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California isnt running out of water. It’s running out of CHEAP water.

Witnesses to the ongoing water crisis in California has heard some pretty dire predictions about the state’s future.

The facts are California isn’t running out of water. It’s running out of cheap water. Drought damage is estimated as $2.2 billion, significant, yes, but not the “end of growth” for California’s $2.2 trillion economy. Businesses, however, have the problem that the price of water jeopardizes their water security. Business needs to be able to ‘crystal ball’ the issue but unfortunately, slow policy response and inconsistent price signals slow adaptation and innovation.

The problem is metrics.
How do you measure water? Since agriculture gulps the majority of the water, (around 80%), the attention is naturally focused on this sector. Without good metrics, the conversation drifts to esoteric metrics such as “gallon per nut” (for almonds) to compare almonds and alfalfa. These two occupy similar land acreage in the state.

An acre of almonds consumes about 1,140 kgal of water per year while an acre of alfalfa consumes about 30% more. But there are real economic differences: Almonds generate about $6,000 of revenue per acre per year, compared to alfalfa’s $1,000. Therefore, the economic value of almonds is about $5.3 per kgal of water and alfalfa is only about $0.7 per kgal – almonds are eight times more valuable than alfalfa per unit of water.

There is even a more basic issue. Water is measured (and charged for) by volume. But the value of a gallon of water is highly dependent on location. In California, the difference is extreme. The typical difference in annual total rainfall between northern and southern California is fifty-fold – 100 and 2 inches, respectively. It becomes obvious that a gallon of water in the north has different value than the same gallon of water in the south, but how can this be quantified?

The most logical proxy to use to sort out the geographic and economic differences in the value of water is energy. There’s no shortage in water for those who are willing to pay for the energy to treat, convey, distribute and collect it after use. This is why California is not running out of water. It already ran out of cheap water. But water needs to be regulated to make sure that withdrawal does not lead to depletion, and is priced in a way that captures the value of the energy and environmental externalities.

When we price water as energy, we gain visibility. The energy intensity of water in California can be as low as 2 kWh per kgal or as high as 37 kWh/kgal (including desalination and conveyance). Assuming an electricity price of $0.15/kWh (to create a “value of water” benchmark), the energy price of water will range between about $0.3 per kgal and $6 per kgal. Almond farmers can easily pay for the low-end (which is less than 10% of resulting crop value), which is what they have been doing until recently. They cannot pay for the high end. Alfalfa farmers can pay for neither, and the popularity of the crop in the state depends on the fact that the state’s byzantine system of water rights means that water can be virtually free for some agricultural users. In some locations, however, today’s drought prices are as much as $3 per kgal and driving an outcry among farmers. In the absence of clear and consistent water pricing, econometrics that use energy as a proxy can provide decision makers with visibility into the value of water.

The Israeli experience seems relevant.  Israel is like a “miniature California”: It is 60% desert, had a seven-year drought between 2004 and 2010 and the driest winter on record in 2013-2014. It has one big surface water reservoir (the Sea of Galilee) and ground water aquifers that need to be protected, and relies on desalination plants for additional water. Fresh water is expensive, so farmers minimize use and when possible use brackish water. Even so, agriculture is 2.4% of GDP (compared to 2% in California) – Israel even exports carrots to Russia. Like California, it’s an entrepreneurial hub, and there the price of water helps drive thriving water innovation: Promising start-ups include Desalitech, which builds improved reverse osmosis systems that farmers can use.

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