Pricing Asymmetries Between Energy, Food and Water in the

Nexus: Problem or Opportunity?

International Conference

Sustainability in the Water-Energy-Food Nexus

Bonn, Germany, 19-20 May 2014

B05 Special Session: The Nexus and Climate Change Adaptation

Charles Rodgers, PhD

SEI Asia Centre - Bangkok

1. INTRODUCTION

Background on the Nexus and SEI’s activities

Sound investment decisions!

www.weap21.org www.energycommunity.org

SEI Nexus Tools

WEAP & LEAP The Water Evaluation And Planning (WEAP) • Used in 170 countries • Models the balance between water demand and supply at

a range of spatial and temporal scales • Simulates real-world policies, priorities and preferences • Built-in rainfall-runoff model with options for crop water use

(FAO, MABIA); can link to GW (MODFLOW); DSSAT The Long-range Energy Alternatives Planning (LEAP) • Used in more than 190 countries • Integrated energy and GHG mitigation planning • Becoming de facto standard mitigation assessments and

Low Emission Development Strategies (LEDs) WEAP and LEAP are available free of charge to all

government, academic and not-for-profit organizations in developing countries.

Approach to Nexus Assessment

(GIS, GAEZ)

(WEAP)

SEI Nexus Research in Asia

Ningxia

NE Thailand

SEI Nexus Research in Africa & Middle East

Lake Tana

Jordan

Nile

Volta

Limpopo

2. SOME ECONOMIC ISSUES

Cost, Price, Value of Nexus goods

4th Rio-Dublin Principle: “Water has an economic value in all its competing uses

and should be recognized as an economic good” BUT water is not like other economic goods – unlike energy and agricultural commodities, prices (almost) never established in competitive markets

Some concepts:

• Price (tariff): Amount actually paid to secure a given volume of water at a particular quality standard ($/m3)

• Cost: Expenditure required to make water available for specific uses. Includes O&M costs, capital costs, opportunity costs, costs of economic and environmental externalities

• Value: Aggregate of benefits to users, benefits from returned flows, indirect benefits, and intrinsic values

Operations & Maintenance costs

Capital costs Full Supply Cost

Opportunity cost

Economic Externalities

Full Economic Cost

Full Cost

Environmental Externalities

Source: adapted from Rogers, Bhatia and Huber (1988); not to scale

Components of the Full Cost of Water

Value of water to users

Net benefits from indirect uses

Adjustment for societal objectives

Economic Value

Full Value

Intrinsic values

Net benefits from return flows

Source: adapted from Rogers, Bhatia and Huber (1988), not to scale

Components of the Full Value of Water

Why is Water Different? • Value of water cannot be established from

observations of price in competitive markets

• Heterogeneous markets (defined by scope for water transfers)

• Water is bulky, difficult to store, transport

• Large variations and fluctuations in value over space, time (scarcity often seasonal)

• Missing, unclear or contested property rights

• Values in specific uses tied to water quality

• Different opportunity costs for “green”, “blue” water • Many benefits are non-market (environmental flows)

• Many other reasons …

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0.01

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2008 U

SD

per

m3

Max

Mean

Min

Irrigation net (n=40)

Irrigation gross (n=52)

Domestic (n=48)

Industrial (n=39)

0.22 0.32

0.59 0.86

2.01 1.97 2.88

6.94

Some Estimates of the Value of Water (2008 USD per cubic meter)

Source: Ecosystem Economics/FAO 2010

Source: IEA World Energy Outlook 2012

Water Use in Primary Energy Production

Opportunity Cost of Water in Biofuels Production

Water Value $/m3 0.01 0.22 2.01 0.01 0.22 2.21

L H2O / L EtOH Total water value $ Percent of production costs

50 < 0.01 0.01 0.10 < 1% < 2% 14%

500 0.01 0.11 1.01 0.7% 16% 144%

1500 0.02 0.33 3.02 2% 47% > 400%

1st Generation bioethanol (corn, sugarcane) Production costs (materials, conversion), 18 studies: • Low: $0.24/litre (Brazil Sugarcane) • High: $1.25/litre • Mean: $0.69/litre (assume $0.70) Water as a % of total production costs under different assumptions on water use, opportunity cost

3. IMPACTS OF CLIMATE CHANGE

The need to price future conditions in today’s decisions

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180.0

200.0

Ind

ex

20

02

- 2

00

4 =

10

0

FAO Food Price Index (Real) 1961 - 2014

Source: FAO

Food: Higher Real Prices Ahead?

Food Crisis 1973

Green Revolution

Rice Crisis 2007-8

Yield stagnation, biofuels, underinvestment

• IPCC 5AR: increased food prices of 3% - 84% by 2050 • Heat stress of important food grains (rice) • Loss of productive coastal land due to saline intrusion • Increase in losses from climate-related disasters • Uncertainty around pests & disease, CO2 fertilization, … • Food and energy prices highly correlated

Energy: Bad News and Good News • Historically, projecting energy prices a fool’s errand • For fossil fuels, generally decreasing EROEI • Policy and regulatory regimes will change due to

global mitigation efforts and conventions, possibly making market fossil fuel costs irrelevant

• General substitution of lower energy density renewables for higher density fossil sources; but

• Economies of scale, induced innovation in renewables will continue to reduce prices; and

• Expanded share of renewables (excluding biofuels) will greatly reduce energy’s water footprint:

Water Use in Generation Coal Hydro PV Solar Wind

Gal/MWh consumed 692 9,000 2 < 1

Source: River Network 2012

Trends Affecting Value of Water

• Population growth

• Increasing competition for available water

• Total watershed management (quantity and quality)

• Climate variability and change (impacts highly regionalized - see IPCC figure following)

• Increasing commodification of water resources (more water under private ownership)

• Improvements in water supply technology; water use efficiency and productivity

• Water rights and emerging water markets

• Increasing costs of investment in water infrastructure; depreciating infrastructure stock

% change of mean annual streamflow for global mean temperature rise of 2°C above 1980–2010. IPCC 5AR WGII Chapter 3 (Water Resources) Figure 3-4

4. PROBLEM OR OPPORTUNITY?

What is the role of Nexus analysis in addressing economic uncertainty?

A Role for Spatial Equilibrium Modeling • If price/value asymmetries between water, food and

energy present challenges in Nexus assessment, integrated spatial equilibrium modeling provides a means to address these challenges.

• Spatial Equilibrium (bioeconomic, integrated economic-hydrologic) models, first developed around 2000*, seek to optimize the allocation of water resources at basin, regional and even national** scales using combined simulation and optimization.

• Spatio-temporal optimization under physical constraints allows the marginal value of water to be estimated under a wide range of assumptions on relative scarcity.

*Rosegrant, Ringler, McKinney, Cai, and Donoso, 2000. Integrated economic–hydrologic water modeling at the basin scale: the Maipo river basin. Agricultural Economics 24, 33–46. **Henderson, Rodgers, Jones, Smith, Strzepek and Martinich. 2013. Economic Impacts of Climate Change on Water Resources in the Coterminous United Sates. Mitigation and Adaptation Strategies for Global Change.

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Mrican Barrage

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30% RF

30% RF 30% RF 4% RF 26% RF

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Segawe weir

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New Lengkong

JC2 JC3 JC4

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Terowong Tulungagung Selatan

Tulungagung HP

Kali Gondang

Parit Agung

Kali Porong

Kali Surabaya

Kali Brantas

Konto

JC23

23% RF

7% RF

RESERVOIR / WEIR

IRRIGATION

MUNICIPAL / INDUSTRIAL

JUNCTION (CONFLUENCE OR FLOW SPLIT)

FLOW MONITORING STATION

HYDRO POWER PLANT

DIVERSION CANAL RETURN FLOW RIVER REACH PUMP

INFLOW

L E G E N D Schematic of spatial equilibrium model of the Brantas Basin, Indonesia

Options for re-allocation in space and time define “market”

Summary of Points The price of water in many uses poorly

reflects its value

Poor understanding of the value of water in alternative uses (opportunity cost) can lead to unsound resource use decisions

Climate change will increase uncertainty around future values of water, food and energy

Need to price future conditions into today’s decisions

Spatial equilibrium modeling provides one approach to establishing plausible values of water in competing uses under uncertain future conditions

Chapada dos Veadeiros, Brazil

© Bart Wickel

Value Cost Tariff Value Cost Tariff Value Cost Tariff

Irrigation Urban Use Industrial Use

RATIOS:

Cost/Value = 6.70

Tariff/Cost = .002

Tariff/Value = .010

RATIOS:

Cost/Value = 1.87

Tariff/Cost = .026

Tariff/Value = .048

RATIOS:

Cost/Value = .180

Tariff/Cost = .054

Tariff/Value = .001

0.1 1.2

65

46.7 46.7

2.5

260 (not to scale)

25

9.7

Comparison of Value-in-Use, Costs, and Prices Charged for Three Sectors in the Subernarehka River Basin, India (Rogers, 2005)