What Is Water Worth?
The economic value of water has become a top-of-mind issue for utilities, policy makers, business leaders, and other stakeholders. Their perceptions of an abundant and reliable US water supply have changed significantly over the past few years, as we’ve entered a period of more frequent and intense weather patterns – think of Hurricane Sandy in 2012, recent record snowfall in the northeast, and devastating wildfires in the south and west.
Changing climate conditions are having both direct and indirect effects on water quality, quantity, and overall availability. Companies that rely on water for manufacturing, energy generation, or health and safety in their daily operations, and those who need to make hard decisions about infrastructure investments, are finding it increasingly difficult to quantify the value of this natural resource.
Quality and Quantity
Concerns about water quality and the liability and damages associated with the incidence of contamination of the US water supply are as prevalent as ever. But more attention is also being paid to water quantity. Droughts in some areas of the country are prompting utilities and manufacturers to focus on risk, competition, and compliance issues – specifically in relation to upcoming changes to Section 316(b) of the Clean Water Act. We and our colleagues have helped power plants perform cost-benefit analyses to evaluate the various technologies that can be used to reduce their water flow and thermal discharge so they can comply with 316(b). There are also growing economic concerns about having too much water: more frequent and intense flooding can damage agricultural lands, leading to extensive crop loss, and, as we saw in recent flooding in Colorado, the destruction of property and infrastructure.
Contrary to popular belief, drinking water is not the largest or even the most expensive use of water in the United States. The power and energy sector accounts for half of all water withdrawals from US streams, lakes, and rivers. This water is used to cool generation turbines and engines – one of the biggest effects of recent droughts has been brownouts caused by curtailed electricity generation. According to the draft National Climate Assessment, power production at existing facilities, as well as the permitting of new power plants, will continue to be constrained if there is not enough water for cooling, hydropower, or for absorbing warm water discharges from some power plants – the latter of which can also affect aquatic life.
Because of its previous abundance, water has typically been considered a free (or nearly free) resource. But the average price and the value of water are not the same thing. During periods of drought, businesses and households have experienced decreased production and increased costs, respectively. Economists are now recognizing that a critical measure of water’s value is as an input to energy production, agriculture, and other manufacturing and service functions. One way to assess this value is to understand factors associated with reliability (of water service) and resiliency (of key industrial sectors that experience service disruptions). A team from Analysis Group recently worked with the American Water Works Association to better understand how the value of water may be calculated and incorporated in national cost-benefit analyses. The team found that water could be worth between $60 and $400 per person per day during periods of short-term disruption, depending on the region and industry. The "standard" value currently used in regulatory analyses is $93 per day. More accurate information about the value of water can help in strategic planning, in assessing damages in disputes involving water shortages and lost output, and in assessing liability and damages in cases in which contamination or water rights and contracts are at issue. ■