Charting China's Water Future: Closing China's water availbility gap results in $21 billion in net savings
A look at a new report by McKinsey that analyzes the economics of water solutions in developing countries. It finds that in China, 55 different solutions exist to close its imminent water availability gap that actually results in a net savings, rather than expenditure, of $21 billion by 2020.
There has been a wave of water price hikes across various cities and regions across China over the past year. Most recently, Beijing raised residential water rates by 8 percent, as we blogged about yesterday. But there have also been proposed or implemented water price increases earlier this year in Shanghai, Lanzhou (Gansu province) and certain cities in Heilongjiang, and others, despite fears of inflation. Getting the prices right, many seem to agree, is an important ingredient in managing scarcity so that water is allocated to their higher value use. And as we noted yesterday as well, higher water rates encourages new investment in water supply and treatment infrastructure. But how one goes about getting these prices right is a topic of debate because a pure-economics approach is either met with the concern that the lower-income folks are disproportionately affected, or opposed by those who take the absolute position that is a public good. Differential pricing–where users who use less water pay a lower rate, any heavier users pay a higher rate–is generally considered fair, but such a tiered water pricing structure has been slow to catch on because of the practical difficulty of drawing the boundaries of price levels that would be considered fair by the general public (I suspect thought that with electricity price reforms recently announced that will adopt such progressive tiered pricing structures, we should see more of this in water in the future).
McKinsey, by now almost everyone’s favorite climate number cruncher, released a report last month called Charting Our Water Future: Economic Frameworks to Inform Decision-Making, in which it unveiled its Water Availability Cost Curve, analogous to its not famous carbon abatement cost curve. The report focuses on the four ‘BASIC’ countries (Brazil, South Africa, India and China) and aims to accomplish three things: First, to paint the supply-demand picture for water from now till 2020; second to present its economic analysis of a menu of options to enhance water availability to make up for water supply deficit; and third to explore the implementation challenges of sustainable water management policy through the lenses of institutions and stakeholders. The report is a very interesting read, but thick. The Green Leap Forward has reviewed it and if you are specifically interested in the China bits, you are in luck, because that it is just those bits that rest of this blog post will summarize…
China’s Water Supply Deficit
Click image to enlarge. Source: Charting Our Water Future, McKinsey
China’s Water Demand
- Agriculture will remain the dominant sector for water demand, Agriculture accounts for 65% of demand today. Flood irrigation remains the main irrigation approach, over more water-efficient techniques such as sprinkler and drip-irrigation.
- But it is the industrial and urban sectors that accounts for most of the demand growth over the next two decades. Agricultural water demand will decline to 50 percent of overall demand in 2030 as industrial and urban demand grows nearly five times as fast (2.7 and 2.9 percent per year) as fast as agricultural demand growth.
- With respect to industrial demand growth, thermal power is the biggest culprit. By 2030, thermal power alone will result in 82 billion cubic meters of water demand, a whole 10 percent of China’s projected entire aggregate water demand of 818b m3, and 31 percent of the whole industrial sector’s demand of 265b m3.
- With respect to municipal and domestic demand growth, I would have guessed that this would be driven by the massive wave of rural-urban migration over the next two decades, but McKinsey attributes this more to a rapidly growing middle-class, from 4 percent of the population in 2005 to 56 percent in 2030, leading to increased water consumption.
- Only 38 percent of municipal water is treated, far below what is acceptable. While a much higher proportion of industrial effluent–91 percent– is treated, the release of metals, cehmicals and other toxins into the water supply remain a big problem (see point on “Quality versus Quantity” below).
China’s Water Supply
- By 2030, China’s water supply will reach 619b m3, significantly short of aggregate demand of 818b m3–a deficit of 25 percent. Eight of 10 major water basins will experience water shortages.
- China has a rich base of renewable water at 3,507b m3, but unfortunately only 565b m3 is accessible and reliable today.
- Because of the vast geographical expanse and diverse conditions, local availabilities matter (see map above). While aggregate availability of renewable water today may cover aggregate water demand (555b m3), a more fine-grained look at China’s ten water basins reveals geographic disparities, and shortages. As we discussed before (see previous post “Chinese Water Torture“), the story of water resource distribution in China is a tale of two regions–the water-rich south versus the water-scarce north. This has served as the impetus behind the construction of the ambtious south-to-north water diversion project that will transfer some 22 billion cubic meters of water by 2030 from the Yangtze basin to the Hai-Huai-Huang basins, representing some 8 percent of water supply in these northern basins.
- Quality versus Quantity. Pollution changes the assessment of available water. Because the quality of some water is so low that it cannot be considered supply, the “quality-adjusted” supply is thus lower than the quantity-only supply, exacerbating water availability deficit. For instance, some 21 percent of surface water nationwide is unsuitable in quality for even agriculture; in the Hai river basin, that proportion is 50 percent.
A Water Availability Cost Curve for China
The report identifies 55 levers to close the water availability gap of 201b m3 by 2030. This would require an annual investment of $7.8b, but ultimately result in an aggregate net savings of $21.7b. These findings are pictorially represented in the water availability cost curve below:
Click image to enlarge. Source: Charting Our Water Future, McKinsey
Some key observations:
- Most of the savings (the vertical bars that are in the negative cost territory), some $24 billion, come from industrial efficiency measures, e.g. thermal power, wastewater reuse, pulp and paper, textiles and steel.
- But as discussed above, just as geography matters in the water supply scenario, a basin-by-basin approach will have to be taken to assess the most cost-effective levers, particular for supply-side solutions.
- In any case, meeting growing water demand fueled by industrialization and urbanization will require a balanced portfolio of levers–agricultural, supply, municipal and industrial.
- The water-energy nexus, discussed below, presents additional challenges in water management.
The McKinsey report discussed something dear to my heart – the water-energy nexus. It highlights a handful of “watergy” solutions, including:
- Ultra-supercritical processes for thermal combustion of coal: boosts plant efficiency, reduces energy costs $3.9 billion, lowers water-cooling needs, reduces water withdrawals and saves $8.20 per cubic meter.
- Coke dry-quenching: an industrial process to recover waste heat in the form of steam in a waste-heat boiler, resulting in water savings and steam generation for electricity production, as well as cost savings of $3.40 per cubic meter of incremental water availability.
- Renewable energy technologies such as wind, water and hydropower offer not only opportunities in the energy sector due to their lower carbon footprint, but also for water management because of their lower water footprint. Coal-to-liquids, not a renewable energy source although certainly considered “alternative”, have generally fallen out of favor in recent years with many proposed projects never seeing the light of day precisely because of water concerns. Concentrated solar thermal, or CSP, though a renewable energy technology, is also placed in an awkward position because of high water use in cooling processes (although at some point, air-cooling technologies can help ameliorate this concern). This partially accounts for why China has favored solar photovoltaic projects over CSP (although there are other strong reasons such as the need to bail out the PV manufacturing sector that at one point was mired in a overcapacity situation).
All in all, the McKinsey report a terrific read. And if you are a keen investor sensing that the dire water predicament in China spells an opportunity, you might want to read this equities research report by DBS that does a great job of covering the individual companies, many of them form my home state of Singapore, that are taking advantage of policy trends in China’s water sector (including healthy allocations to water inrastructure from the economic stimulus package) to build viable businesses.