While scarcity and competition for water resources may not be new concepts, it is not just about water.  The tip of an iceberg of issues, water is likely to impact almost every industry on the planet in years to come.  However, because water and energy are joined at the hip in this body that is our earth, the water energy nexus is likely to become a focal point for investors in the very near future.

What is the Water Energy Nexus?

The “water energy nexus” refers to the interdependence of water and energy.  Energy is required to gather, transport, and treat water; and similarly, water is necessary for energy production. In the U.S., while the water industry consumes 4% of total power, states like California consume much more, 19%, making the water industry the largest user in the state.1 Likewise, according to the U.S. Geological Survey (USGS), even excluding water for hydroelectric purposes, thermoelectric/energy companies were the number one water users, responsible for 49% of all withdrawals in the U.S.  Additionally, while saline is also used, freshwater withdrawals (85% of total) still dominate, with energy companies consuming 42% of all drawdowns.2

As depicted in Figure 1 data aggregated from the USGS and U.N. reveals major differences between water consumption in the U.S., and the world as a whole.  For example, in the U.S., energy and industry make up 47% of freshwater withdrawals (vs. 20% worldwide), 40% for irrigation (70% worldwide), and 13% domestic (10% worldwide).3 But while shifting water consumption patterns from agrarian to industrialized economies worked in the past, what happens now, in a world of 7.2 billion and growing?

CindyMotz_Figure1

How Much Water do We Have and What Does it Mean?

Estimates peg total planetary water at approximately 1.4 billion cubic kilometers (cu km).  However, since 97.5% is saltwater, that estimate becomes 200,000 cu km of freshwater available to humans, animals, and ecosystems.4  Additionally, the U.N. has estimated that the world’s six billion people use 54% of accessible water found in lakes, reservoirs, and underground aquifers;5 however, we were at six billion in October 1999,6 seven billion in October 2011,7 and are now over 7.2 billion.8  Further, over the past 50 years, water usage has grown at double the population growth rate, with the U.N. expecting growth in water demand of 50% in developing, and 18% in developed, countries by 2025.9

You Can’t Have One Without the Other…Rising Demand for Energy

Much of the reason we are going to need more water is because we are going to need more energy.  Figure 2 presents the EIA’s forecast depicting a significant rise in energy demand, with consumption growing by 20%, 39% and 56% in 2020, 2030, and 2040, respectively, over 2010 levels.

Motz: Figure 2

Future Problem—What if the Future is Now?  Global Water Model

For some, as long as water comes out of the tap, water shortages are a future problem.  But what if the “future” becomes “right now?”  Over the 12 year period between October 1999-October 2011, we calculate approximately 227,169 humans were added to the world every day, or 83 million every year. Leaving these numbers static results in population growth slowing, from about 1.38% in 2000 to 0.98% in 2030.  Using estimates of 200,000 cubic km of water, and a 54% appropriation rate, we arrive at a 2000 global water usage of around 108,000 cu km, or .000018 cu km per capita (apportions all water used by industry, agriculture, residential to each individual).  Assuming past growth in water usage (i.e., double population growth rate), demand for water exceeds supply in 2026-2027.

Motz- Figure 3

Scenario 2: Water Demand Exceeds Supply by Mid-2020

Scenario 1 may be optimistic.  While growth in water usage may have been double the population rate in the past, assuming it remains static (hence, continuously drops on a per capita basis) is not realistic in a world where non-OECD countries are shifting from agrarian-based economies to more industrialized ones.  As their economies ramp, these countries will likely need more water and energy, resulting in a situation that may resemble Scenario 2, in which per capita water consumption grows by 2% annually, versus declining as in Scenario 1.  Given these assumptions, demand for water could exceed supply sooner, by 2020, with a 38% shortfall by 2030, very much in line with recent U.N. comments.

“By 2030 nearly half the global population could be facing water scarcity. Demand could outstrip supply by 40%.”
–Ban-ki Moon, Secretary-General of United Nations, October 8, 201310

Motz- Figure 4

Winners & Losers?  Life-Cycle Analysis (LCA) & Water Footprints Need to Be Examined

Winners will be those who use less, use more efficiently, or develop cost effective technologies providing better access to water and energy.  Many industries, apparel, beverage, chemical/pharmaceutical, mining, use lots of water.  While energy companies may use more, this is because energy is a major input in most product cycles.  Even “cleaner” energies may not be as “clean” as one would think when it comes to water.  As shown below, biofuels may have lower greenhouse gas emissions (GHGs), but still require large amounts of water to produce.  Regardless of how exact numbers play out, it seems clear we should consider water and energy together, and in terms of both their environmental and economic impacts.  While LCAs are helpful in assessing risks, to date, most have focused on GHGs.  However, while GHGs and other climate change impacts are concerning, water may be the most limiting factor in the near future.  Hence, it would make sense to have companies disclose, along with traditional financial metrics, their water usage, conservation efforts, and overall water risk exposure on a regular basis.

Motz- Figure 5

Water, Water Everywhere—But Not a Drop for Anything?

Well, hopefully not.  But bottom line, triple or traditional, our relationship with water and energy is similar to the one we have with our checkbook.  If it doesn’t balance, it doesn’t work.  Incorporating ESG principles into one’s financial analysis is not going to be an option when it comes to water.  Although the numbers are daunting, if we do not consider water and energy together, we exacerbate the situation and increase the challenges.  However, to the extent we can adapt our usage and enhance our technologies, there may be many investment opportunities down the road.

Full-length article or more information, contact:  www.cindy@motz.net.

Cindy Motz CFA, Global Advisory Council Cornerstone Capital, Financial Services Consultant and former II & WSJ All Star Analyst

 

1 NRDC, “Water Efficiency Saves Energy:” 2009, http://www.nrdc.org/water/files/energywater.pdf.
2 Kenny, J.F., Barber, N.L., Hutson, S. S., Linsey, K.S., Lovelace, J.K., and Maupin, M.A., 2009, “Estimated use of water in the United States in 2005”:  U.S. Geological Survey Circular 1344, 52 p.  http://pubs.usgs.gov/fs/2009/3098/
3 To compare USGS and UN data, thermoelectric and mining consolidated into “industry;” agr/livestock in “irrigation;” remainder-“domestic.”

4 Gleick, Peter H. “The World’s Water.” Washington, D.C. Island Press, 2000, 19-38. http://www.popline.org/node/182708
5 United Nations, U.N. Water Statistics, http://www.unwater.org/statistics.html, accessed December 2013 & January 2014.
6 Sommerfeld, Julia. “World Population Hits Six Billion,” MSNBC.com, http://www.nbcnews.com/id/3072068/#.UtQ0-55dWQw, Oct.12, 1999.
7 El Nassar, Haya. “World Population Hits 7 Billion,” USA Today, http://usatoday30.usatoday.com/news/world/story/2011-10-30/world-population-hits-seven-billion/51007670/1
8 http://www.populationinstitute.org/, accessed January 9, 2014.

9 United Nations, U.N. Water Statistics, http://www.unwater.org/fileadmin/user_upload/unwater_new/docs/water_scarcity.pdf, Feb. 2014.
10 Ki-Moon, Ban.“Opening Statements at Budapest Water Summit,” Budapest, Hungary, October 2, 2013. http://www.un.org/sg/statements/index.asp?nid=7184