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The water-energy nexus is becoming one of the great challenges of our generation, says a new environmental study, which points out that more than half of the world’s coal-producing and consuming countries face acute water scarcity


First, some figures. New coal-fired power plants with a total installed capacity of more than 1,400 GW have been proposed for construction in 59 countries worldwide. More than three quarters of this capacity is slated for development in China and India.

As much as 70 per cent of India’s coal-fired capacity faces water stress or scarcity — and hundreds of gigawatts of proposed plants are set to further strain already vulnerable water supplies.

In China, 58 per cent of existing coal-fired power generation capacity is located in high to extremely high water-stress areas, with more capacity being planned in already stressed areas.

Now, the facts. Water is essential for energy production — when water risks arise, energy producers around the world feel the impacts. A massive flood in Australia in 2011 reduced its coal export volume, pushing global coal prices higher. Drought in the US midwest ravaged corn fields in 2012, contributing to higher gasoline prices.

The trend is clear. Regional water concerns are creating significant financial risks, thanks largely to advanced global commodity trading and energy industries’ high dependence on water. And it’s a trend that is poised to worsen. While energy experts project a 36 per cent increase in global energy consumption by 2030, the Water Resources Group (WRI) predicts that in the same amount of time freshwater supplies will fall 40 per cent short of total demand globally.

The water-energy nexus is, therefore, becoming one of the great challenges of our generation — one that also holds significant implications for political leaders and investors alike.

Global energy and coal industry overview

Coal continues to be a dominant force in the international energy market. The fossil fuel accounts for one-third of total energy consumption, second only to oil. Global coal consumption grew by 2.5 per cent in 2012, continuing coal’s years-long streak as the fastest growing fossil fuel. Many of the world’s top coal producers are also the biggest consumers with China, India and the US near the top of both lists.

As with most energy sources, coal-related industries — including mining, coal-to-chemicals, and power generation — are extremely water-intensive. Coal mines depend on water to extract, wash and process coal, while coal-burning power plants need water to create steam and for cooling. Use varies widely at different plants depending on their generating and cooling technologies. In the US for example, dry cooling, when employed, requires small amounts of water for system maintenance and cleaning.

Once-through cooling systems withdraw the most water— between 20,000 gal/MWh (75.7 m3/MWh) and 50,000 gal/MWh (189.3 m3/MWh). They consume far less — between 100 gal/MWh (0.4 m3/MWh), and 317 gal/MWh (1.2 m3/MWh. Without effective regulatory enforcement and long-term water–resource management, water-energy choke points create uncertain financial risks to companies and investors.

Consumption vs withdrawal

“Water withdrawal” and “water consumption” describe two different processes. Water that is withdrawn is used and then returned to the source. Therefore, most of the water used by once-through cooling systems is withdrawn. Water that is consumed is used and not returned to the source. Consumption happens when water evaporates or is incorporated into other products — especially agriculture. Almost 50 per cent of the water used in agriculture is lost to the atmosphere or transpired through plant leaves.

Like much of the world’s energy supply, the coal industry’s thirst is especially concerning when you consider global water trends and risk hotspots. According to WRI’s Aqueduct Water Risk Atlas, water stress — taking into account agricultural, industrial, and domestic users — is growing worldwide. Baseline water stress was more prevalent and more severe in every continent in 2010 than it was in 2000, particularly in China, South and Central Asia and the US west coast. This increased stress can be attributed to a growing demand for freshwater and supply shortages caused by shifting global precipitation patterns from climate change, among other factors.

Baseline water stress is a measure of demand and supply for water in a given area, and is calculated as a ratio of local water withdrawal over water supply. In extremely high water-stressed areas, 80 per cent of the available supply is withdrawn every year. A high percentage means more water users are competing for limited supplies.

More than 50 per cent of the world’s largest coal-producing/consuming countries face high to extremely high levels of water stress, which can be attributed to the many competing demands on water resources. WRI developed a country-level water stress measurement that identifies where agricultural, domestic, and industrial users are withdrawing water. This is important, since water supply and demand varies significantly within a country, from dry prairies to lush rainforest and from industrial megacities to rural townships.

High to extremely high stress indicates that farms, municipalities, and industries nationwide already account for at least 40 per cent of the water naturally available to them, based on a weighted average. That fact can pose significant hurdles for energy producers and other water-intensive businesses.

Additionally, nearly half of the seven most water-stressed countries also face high to extremely high seasonal variability; in each of these countries, the water supply varies dramatically between wet and dry seasons within a year. That volatility can disrupt operations and increase production costs. For example, a drought in Texas in 2011 placed exceptional stress on the power grid, and the state only avoided blackouts by placing restrictions on farmers and ranchers with senior water rights, showing the tension on the water resources from the competing demands of primarily agriculture and energy.

Water stress is not limited to geographically dry countries. Indonesia, South Korea and Japan — all coal producers/users — are classified as highly water-stressed because they use more than the annually available surface freshwater supply for city, agricultural and industrial development. Because naturally occurring, renewable freshwater cannot meet these countries’ needs, they are dependent on costly alternative water sources, such as groundwater, seawater desalinationand inter-basin transfers. The more dependent an area is on alternative freshwater sources, the higher the water-related risks to its financial assets.

These risks can be wide-ranging, as Société Générale outlined in an October 2013 report. The report found that limited access to water-supply sources can disrupt operations. Cutting water-allocation permits due to insufficient water in an area can delay project development.

Securing new water sources is often an expensive process, increasing project costs. Possible upfront investments — which can reduce those long-term costs — include efficiency, recycling and wastewater treatment to meet regulatory requirements meant to protect stressed resources. Companies could avoid all those issues with sufficient naturally occurring supplies. However, as demand exceeds renewable supplies, alternative sources and all their associated issues come to the forefront.

Examining the water-coal nexus In India

Already one of the world’s top coal consumers, India’s dependence on coal-fired power generation is expected to grow. The country proposed nearly 520 GW of new coal-fired capacity nationwide as of July 2012 to meet high growth in electricity demand.

India is already highly water stressed, however, largely based on water use in the agricultural sector. Total water withdrawals in 2010 topped 760 billion m3. That is more than China and Russia’s total withdrawals combined, while India’s total renewable water resources account for only a quarter of China and Russia’s combined total.

More than 70 per cent of India’s power plants are located in water stressed or water-scarce areas. Stressed water resources are already impacting power projects in India, causing delays and operational losses. For example, inadequate water supplies in the state of Chhattisgarh shut down the National Thermal Power Corporation’s Sipat plant in 2008. Project execution delays and lost power output can also turn water-related risks into financial losses.

While shareholders are usually not financially exposed to water-related risks, as they are shielded by protective regulations enabled by India’s state-owned power sector, water risks may become more material under certain circumstances. Unregulated plants, for instance, might not be able to pass costs on to end-users, reduced power outputs could violate the terms of the purchase agreements, or the regulatory framework could change. Any changes would fall against the backdrop of the oovernment of India’s National Water Mission.

The national policy framework calls for a 20 pe rcent improvement in water efficiency nationally through regulatory mechanisms. It also encourages conservation and water waste minimisation. Every water user, industrial power generators included, will need to optimise their conservation, recycling, and reuse practices to meet this goal.

Several measures can help utilities in stressed regions better manage and mitigate water-related cost, output, and regulatory risks. Infrastructure investments, including backup supply reservoirs and desalination plants, will better secure long-term business growth, even though such capital spending requires up-front investment.

The Energy and Resources Institute in India also recommends third-party, regular water audits, as well as standards for water consumption in the power sector. More consistent legislation overall will give companies a framework for long-term energy production and financial planning while protecting at-risk water supplies.

Managing global water risks in coal

Unmanaged water risks have financial consequences for national and international companies. Recent guidelines from China’s ministry of water resources will limit coal expansion based on regional water capacity, and may slow down coal-project approvals. The guidelines will also push companies to pay for wastewater recycling and wastewater treatment systems. That large capital investment, combined with higher annual operating costs, means that companies must take a long-term view. They should pursue advanced water risk management at power plants while understanding the value in consistent, carefully crafted legislation. The combination will ensure that energy production can grow within natural resource limits.

Considering the potential for increased regulatory uncertainty and likelihood of supply constraints, water poses a variety of business risks for the global coal industry. WRI recommends that the industry assess water risks more deliberately and broadly, hold itself accountable, and take actions to respond to the challenges. A range of actions is available, including innovative technology and public policy engagement to collectively reduce shared water risks, all on the path to advanced water stewardship.

Furthermore, governments around the world should protect water resources and encourage energy projects that face fewer risks from water stress and limits on greenhouse gas emissions. Those cautionary measures will better align policymaking with water and energy planning, and balance resource constraints with economic growth. zz

(This article, co-authored by Betsy Otto, Tien Shiao and Andrew Maddocks, originally appeared in cornerstone[http://cornerstonemag.net/], the official journal of the world coal industry)

Source: Financial Chronicle