COMMENTARY: The Business of Water

Shrinking Water Supplies and Growing Energy Demands—an Emerging Strategic Headache

The Sonora Desert in Mexico. Rising populations and increased energy demand are straining limited global water resources.

The links between energy and water have significant strategic implications for many businesses and will affect companies outside the energy and utility sectors. The future development of these interrelationships begs the question: Do businesses fully recognize the wider strategic risks posed by water scarcity, the impact of climate change and the implications for energy production and availability? In most cases, the answer is no.

Water availability presents a potent mix of economic, social and environmental issues. We will undoubtedly see both businesses and governments increasingly come into conflict over this scarce resource as many organizations face a future of increasing costs and limits on the amount of water available to them. The potential for major damage to corporate reputations also exists if companies are, or are perceived to be, having a negative impact on public water supplies. In 2003 Coca Cola's image suffered significantly when it was court-ordered to stop extracting ground water from one of its Indian properties following accusations by villagers that it was depleting their water supply. Operations were suspended in that state, and the flow on effect saw bans of varying severity on Coca-Cola products across the whole of India attracting international media attention.

Those major companies that have identified water as a priority concern recognize the strategic risks presented by increasing global water scarcity and decreasing access to clean water. However, the complexities and uncertainties involved mean that a lot of companies are either ignoring the issue or believe it to be long term—a dangerous position to take. Especially as some businesses, (like TVA who during 2007 had to briefly shut one of its nuclear reactors) are beginning to experience operational challenges due to water scarcity.

Drought already affects over a third of the continental U.S., and the government projected that at least 36 states would face water shortages due to a combination of rising temperatures, drought, population growth, urban sprawl, waste and excess. Many other regions across the globe are also experiencing high levels of water stress—where water consumption is more than 25% of the renewable freshwater supply. The situation is likely to get worse with rising populations, increased energy demand and the effects of climate change resulting in dangerous implications for global water resources. While companies can pay off their carbon emissions, the world's freshwater resources are limited. With less than 1% of the world's total water as easily accessible freshwater, when the tap runs dry, there will be nowhere to go.

The links between climate change and water are generally well known. Changing temperatures will affect precipitation patterns, polar icecaps and mountain glaciers. Broadly, climate change will exacerbate problems concerning water in many areas. There are important direct links between water and energy—significant energy is used to access, treat and manage water; conversely, hydropower is currently the world's largest and most widespread source of "renewable" energy.

Energy & Water

Irrigation accounts for 40% of freshwater withdrawals and nearly 70% of groundwater withdrawals.

A careful examination of energy sources uncovers wide linkages with water. Global economic growth, particularly in emerging economies, has led to greater demand for energy, and new power plants are being built at a rapid pace—especially in the developing world. It is estimated that China is building two power stations every week! This need for energy has an environmental cost both in water and emissions. In 2000, thermal power stations accounted for 39% of all freshwater withdrawals in the U.S. Conventional thermal and nuclear power stations are typically major users of water in their "wet" cooling systems. They either withdraw and return large quantities of water for cooling purposes or consume smaller, but still significant, quantities in closed cooling systems.

There is much debate around the sustainability of first generation biofuels, and the most heated debate is usually reserved for the comparative carbon benefits of biofuels and their impact on global food commodities. Relatively few commentators have focused on the link between biofuels and water. Agriculture is the world's largest, and often most inefficient, user of water. The U.N. World Water Development Report identifies that 70% of all water is being used for agricultural irrigation, 22-23% is used for industry, and the remaining 7-8% is domestic use. According to the USGS, irrigation accounts for 40% of freshwater withdrawals and nearly 70% of groundwater withdrawals. Further increases in first generation biofuels are likely to have further negative implications for water availability in a number of regions that could further affect food availability and prices.

Oil & Water

Many oil companies are producing greater quantities of oil from unconventional sources, too. There is much debate concerning peak oil but regardless of the size of the world's remaining crude oil reserves, many observers and industry players predict that unconventionals will play an increasingly key role in meeting the future demand for energy. The CO2 impact of extracting these reserves, and their subsequent use, is frequently debated, but the extraction and processing of these resources often requires significant volumes of water. For example, the Canadian tar sands in Alberta use substantial quantities of water. Tar sands are mixed with large quantities of steam in order to release the bitumen mixed with the sand. Despite remediation, much of this water contains significant volumes of heavy metals which end up in tailing ponds.

The challenge related to water and oil is not just an issue for so-called unconventional fuel sources, either. For a number of oil-producing countries, and not just those in the Middle East, water is already a scarce resource. With 95% of Texas experiencing some stage of drought, oil companies are beginning to recognize that water availability will be a key constraint on their ability to exploit certain reserves and are at an early stage of understanding how best to address the issue.

Coal & Water

Coal accounts for approximately 52% of U.S. electricity generation and each kWh requires 25 gallons of water.

The world still has significant coal reserves remaining, but the implications of an increasing reliance on this CO2-intensive energy source have obvious implications for fighting climate change. Coal accounts for approximately 52% of U.S. electricity generation and each kWh requires 25 gallons of water. In the absence of regulations, wastewater from power stations can significantly impact the cost, quality and availability of local water. Even in well-regulated markets an increase in coal-fired stations is likely to mean an upsurge in the use of wastewater treatment chemicals.

Proponents of new coal-fired capacity often cite Carbon Capture and Storage (CCS) as the answer to concerns over coal's greenhouse gas (GHG) emissions. The U.S. Department of Energy has created seven Regional Carbon Sequestration Partnerships to help develop knowledge and infrastructure; many see the technology as a silver bullet for the challenge of climate change. Despite the fact the technology is unproven and the myriad of legal issues surrounding its use, there are indications the technology does not come without additional environmental costs—such as the increased need for water. A study by the National Energy Technology Laboratory in the U.S. suggests that a

CCS-enabled power station may require up to twice the water consumption of a conventional thermal power plant.

Water Quality

Finally, the water sector itself is a major user of energy; both in transportation of resources and the purification of supplies—an estimated 20% of California's total energy use is water-related. In general, rising standards for water quality require more energy in processing. A popular suggested solution to water scarcity is desalination; however this, too, is currently an energy-intensive process. The combination of a greater demand for water, increasing standards for drinking water quality and demand for sanitation will mean that water utilities across the globe will become more significant energy users thereby perpetuating a vicious cycle. More and cleaner water needed, increasing energy demand, more power stations using more water creating greater water demand and more water stress

Business Risks

The individual interrelationships identified above may be obvious to technologists or to those in specific industries (such as power generation), but the wider linkages between them are not widely or fully understood. Many companies will face major strategic risks as a result. For utilities and the oil and gas industry, the lifetime of many energy assets is often significant (30-40 years or more in the case of a coal-fired power station or refinery) and investment decisions being made today concern assets that will face very different strategic challenges during their operational life. Even businesses that are used to making decisions on such assets have been struggling with the uncertainties of climate change and the implications of evolving GHG regulations.

In many locations, the impact of water shortages is not decades away—the U.N. estimates that 50 million people will be displaced by water shortages in the next 10 years. This means addressing water issues is just as important as addressing climate change during the 21st century. Understanding where the risks are, and the opportunities, will place companies in a more competitive position in which to lead and succeed in a carbon- and water-constrained economy. The tools and the know-how do exist for companies to assess and manage these risks and opportunities—but only the enlightened few are yet using them. Many companies remain oblivious to the risks to their supply chain or their markets. Such companies should be doing more both to protect and enhance their own performance and competitiveness, as well as the needs and interests of key stakeholders.

DAVID HAMPTON is a London-based director at LECG (a global expert services firm) and a leading expert on carbon and climate change.

CONTACTS: LECG; Regional Carbon Sequestration Partnerships; U.N. World Water Development Report