Commodity derivatives trading in water?

It’s not as far-fetched as it sounds, and it may become part of the energy business soon.

Water supply is critical to 89% of all electricity generation worldwide, so energy companies need to calculate “water risk” as part of overall business risk. Upmanu Lall, Director of Columbia University Water Center, said key to managing these risks is quantifying them, so businesses can create “actionable agendas.”

But quantification could also create new and profitable business opportunities including commoditized water markets, Richard Sandor, Chairman/CEO of Environmental Financial Products, told a Growing Blue conference in Washington DC recently. Growing Blue is a resource site initiated by Veolia Water, with members ranging from The Nature Conservancy to IBM.

Availability of water, and especially potable water, affects health, food production, and industrial capability, but it is also vital to energy, conference speakers agreed. A study by IBM’s Institute for Business Value found 49% of water in the US, and 44% in the European Union, is used by the energy sector.

Mary Keeling, Manager of the Institute’s Center for Economic Analysis, said water stresses include both shortages and increasing floods brought on by climate changes worldwide.

Sandor said the potential exists for “water to be the largest commodity in the world,” with physical and derivative trading bringing market efficiencies to water supply in the 21st century.

The first 20-30 gallons are a human right, the next 150 are a lot of waste,” – Sandor

Water will not be put to its “highest and best use” unless it is priced, Sandor said. Human beings have a right to a certain minimum of water needed for health, he said, but much of the developed world uses far more than that minimum per capita, for things ranging from manufacturing and farm irrigation to golf courses and swimming pools.

He pointed to Albuquerque, NM, where the average per capita water usage is 175 gallons per day. “The first 20-30 gallons are a human right, the next 150 are a lot of waste,” he said, and that won’t change until the water is appropriately priced.

Sandor pointed to trading markets in physical food products and their derivatives, saying they “are working very well,” so even though the US is experiencing record drought, the nation is not in famine.

Vincent Tidwell, Principal Member, Sandia National Laboratories, said controlling allocation of scarce water supplies is already a major issue in the Western US. Thermal power plant operators usually use drinking water for steam and cooling, he said, but technologies are being developed to allow use of non-potable water.

“Over half of the retrofits cost less than $5 per megawatt-hour,” Tidwell said, “so there is low-hanging fruit.”

Some use is already being made non-potable water in energy. For instance, Arizona’s Palo Verde nuclear plant, located in a desert, was built to use treated water from Phoenix’s sewage treatment plant as coolant.

A further allocation issue is being raised by spread of water-intensive hydraulic fracturing for oil and natural gas wells, Tidwell said.

Larger wells can take more than 5 million gallons to fracture.

Keeling said one of the barriers to water being included in things like energy retrofits of buildings is the current low price. “What you pay for water does not reflect the cost to your business” or bottom-line value, she said.

Increasing droughts and floods are showing the broad impact of water risk on society, she said, adding, “We have to help people see the scale of the connections.”