Monday, March 4, 2013

In California, What Price Water?

... At the moment, the seawater [being drawn into the intake valve from Agua Hedionda Lagoon] is being diverted from the ocean to cool an aging natural-gas power plant. But in three years, if all goes as planned, the saltwater pulled in at that entryway will emerge as part of the regional water supply after treatment in what the project’s developers call the newest and largest seawater desalination plant in the Western Hemisphere. 

Large-scale ocean desalination ... has remained futuristic in North America, even as sizable plants have been installed in water-poor regions like the Middle East and Singapore. 

The industry’s hope is that the $1 billion Carlsbad plant, whose builders broke ground at the end of the year, will show that desalination is not an energy-sucking, environmentally damaging, expensive white elephant, as its critics contend, but a reliable, affordable technology....
Proposals for more than a dozen other seawater desalination plants, including at least two as big as Carlsbad...
Desalination Project
The San Diego County Water Authority has agreed to buy at least 48,000 acre-feet of water from the plant each year for about $2,000 an acre-foot. An acre-foot equals about 326,000 gallons, roughly enough for two families of four for a year. The authority has made a long-term bet that those costs — now double those of the most readily available alternative — will eventually be competitive. But it still means the authority will pay more than $3 billion over 30 years for only about 7 percent of the county’s water needs.
The technology used in the Carlsbad plant, known as reverse osmosis, was developed decades ago. It involves pushing the water through a series of microscopic sieves rolled up into larger cylindrical filters. The energy-intensive process separates pure water from both salt molecules and impurities. The filters, some of which are made locally, are cheaper and more durable than they were a decade ago, industry accounts say, bringing down the overall price of the plant and its operations.

In the Western United States, where the complexities of water law and heavily subsidized federal and state water projects have complicated the economics of water delivery and hamstrung any widespread development of water markets, the Carlsbad plant offers a peek into a future when water prices reflect the actual cost of procurement and delivery. David Moore, a managing director of Clean Energy Capital, financial advisers to the San Diego County authority, said the water authority had “made the call that over time this water is going to be more affordable than other sources....” The price of water the authority now gets from the Metropolitan Water District of Southern California is about $1,000 an acre-foot.

...The recent history of desalination in the United States and Australia has been mixed, at best. Some recently constructed Australian plants are flourishing while others stand idle some of the time. In this country, technological missteps, delays and bankruptcies dogged the first big plant, which finally opened in Tampa in 2007....

The water purchase agreement was signed by the San Diego authority and the plant’s developer, Poseidon Resources, of Stamford, Conn., in late November. Poseidon bears the responsibility for completing the plant and operating it; the authority does not pay for any water that is not delivered.

The project’s costs are financed by two bond offerings totaling $734 million and a $189 million equity investment. In addition, the water authority is committing about $80 million to other capital needs. All of these arrangements have interlocking guarantees and risks, with the costs of constructing the plant borne by the project developers and the water authority responsible for constructing a 10-mile pipeline to send the water on its way to San Diego’s taps.

The public water authority did not want its ratepayers to be responsible for paying for water that was never delivered; it will pay only for water that meets its standards and goes into its reservoirs. That said, when the water is flowing in 2016 the county must pay as much as $113 million annually, which could rise over time.

Late last year, this financial picture prompted Fitch Ratings to give the project’s bond issue a BBB- rating, the lowest for investment grade debt. For Fitch executives, familiar with the unexpected obstacles in deployment of desalination technology, the water purchase agreement was a critical factor leading to a rating above junk level.

The cost comparison remains ugly for desalination right now, but the water agency has calculated that, given the history of annual rate increases from the Metropolitan Water District of Southern California, the desalinated water could be cheaper than the current supply by 2024.

Then there is the question of reliability. Water supplied by the Southern California water district comes from Northern California transfers and Colorado River diversions. Climate change is likely to cut into both sources over time. And San Diego and the Southern California district have a history of antagonism....

But water policy experts and local environmental activists are skeptical about the value of desalination compared with conservation and reuse. She added that by promising to buy at least 48 million gallons a day from the plant, the county water authority has less incentive to step up its push for water conservation, or to invest further in water reuse.

... Among other things, the [Surfrider] Foundation emphasizes the energy needs of the plant, which will consume 5,000 kilowatt-hours of electricity to produce an acre-foot of water.  As electricity costs go up over time, the county’s water bill — already estimated to be $5 to $7 a month higher for each customer by 2016, thanks to Carlsbad — will rise in tandem. But authority officials noted that water delivered from the Southern California district also required energy, and its cost, too, would go up in such circumstances.
If, for instance, the entire intake had to be moved below the surface — the cost to ratepayers, and particularly to Poseidon, could increase significantly. The county and the developers said this eventuality was covered in the financial planning.
The New York Times
February 28, 2013

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