Pricing Asymmetries Between Energy, Food and Water in the Nexus: Problem or Opportunity?

Transcription

1 Pricing Asymmetries Between Energy, Food and Water in the Nexus: Problem or Opportunity? International Conference Sustainability in the Water-Energy-Food Nexus Bonn, Germany, May 2014 B05 Special Session: The Nexus and Climate Change Adaptation Charles Rodgers, PhD SEI Asia Centre - Bangkok

2 Background on the Nexus and SEI s activities 1. INTRODUCTION

3 Sound investment decisions!

4 SEI Nexus Tools

5 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.

6 Approach to Nexus Assessment (GIS, GAEZ) (WEAP)

7 SEI Nexus Research in Asia Ningxia NE Thailand

8 Nile Jordan Volta Lake Tana SEI Nexus Research in Africa & Middle East Limpopo

9 Cost, Price, Value of Nexus goods 2. SOME ECONOMIC ISSUES

10 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

11 Components of the Full Cost of Water Environmental Externalities Economic Externalities Full Economic Cost Opportunity cost Capital costs Operations & Maintenance costs Full Supply Cost Source: adapted from Rogers, Bhatia and Huber (1988); not to scale Full Cost

12 Components of the Full Value of Water Intrinsic values Adjustment for societal objectives Net benefits from indirect uses Economic Value Net benefits from return flows Value of water to users Source: adapted from Rogers, Bhatia and Huber (1988), not to scale Full Value

13 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

14 Some Estimates of the Value of Water (2008 USD per cubic meter) USD per m Max Mean Min Irrigation net (n=40) Irrigation gross (n=52) Source: Ecosystem Economics/FAO 2010 Domestic (n=48) Industrial (n=39)

15 Water Use in Primary Energy Production Source: IEA World Energy Outlook 2012

16 Opportunity Cost of Water in Biofuels Production 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 Water Value $/m3 L H2O / L EtOH Total water value $ Percent of production costs < < 1% < 2% 14% % 16% 144% % 47% > 400%

17 The need to price future conditions in today s decisions 3. IMPACTS OF CLIMATE CHANGE

18 Food: Higher Real Prices Ahead? Index = 100 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 FAO Food Price Index (Real) Rice Crisis Green Revolution Source: FAO Food Crisis 1973 Yield stagnation, biofuels, underinvestment

19 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 Gal/MWh consumed Source: River Network 2012 Coal 692 Hydro PV Solar 9,000 2 Wind <1

20 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

21 % change of mean annual streamflow for global mean temperature rise of 2 C above IPCC 5AR WGII Chapter 3 (Water Resources) Figure 3-4

22 What is the role of Nexus analysis in addressing economic uncertainty? 4. PROBLEM OR OPPORTUNITY?

23 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 economichydrologic) 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, Integrated economic hydrologic water modeling at the basin scale: the Maipo river basin. Agricultural Economics 24, **Henderson, Rodgers, Jones, Smith, Strzepek and Martinich Economic Impacts of Climate Change on Water Resources in the Coterminous United Sates. Mitigation and Adaptation Strategies for Global Change.

24 Schematic of spatial equilibrium model of the Brantas Basin, Indonesia In6 LEGEND RESERVOIR / WEIR IRRIGATION MUNICIPAL / INDUSTRIAL JUNCTION (CONFLUENCE OR FLOW SPLIT) INFLOW HYDRO POWER PLANT DIVERSION CANAL RETURN FLOW In3 RIVER REACH PUMP FLOW MONITORING STATION 30% RF M_kr Mtsjtm Q7 JC8 30% RF JC7 B_kdr JC9 Ploso Segawe weir Q10 Wonorejo 7% RF 23% RF 7% RF JC5 Q13 Kali Gondang Parit Agung Terowong Tulungagung Selatan 0 23% RF Konto JC23 Q9 Q1 Mlg JC1 Mlk Lodgung 0 Options for reallocation in space and time define market In1_2 Kali Brantas Lodoyo Wlingi Q5 Q4 4% RF JC4 26% RF JC3 Tulungagung HP Kali Porong Jtkl Selorejo Jeli New Lengkong Q8 Mjksdj M_kn JC6 Mrican Barrage Q6 Kediri Q12 0 Kali Surabaya Sbygrs B_delta In4_5 Kertosono Q11 Surabaya 30% RF Mlirip Babb 30% RF 30% RF Sutami JC2 Q2 Sengguruh Q3

25 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 Bart Wickel Chapada dos Veadeiros, Brazil

26 Comparison of Value-in-Use, Costs, and Prices Charged for Three Sectors in the Subernarehka River Basin, India (Rogers, 2005) Irrigation Urban Use Industrial Use 260 (not to scale) Value Cost Tariff Value Cost RATIOS: RATIOS: Cost/Value = 6.70 Tariff/Cost =.002 Tariff/Value =.010 Cost/Value = Tariff/Cost = Tariff/Value = Tariff Value Cost Tariff RATIOS: Cost/Value = Tariff/Cost = Tariff/Value =