Download PowerPoint - Water Droplets – Mike Young

Reducing the cost of water
Prof. Mike Young
Research Chair, Water Economics and Management
The University of Adelaide
Climate Change and Business, Brisbane
30th August 2007
Climate Change
The adverse effects of climate change
will express themselves first in water!
2
Water withdrawals per capita
Australia = “The driest inhabited continent in the world.”
Iraq
Australia
New Zealand
United Kingdom
(Australia = 135/161 countries)
“We have a water management problem not a water supply problem!”
Business Council of Australia 2006
3
Managing supply variability
After Craik 2007
COUNTRY
RIVER
RATIO MAXIMUM
over MINIMUM
ANNUAL FLOW
BRAZIL
AMAZON
1.3
SWITZERLAND
RHINE
1.9
CHINA
YANGTZE
2.0
SUDAN
WHITE NILE
2.4
USA
POTOMAC
3.9
SOUTH AFRICA
ORANGE
16.9
AUSTRALIA
MURRAY
15.5
AUSTRALIA
HUNTER
54.3
AUSTRALIA
DARLING
4705.2
4
Melbourne
5
Warragamba + 3 Nepean Dams (Inflows & annual rainfall)
10,000
0
9,000
500
8,000
1000
7,000
6,000
5,000
- 25%
780 mm pa
907 mm pa
Inflow GL
681 mm pa
Less rain means much less water!
4,000
1500
2000
2500
3000
2,027 GL pa
3,000
2,000
Rainfall (mm)
Sydney
3500
572 GL pa
892 GL pa
4000
- 75%
1,000
4500
0
5000
1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Year
6
7
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“The simple fact is that there is little or no
reason why our large cities should be gripped
permanently by water crises …
Having a city on permanent water restrictions
makes as much sense as having a city on
permanent power restrictions.”
John Howard 17 July 2006
Cost of restrictions has been high
Cost to Brisbane 50% of a desalination plant
PMSEIC, 2007
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Direct Costs of Water Supply/Demand Options
(Sydney, Adelaide, Perth, Newcastle)
Source: Marsden Jacob 2006
$10.00
$9.30
The price of urban water supply and security is rising!
Who should bear the financial risk for increased security
in a world of climate shift and change?
$9.00
$8.00
$7.00
$6.00
$6.00
$5.60
$/kL
$5.00
$5.00
$4.00
$4.00
$3.00
$3.00
$2.00
$1.30
$1.45
$1.50
$1.68
$0.25
$0.00
$0.63
$0.00
$0.10
$0.20
$0.15
$0.30
$0.08
$0.06
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$3.00
$1.58
$1.00
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$3.00
$2.61
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Water Policy History
•
1994 – CoAG Agreement- National Competition Policy identified water as
an arena for reform

Separate policy from infrastructure

Water trading in rural areas

Full cost pricing including the costs of externalities
•
1996 – Agreement extended to cover groundwater and storm water
•
2004 – National Water Initiative
•

An internationally renowned template for ongoing reform

Lacked urban policy detail but commits urban Australia to efficient urban water
use

Allowed all states & all state-owned utilities to escape from the tranche-payment
incentive mechanism
2005 – 07 – Awareness of a water supply step change caused governments
to lose sight of the importance of competition and market-opening reforms
that provide incentive

Grants, subsidies and restrictions have become the norm!

NWI progress has been slower than scheduled
11
National Water Initiative Intent
(s5)
1. “.. in recognition of the continuing national imperative to
increase the productivity and efficiency of Australia’s
water use,
2. the need to service rural and urban communities, and
3. to ensure the health of river and groundwater systems
..”
1.
“clear pathways to return all systems to environmentally sustainable
levels of extraction.” …
2. “greater certainty for investment and the environment, and”
3. “underpin the capacity of Australia’s water management regimes to
deal with change responsively and fairly.
12
NWI v’s Grants, subsidies & promises
Urban

$250 million over four years to fix leaking water pipes and save
155 ML water per annum. (Labor)

$17 million for Australian scout halls to install rainwater tanks

Water Smart Australia Program $1.6 billion for projects over
$1 million in value
Rural

$10 billion for National Plan for Water Security $3 billion for
entitlement purchase & $5.8 billion for “modernisation”
Necessary transitional payments to speed reform (?)
NWI “..full cost recovery for water services to ensure
business viability and avoid monopoly rents..”
“ ..upper bound pricing”
13
National Water Initiative
s. 65 In accordance with NCP commitments, the States
and Territories agree to bring into effect pricing
policies for water storage and delivery in rural and
urban systems that facilitate efficient water use and
trade in water entitlements, including through the use
of:

consumption based pricing;

full cost recovery for water services to ensure business viability
and avoid monopoly rents, including recovery of environmental
externalities, where feasible and practical; and

consistency in pricing policies across sectors and jurisdictions
where entitlements are able to be traded.
In a grant-dominated world, private investment is risky
14
Urban water supply and disposal
Water source management
Water distribution
Water retailing
Sewage disposal
Unbundling would allow competition and markets to emerge.
The Prime Minister’s vision of a world without water restrictions could emerge.
15
1. Urban supply & disposal separation
1.
Bulk supply from other regions

2.
Storage management and treatment
•
3.
4.
5.
•
Dual supply encouraged (Supply system bypass possible)
•
Third party access to first-use dsn system for desalination, private dams, private
storm water capture, etc
•
Removal of postage stamp pricing
•
Competition and innovation
Retail
Sewage infrastructure maintenance
Recovering costs via indirect re-use
Sewage treatment
•
7.
Indirect re-use can have competitive access
Distribution
•
6.
Urban – rural trading by developers
Charging households for estimated load
Stormwater infrastructure
•
Load based charging
•
Tradeable credits for peak load reduction
16
2. Competitive Pricing
1.
Scarcity pricing coupled with full opportunity cost recovery
•
Entitlements markets
•
Allocation markets
•
Recover 100% of cost of grants (or abandon them)
2.
Large water user urban-water entitlement and allocation trading
3.
Tolerance for retail block tariffs

But household trading of blocks allowed

(Access-rights to a cheap block can be traded)
4.
Small users pay marginal opportunity cost (scarcity price) for
entitlements and allocations above, say, 200KL/annum
5.
No special industry water supply agreements
6.
Independent regulation of supply charges and scarcity prices in all
States
17
3. Competitive infrastructure access
1. Depreciation rules that recognise infrastructure
obsolescence (when does the access holiday end?)

PMSEIC observation energy costs for water supply to Kalgoorlie

By pipeline 12 kWhr electricity / kL

By desalination 2-3 kWhr electricity / kL
2. Competitive access to all elements in the supply and
disposal system

All classes of water from drinking to sewage
3. Rules that prevent governments from crowding out
private investment
4. Access rules that reveal cost of using obsolete
infrastructure and technology
18
4. Managing externalities
NWI .. full cost recovery for water services to
ensure business viability and avoid monopoly rents,
including recovery of environmental externalities,
Generally, more efficient to manage externalities
using separate instruments

Offset infrastructure externalities and reflect them in
access entitlement charges not water prices

Stormwater credits

Tradable nutrient credit systems

Separate sewage charges based on load not land value
19
5. Building and subdivision incentives
Source: Marsden Jacob 2005
PMSEIC 2007
Developer & Builder ~ 80%
Owners & Occupiers ~ 20%
1. Developers required to source urban water entitlements
prior to subdivision

Options

Irrigators

Urban storm water credits

Aquifer storage and recovery
2. Urban infill and extensions under same regulatory
disciplines as a new home
3. Mandatory disclosure of water efficiency at house sale
20
5 elements of an NWI urban supplement
1. Supply and disposal system separation
2. Pricing structures, investment rules and trading
rules that signal

Long-run opportunity costs and supply risks

Short-run opportunity costs and scarcity
3. Competitive access to all infrastructure

Depreciation rules that recognise assets can become
redundant
4. Independent management of externalities
5. Building and subdivision incentives
21
Concluding comments
Out of supply adversity comes competitive
opportunity
1. Urban reform
•
Increase competition
•
Allow private investment
2. Remove grant/subsidy culture
•
A water price signal
3. Re-introduce competition payments if States retain
control
22
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Contact:
Prof Mike Young
Water Economics and Management
Email: [email protected]
Phone: +61-8-8303.5279
Mobile: +61-408-488.538
www.myoung.net.au