it’s sold at marginal prices (meaning it would not be necessary). If it’s sold at lower prices and/or delivered to new housing in the region, then SDCWA is losing money on the deal and/or subsidizing new development at the expense of existing customers...
Now, I read (via JF) that San Diego has "too much water" due to water conservation, meaning that customers will be paying more when the plant opens in a few months. I had called attention to this potential (well know) problem as well, i.e.,
It’s important ... to ensure that SDCWA doesn’t get left with a white elephant, as the people of Melbourne, Australia just did with their A$3.5 billion project that is now mothballed due to recent rainfall.
The article concludes with "SDCWA expects the cost of treated imported water to surpass the cost of desalinated water by 2030," i.e., the plant will BEGIN paying for itself in 15 years.

Bottom Line: San Diego's ratepayers are ALREADY paying for a mistake. I now predict that "excess supply" will be used to support further housing development.

* From the report:
Assuming an average demand elasticity of -0.20, then the reduction in quantity demanded resulting from doubling the price of water would be greater than the additional quantity supplied (assuming that the plant supplies 7 percent of total supply), i.e., doubling the price to pay for 7 percent more supplies would reduce demand by 20 percent. Put differently, customers facing a price that reflected the actual cost of desalinated water would reduce their demand by enough to eliminate the need for the plant!


Joe said...

The same problem of existing ratepayers subsidizing new development water also happens with (non-desalinated) recycled water in general. In this case the wastewater rate payers provide all the treatment and distribution costs and the developer gets low cost water freed up...and in many cases it isn't even new water...... see your October 1 post.

It still may be the best answer, it just needs to be sold that way up front to the ratepayers and not "backdoored" after the fact..

Wayne Lusvardi said...

Water in California is socialized and the price is thus socialized. So the higher cost of desalted water is spread with the much lower cost of imported water. So if there is a flood of new water this year it would only lower the spot price of water in the 5% of water that is traded; but it wouldn't lower the cost for water under long-term contracts.

Northern San Diego is the driest territory in their service area and has no pipelines directly supplying Colorado River Water or SWP water. So let's say desalted water costs $2,000 per AF, but blended with imported water the total composite cost is, what, say, $1,000 per AF? But that is the marginal higher price for developing new water supplies from the proposed Sites Reservoir isn't it?

Look, water is free. It is the cost of storing, conveying and treating it that results in its final price. So the blended price is higher but the supply of water is increased and dependence on imports is lessened.

San Diego CWA has for decades insisted, since the infamous Laguna Declaration, that they are at the end of the pipe and that MWD's original 13 colonies have first dibs on water in a drought.

Another thing to consider is that Northern San Diego is one of the most affluent areas (Carlsbad, Rancho Santa Fe, Encinitas, etc.). But Northern SD is not paying $2,000 per AF for desalted water; they are paying the blened rate, whatever that is.

TS said...

Your desalination comments and economics are right on. The economic flexibility offered by transporting water through the ocean using waterbag technology would avoid the economic quandary facing San Diego. We hope to be able to implement a demonstration of our technology this year in order to give waterbag technology more economic and technical credibility.

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