Pricing water for scarcity and what that would mean for the energy-water nexus

It takes water to produce most forms of energy and it takes energy to deliver water to customers. This relationship, termed the "energy-water nexus", has been a popular topic for several years because of the concern that with water demand rising and supplies decreasing, there may be diminished energy resources.

In a recent piece on Growing Blue,  David Zetland argues that the solution to this co-dependence of water and energy is to price water for its scarcity. He uses the example of the value of water derived from two different businesses: a restaurant and an manufacturing facility. The economic gain per unit of water is much greater at the industrial facility, and the economic loss of not having water is significantly higher, than that of the restaurant.

Image  of the Necco wafer manufacturing facility water tower. Probably doesn't have quite the impact (or the water requirements) of a silicon wafer factory, but it is also hard to imagine life without Necco wafers... (photo by Jill Robidoux)

Zetland argues that pricing water according to market forces of supply and demand would cause prices to rise as shortages approach, and some low-value water users that are unwilling to pay more would reduce their use, thus alleviating the shortage. Those with a higher value product would be willing to pay more. And, as a high-value end user of water, the energy market would presumably be one of those industries willing to pay more in order not to lose its water supply. He points out that this approach of highest value user ignores the necessity of water supplies to sustain the environment, an important benefit of water that should not be overlooked.

The idea to incorporate the finite nature of water into water prices is one theme of Zetland's excellent blog, Aguanomics.

Bottom line for Arizona. Market pricing of water rarely happens because water distribution is usually a monopoly where prices are regulated to not exceed cost of delivery. However, it seems like within a utility, or within a water wholesaler's distribution area, it would be worth considering changes in water pricing to encourage more rational (in the economic sense) distribution.