Water Markets: Potential Solution To Shortage, New Infrastructure May Be Key

November 1, 2017

Market forces govern almost all commodities subject to shortage. Exceptions to this rule include public utilities (although this is slowly changing with the application of deregulated electric grids). This change developed as a response to shortage and inefficiencies of monopolized service providers. In the Southwest United States, a similar shortage and inefficient use governs water use. Areas like California are experiencing tremendous levels of drought with no feasible way to increase supply, while other areas of the country have a surplus.
Water is regulated like a traditional public utility and not sold at true economic cost. Two solutions, which are applied in electric markets, could provide solutions: (1) wheeling; and (2) demand response. Wheeling in electric markets is when power producers sell electricity a Regional Transmission Organization (RTO) which operates as a power bank, and sells this electricity to individual or retail consumers who demand power. Demand response is another concept of electric markets in which water utilities could look for innovation. The concept requires an RTO to determine how much electricity is needed on the grid at any one time, and buys electricity from providers at increasing bid prices until demand is met. This creates an efficient market because no energy is wasted. The concept involves varied prices at peak seasonal and hourly times.
Both these concepts can be applied to water (although not as efficiently since water does not move at the same speeds). Water banks exist, but are not common.

More robust infrastructure such as pipelines throughout the Southwest could create a workable solution for wheeling. Demand Response, may require more coercion, but could function as a seasonal or even crop rotational basis.

The majority of water use in California is used on agriculture, so demand is often correlated to growing seasons. When certain areas are in low irrigation seasons, users could sell their excess water into the bank, and withdraw when their individual needs are higher.
Recently the proposed Cadiz pipeline was granted Bureau of Land Management (BLM) approval. The project would serve as a water bank and a water pipeline across the Mojave Desert to ease California’s water shortage. The project is slated to be built on Cadiz’s own railroad right of way, but faces permitting concerns over a 200-foot stretch passing through state lands. Lawmakers in California are also concerned of the prospect that the pipeline will be used simply to siphon water from desert communities into more economically feasible farmland, thereby harming the eco-system in the Mojave Desert. The project is currently on hold based upon the determination of state permitting, and is likely to face harsh criticism from environmental groups. Regardless, the drought poses grave environmental hazards. Increasing the availability and transportability of water in the state is critical to the future of California’s future.