IN ADDITION TO THE TECHNICAL solutions for meeting our expanding needs for water and energy, there are a host of nontechnical solutions that include policy choices, economics, cultural forces, behavioral changes, and markets. These solutions include investing in research and development (R&D) for energy and water, setting strict performance standards, and designing more functional energy and water markets. Above all, conservation is the most promising path forward.
One important option is to implement policies that support massive investments in water and energy R&D on a scale that makes a real difference. In light of woefully low investments in R&D over the decades for both sectors, a commitment on the scale of a Manhattan Project or Apollo Project for clean energy and water might trigger a substantial breakthrough.
During World War II, the Manhattan Project was a national priority. Significant increases in scientific-industrial-military research led to the development of a nuclear weapon that could end the war. The Manhattan Project at its peak was responsible for about $10 billion per year of R&D funding in the United States, which was a sizable fraction of all R&D in the nation.1 It was an overwhelming diversion and concentration of resources with a singular aim of achieving a breakthrough that would change the world. And it achieved its goals.
A similarly ambitious call to arms for concentrated R&D to achieve an ambitious purpose was with the space race of the 1960s, peaking with the Apollo Project to send men to the moon and back. From 1964 to 1967, space exploration received the lion’s share of funding, with over 60 percent of the total nondefense federal R&D budget for the Apollo Project. The space race was a top national priority, and that investment not only put human beings on the moon but also stimulated progress in a number of technologies like miniature electronics and computing that are still producing economic benefits.
In May 1961, President John F. Kennedy challenged the nation to win the space race in a famous speech before the U.S. Congress: “No single space project in this period will be more impressive to mankind, or more important for the long-range exploration of space; and none will be so difficult or expensive to accomplish.” In response, by 1969, we put humans on the moon and returned them safely to Earth. What most people don’t realize is that in press conferences and campaign speeches, Kennedy made a similar challenge to the one that kicked off the space race, urging the United States to develop desalination technologies. “If we could ever competitively—at a cheap rate—get fresh water from salt water, that would be in the long-range interest of humanity and would really dwarf any other scientific accomplishment.”2 Kennedy understood that improving desalination technologies holds the prospect for raising people out of poverty and improving public health globally. Unfortunately, that challenge failed to spur the nation to action.
Despite Kennedy’s call, water R&D investments are a small fraction of total U.S. R&D spending. They are so small, in fact, that they have not been tracked by the U.S. government, making it difficult to provide firm estimates of total spending for many years. There is no federal Department of Water, and that might be part of the problem. Even though there is a federal Department of Energy, energy R&D investments are also relatively small compared with health, space, and defense research. That phenomenon is ironic, since it can be argued that effective R&D and implementation of new energy systems could reduce our health problems, improve our national security system, and enable our space program. Energy R&D spending peaked in the 1970s in absolute and relative terms at nearly $8 billion of annual investment in response to the two different energy crises.
Spending grew toward the end of the Ford administration and continued through the Carter administration, until it shrank under President Ronald Reagan. The federal energy R&D budgets continued to decline under Presidents George H. W. Bush and Bill Clinton, dropping significantly during the late 1990s when oil prices were very low, energy crises seemed a distant memory, and balancing budgets was a policy priority. Funding held relatively steady (or even increased slightly) at approximately $1 billion annually during President George W. Bush’s first term, though the priorities shifted from alternative fuels and efficiency technologies toward nuclear and fossil fuels production. Funding nearly doubled to $2 billion toward the end of his second term, partly in response to the oil price spikes in 2005 and 2008. Keep in mind that this total funding—$2 billion from federal sources, and if you include all other governmental spending on R&D still less than $4 billion—is less than what one pharmaceutical company would spend on its R&D division.
Under President Barack Obama, energy R&D more than doubled again, exceeding $4 billion annually, as part of the American Recovery and Reinvestment Act and other stimulus provisions that were executed in response to the economic collapse of 2008. Those investments prioritized alternative and domestic energy sources and included significant funding for large projects, often in the form of cash grants and loan guarantees. Whether energy R&D will continue on this path is hard to foresee, but it is a sign that the nation takes its energy problems more seriously now than in the previous decade.
If energy R&D is too small, water R&D is even smaller. Neither desalination nor the larger issue of the nation’s water infrastructure has received much public attention or regular directed federal support. Water R&D has not been a consistent priority, and investment has endured erratic boom and bust cycles. Sheril Kirshenbaum, a highly regarded science writer, captured this phenomenon in a piece we wrote together titled “Another Giant Leap for Mankind.”3 Initially the nation responded to Kennedy’s comments about converting saltwater to freshwater. During the 1960s and 1970s, the U.S. government cumulatively spent over $1 billion (without adjusting for inflation) on desalination R&D alone. The Water Resources Research Act of 1964 led to the creation of the Office of Water Research and Technology in the Department of Interior in 1974 to promote water resources management, and it also helped to establish water research institutes at universities and colleges. Three years later, the Water Research and Conservation Act authorized $40 million for demonstration-scale desalination plants. The following year, the Water Research and Development Act extended funding through 1980.
But the Office of Water Research and Technology did not last. Just eight years after it opened, the Reagan administration abolished it, distributing authority over water programs among a host of agencies and departments, making it extremely difficult to track government R&D spending on water. Because of this low level of funding, it is no surprise that water treatment technologies have evolved so slowly, that water infrastructure leaks so abundantly, and that water quality is at risk from a variety of societal activities and policy actions. Despite decades of building the world’s greatest innovation and R&D system, U.S. progress in water innovations seems halting and stunted, especially when compared with the advances that occurred in parallel for information technology, energy, health care, or just about any other sector critical to society.
As Kirshenbaum likes to say, “Just imagine what we would have accomplished by now had we devoted the same attention to looking for water on Earth as looking for water on the moon.” Even the youngest Americans can quote Neil Armstrong, but it is hard to imagine children today recounting the name or accomplishment of a water scientist’s great laboratory triumph or the name of the British doctor who identified cholera as a water-quality problem. The article Kirshenbaum and I wrote said: “We celebrate the space program as one giant leap for mankind. Now it’s time to take a second great leap by doing something even greater for humanity: investing in water research.”
Beyond R&D, there are other policy approaches to consider. One policy option is to develop a new clean energy standard that incorporates water consumption as well as emissions. To date, most clean energy standards for pollution from power plant smokestacks and automobile tailpipes have focused on emissions only. Those policies set standards for emissions rates, using rates like grams, pounds, or tons of emissions per megawatt-hour of electricity generated, or grams emitted per mile of travel for cars. They also use volumetric fractions in parts-per-million, or ppm, of pollution. For automobiles, recent fuel economy standards, implemented in miles per gallon, were developed using emissions standards of grams of carbon dioxide emitted per mile traveled.
To comply with the regulations, sophisticated scrubbers have been developed to remove pollutants such as nitrogen oxides and sulfur oxides from power plant smokestacks. Power plants fueled by nuclear, solar energy, and wind turbines meet the standards without scrubbing. As new regulations for mercury, particulate matter, and carbon dioxide are implemented, additional scrubbers might need to be installed for conventional fossil plants.
Keep in mind, however, that the scrubbers can be water intensive, as are the cooling systems for nuclear power plants. By making air emissions comply with stricter standards, the power sector might become more water intensive from the additional scrubbers or from fuel switching to nuclear power. In this instance, one environmental objective—cleaner air—can conflict with another environmental objective—reduced water use.
Adding a water standard to the clean energy standard—that is, requiring production to be done with water consumption below a particular threshold—will help mitigate this problem. But, doing so would exclude traditional nuclear plants, coal plants with water-intensive scrubbing systems, and concentrating solar thermal plants. Creating a new clean energy standard that includes a water standard along with an emissions standard might lead to a sweet spot of power plants that are both carbon-clean and water-lean. For an integrated clean energy standard, the list of “clean” power plants is essentially reduced to small nuclear plants, integrated gasification combined cycle coal plants with dry cooling, natural gas combined cycle plants, natural gas combustion turbines, solar photovoltaic cells, and wind.
Beyond policies, the dysfunctional markets for energy and water also need to be refined. In the current paradigm, many prices for energy are set by central regulators. Such fixed-pricing schemes create the preposterous situation where the price for electricity is the same for many communities in the afternoon in August as the early morning in March, even though the demand for electricity is much different and the supply is different, too. The situation is similar for water in that prices are usually fixed and do not change, despite the fact that water demand is usually higher in the summer when water supply from precipitation is usually lower. To make matters worse, as noted above, the water is often free.
The smart technologies described earlier enable a more efficient market, for which the prices for power reflect up-to-date assessments of demand and supply. Gasoline prices go up in the summer when demand is high or after supply disruptions when supply is low. Electricity prices should do the same. With the advent of smarter technologies, markets can move to a design that has more fidelity. Those technologies could track movements in supply or demand that are updated every second and are shared with consumers so that price signals could inform behavior. That is part of the appeal of the smart grid.
If we think the power markets are dysfunctional, the water markets are much more backward. While energy systems have poorly resolved metering and fixed prices, in many places water systems have not had meters at all and the water is free or fixed at a falsely low price. Yet the same approach of improving markets that would help the power system could also be used for water.
Because many agricultural and industrial customers bought their water rights a long time ago, their prices for water are often very low or highly subsidized from government projects such as western dams. For many agricultural operations, which use tremendous volumes of water, it is cheaper to waste water than to conserve it. Because water has such a low price, there is essentially no cost for wasting it. By contrast, conservation is expensive because it often requires investment in capital-intensive equipment that is more water efficient. That means it’s free to throw the water away, but saving it would cost these producers millions of dollars. Heartbreaking.
Some petrochemical complexes in Texas have a similar situation, with take-or-pay contracts that discourage conservation. As the water is prepaid, plant operators have an incentive to use all the water that was purchased. If they do not use it one year, then they might forfeit the excess water the following year, creating a perverse incentive to avoid conserving water and to use as much as possible.
Another factor to consider is that water and energy are both too cheap. They are priced at levels far below their true value. In particular, the prices for energy and water in the United States are cheaper than in just about every other developed country. The low prices discourage conservation because they send a market signal that the resource is plentiful and not worth saving. That price disparity is one of the reasons Europeans and Japanese consume lower amounts of energy and water per capita. Unfortunately, low prices in the United States make it harder for people to realize the true worth of water and energy.
Also, in many places, water bills are mostly computed as cost recovery for the capital expenses of the infrastructure. Most bills require consumers to pay for the pipes and pumps, but do not always charge them for the water. Or if they charge for the water, the price per gallon is very low. In places like Sacramento, California, for many years homes did not have water meters, as there was not a charge per gallon. Essentially, consumers received a fixed water bill that did not change no matter how much water they consumed. In Ireland, water meter installations and the concept that people should pay for water led to widespread protests and discontent.
Such fixed prices for either energy or water suggest to consumers that they should consume as much as they want. At the same time, another phenomenon kicks in when fixed prices every month are high and the marginal cost for the water or electricity is low or free: people want to consume more energy and water because they want to get their money’s worth for the fixed price. If they pay $40 each month in their water bill before they use any water, they feel like they need to consume a lot of water to justify the expense.
Another problem occurs when consumers get volumetric discounts: the more they use, the cheaper it is. This kind of price system is not that different from buying groceries in bulk as a way to save money. The price reduction with increasing volumes is an honest reflection of how the costs drop for the provider with economies of scale. But that structure encourages more consumption and discourages conservation as consumers chase the better deal. For constrained resources—such as water and fossil fuels—the consequences of encouraging consumption are felt societywide. At the same time, as noted above, just increasing rates to encourage conservation can price poor people out of the market, denying them economic opportunity, comfort, and in some cases good health.
Another option would be a high price for both the fixed charges and the volumetric usage to discourage profligate consumption. High prices will reduce consumption, but they pose two different problems. First, the high prices will reduce access to energy and water for poor people who need it for economic opportunity and for many basic functions such as heating, cooking, cleaning, and drinking. There is a whole swath of the population for whom high prices would mean that water and electricity would be cut off, which would be bad from a humanitarian perspective. Second, high prices for each marginal gallon of water or kilowatt-hour of electricity sold give the utility an incentive to sell as much water and energy as possible, which might work against conservation. Many people have proposed decoupling revenues from volumetric sales as a way to get utilities interested in conservation. The way to do that is to raise the fixed prices and reduce the marginal prices for consumers’ bills. That way no matter how much the customer consumes, the utility collects the same amount of revenue. But that brings us back to the first problem noted above: fixed bills that do not change no matter how much the customer consumes send an unclear signal about resource scarcity and abundance.
So what is good for encouraging conservation by the consumers—low fixed prices for the infrastructure and high prices for energy and water—is different than what encourages conservation by the utility—high fixed revenues with low marginal revenues. A common way to solve this problem is for rate setters to split the difference for the fixed prices and rates.
In parallel, there is a tension between the human right for water, which reflects social justice priorities, and the value of water as a commodity. Advanced markets for water would enable the more efficient allocation of the resource based on economic value. Heading that direction would help avoid the problems of using a lot of water for growing low-value crops or wasting water because using it is cheaper than conserving it. So proper pricing and market efficiency can offer a lot of improvements.
At the same time, there is a concern that in the process of properly valuing water, markets would make clean, accessible water a luxury good that is too expensive for many people. Although raising the price of water is generally a good thing, as water is underpriced today, the fears that markets would overlook the value of water as a staple are widespread.
Thus, there is a conflict between the social justice value of water as a right versus the market allocation value of water as a commodity. One way to accommodate these different angles is to make the quantity of water available for daily living needs—washing, cooking, eating—very cheap or free, after which the prices for luxury uses—watering lawns, washing cars—go up.
This system is known as inverted block pricing. The first increment of electricity and water—say the first 500 kilowatt-hours of electricity consumption over a month and the first 2,000 gallons of drinking water—are relatively cheap. That way people who are using the electricity and water for basic functions such as refrigeration, lighting, heating, drinking, and washing can afford to get the resources they need at a reasonable cost. Above that, different price tiers kick in that get progressively steeper. The price structure is inverted: instead of rates dropping as consumption increases, the rates increase. That structure has been implemented for water in Irvine, California, and El Paso, Texas, and for electricity in many locations.
In El Paso, an arid part of the country, where one of the world’s mighty rivers, the Rio Grande, runs dry many months of the year, the first tier of water use is set as the average of the three winter months. That first tier is the cheapest, and any use above that tier is priced at a higher level. This approach presumes that users are not irrigating in those months, and thus the water use over that time period is strictly for indoor use. The rate is adjusted each year for each water meter, which helps update the baseline when the number of household occupants changes.
Presumably the first tier of rates is for basic functions that are necessary for modern society, whereas the higher rates are for the consumption tied to unnecessary functions. The rationale is that poor households consume less energy and water, and rich households consume more. The expectation is that inverted block pricing would not unduly increase the burden on people already struggling with poverty.
This expectation is not always true, however: many poor households were very high consumers of electricity. This phenomenon occurs for a variety of reasons. Many poor households have a greater number of people living in the home, for example. It is not unusual for three generations to live together and for family sizes to be much larger than for the wealthier families who have fewer children and whose grandparents live elsewhere. Because consumption tracks roughly with population, these poor, large households consume a lot. At the same time, poor families often could not afford energy-efficient air conditioners, double-pane windows, or extra attic insulation. Consequently, their homes were leakier and more difficult to keep cool or warm, also driving up their electricity consumption.
In contrast, wealthier households could afford many of the systems and components that drive down electricity consumption. Solar panels, green building designs, efficient air conditioners, and other energy-saving items all conserve energy but cost a lot of money. So, ironically, some of the city’s smallest electricity consumers were among the richest households. Overall, that means there might be some surprises as the inverted block pricing gets implemented: it will encourage high-use consumers to try harder at conservation, but it might also accidentally increase the burden on households that already cannot afford the equipment they need for conservation in the first place. It is not clear if the same phenomenon happens with water. Generally speaking, water use tracks affluence more closely, as water use correlates with yard size and how expensive the neighborhood is, which translates into pressure from neighbors to irrigate lawns.
When adjusting prices, whether by markets or regulated price tiers, it is clear that prices need to go up. One of the reasons that energy and water prices in the United States are so low is because their externalities are not figured into the transaction. Externalities are costs that are borne by the consumer, but in a method that is external to the market.
There are several types of externalities. National security externalities are related to protecting the imports of petroleum with the U.S. military. In addition, there are environmental externalities related to energy consumption from air pollution, water use, and ecosystem impacts. These costs are associated with energy and water use, but are not paid through our utility bills. Rather, we pay for them in our tax bills, health care premiums, or in the economic loss related to shortened lifespans, poor health, and degraded biodiversity.
The national security costs of petroleum alone work out to be $0.201.00 per gallon of gasoline.4 In addition there are the environmental impacts. In a landmark study, the National Academies of Sciences and Engineering produced a report entitled “The Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use,” which tried to put a price on the environmental externalities associated with energy consumption with a focus on the power sector.5 Looking at air pollution, the report’s results valued the damage done by power plants. This damage included premature mortality and morbidity, reduced grain crop and timber yields, and other monetized damages. Premature mortality had the biggest impact. Their analysis determined that coal-fired power plants cause anywhere from 0.5 to 12 cents per kilowatt-hour of damage from sulfur oxides, nitrogen oxides, and particulate matter emissions. The mean damage by coal plants is 3.2 cents per kilowatt-hour, which is very similar to the wholesale price. Each kilowatt-hour of electricity from a coal-fired power plant is worth about 2 to 4 cents, which we remit in our utility bill at a retail rate of approximately 10 to 12 cents after including the infrastructure and markups. That means if we include the 3.2 cents of damage to our lungs and environment, the full cost is about twice what the wholesale markets imply.
We pay for the latter parts through elevated insurance premiums and degraded economic output. Because their costs are borne outside of the transaction—that is, they are not listed on the utility bills we receive—they are considered market externalities. And, by the way, those estimates for monetized damages do not include the impacts from greenhouse gas emissions, water use, or land disturbance, all of which might drive the hidden costs—the externalities—higher.
That report was followed up by a subsequent study performed at Harvard. Researchers concluded after a more comprehensive look at the externalities of coal, including land disturbance and a few other factors left out by the National Academies, that the life-cycle impacts of coal are anywhere from 9 to 27 cents per kilowatt-hour.6 We pay these costs through lost economic activity in other sectors, higher tax bills to our governments to pay for environmental cleanup, and higher health care premiums. And, these costs are much higher than the subsidies offered to alternatives like renewable energy.
For the energy and water markets to function more effectively, these costs need to be embedded in the price signals. Once full-cost accounting is implemented, then it is expected that the markets can settle out toward a more efficient, cleaner solution without the hidden costs. However, as long as subsides, which distort the markets, are in place, and as long as the externalities, which also distort the markets, are not priced into the system, then the markets will produce outcomes that are inconsistent with long-term goals for environmental sustainability.
One possible solution for the markets includes liberalization. An updated market design, where the prices for water and energy include full-cost accounting, adjust according to supply and demand, and include externalities, offers the opportunity for some additional efficiencies and environmental protection. By including the environmental externalities, it will be expensive to pollute and there will be an incentive to be clean. Updated markets also open up the prospects for cross-sectoral water deals that are good for energy and water. It is not unusual today for the agricultural sector to use 80 percent of the water in a region to generate less than 1 percent of the local economic output. For example, in South Texas a significant amount of water is used to grow alfalfa, a form of cattle feed, and other low-value crops. California endures a similar phenomenon.
That means in today’s typical situation, the agricultural sector has a lot of water, but not a lot of money. Then along comes the energy sector as a new marginal water user. In this case, they have a lot of money, but do not have a lot of water. And, because they are the newest water user, they often provoke a lot of resistance from local communities despite the fact that their water needs are usually much lower than the agricultural sector’s. Hydraulic fracturing holds much promise to increase local employment, taxes, and economic activity dramatically, but it requires significant volumes of water to do so. If the producers cannot get access to water, then their production might be curtailed.
While this competition for water resources can create conflict, it also has the potential to use efficient markets to reallocate resources. In particular, since the energy sector is rich and wants water and the agricultural sector is poor and has water, they could make a deal: they could trade money for water. This type of exchange is pretty obvious and is what we do for many commodities in other parts of the world. For the energy producers, the water is highly valuable: they can produce much greater economic value per gallon of water than the farming operations. That means they can pay a higher price for water than prevailing rates. At the same time, as noted earlier, farmers cannot afford to conserve water because the water is cheap and the equipment they need is too expensive.
If the market is structured the right way, then the energy producers can simply buy or lease the water from agricultural users. At the right price, the amount of money that is paid to the farming operations gives them the capital they need to invest in water-efficient irrigation equipment.7 In this case, the energy sector essentially pays for new irrigation systems on the farms. Once they have that water-efficient equipment in place, farmers should still be able to produce their agricultural goods, but with much less water. This is “more crop per drop” coming to fruition. This water efficiency means farmers would have excess water available to sell to the energy producers in exchange for the capital investments. And, the potential efficiency gains on the farm are often so large that there might even be additional water leftover for the streams and basins. Just by putting a higher price on water and liberalizing the markets, the energy sector, which normally is a source of frustration as a marginal water user, becomes a catalyst for investments that increase the utility and availability of water overall. This scheme of using outside investment to achieve better management of water rights through efficiency, yielding additional water for selling or leasing, is already under way. Private equity groups are buying up farming operations in western states to secure the water rights. Then they invest in efficiency, keep the water they need for farming, and sell the rest.
The Australians and the French have already pushed their markets ahead. While there are fair concerns that water markets would make water too expensive and out of reach for poor people, that phenomenon hasn’t unfolded in France, where water demand has been met by private suppliers for over a century. Leave it to the socialist French to deploy water markets with high levels of private-sector participation while the capitalistic Americans frequently use centrally regulated markets and government monopolies. In fact, French water companies have created recognizable global brands in the process: Perrier, Evian, and Vittel are all available in bottles in U.S. grocery stores. The Australian situation is more severe, as massive drought triggered a major rejiggering of their water markets. By reallocating water and putting a price on it, Australians are in position to weather the next drought more successfully. Placing a price on water makes people value it more.
Given all these idiosyncrasies of the markets, it’s a sign that there is much room for improvement. Setting a real price on water and energy might solve many of these dysfunctionalities. Another major market adjustment that could be quite beneficial is a widespread shift from cost-based capitalism to value-based capitalism. Another way to describe it is a shift from manufacturing to services.
In today’s utility markets, the prices are based on costs of service—it is cost-based capitalism. The utilities figure out what it costs to build a large-scale electricity or water system, amortize that amount over a twenty- to forty-year period, add in a predetermined profit—10 percent is typical—then they charge the ratepayers an amount that will recover those costs. This kind of cost-plus mentality has been the driving force for regulated monopoly utilities for a century. Their goal is not explicitly to maximize profit, but seeking that goal is hard to resist.
One way to think about that setup is that utilities are not really in the business of providing electricity, water, or natural gas; rather they are in the business of spending money on large projects, for which they slowly charge ratepayers. Selling the energy or water is sort of a by-product or an afterthought. And because most utilities have volumetric sales, the utilities have an incentive to sell more: the more they sell, the more revenue they make and the more quickly they can pay off their capital investments. Once the power plants or water systems are paid off, the utilities earn higher profits.
This whole scheme gives utilities an incentive to spend as much money as possible to increase costs and to sell as much product as possible to increase revenues to cover those costs. These factors combine to push utilities toward investing in larger, capital-intensive projects and to encourage consumption. These large projects create a capital “lock-in” effect that discourages conservation or newer, smaller, distributed technologies.
Another approach is to shift toward value-based capitalism. In value-based capitalism, companies can charge based on the value of the service they provide rather than the cost of the capital they invested. Doing so gives the providers an incentive for reducing investments and consumption as a way to increase profit margins.
Rather than selling water and electricity, the utilities could sell water services and electrical services. Instead of selling water for dishwashers, the water utility could sell a dishwashing service charged by the number of loads washed. Instead of selling electricity for lighting, the electrical utility could sell lighting services sold by the number of lumens of lighting. Instead of selling electricity for water heaters, the electrical utility could sell electrically heated water valued by the number of gallons of hot water.
Today, the utility sells kilowatt-hours of electricity and the customer converts it in the home to lumens of lighting. Most incandescent lightbulbs have a 5 percent efficiency, which means for every one hundred watts of power coming in the home for an incandescent lightbulb, only five watts is emitted as useful light, with the other ninety-five watts released as waste heat. Today’s utility likes it when customers have inefficient incandescent lightbulbs because that drives up consumption, increasing revenue.
Switching toward a service-based model opens the door for significant savings because the utility’s incentive switches from encouraging its customers to increase consumption to encouraging conservation instead. If the utility sells lighting services, measured in how many lumens of actual lighting is delivered, instead of electricity measured in kilowatt-hours, then the utility would have an incentive to install the most efficient lightbulbs possible. If the utility owned the lightbulbs and sold lumens, then they would prefer an LED system with 20 percent efficiency instead of the 5 percent efficiency of incandescents. To deliver the same five watts of lighting, only twenty-five watts of electrical power would be needed, which is a significant savings compared with the one hundred watts that would have been needed for the older lightbulb.
While customers could make this switch on their own, there are two typical barriers for doing so.8 The energy-efficient appliances usually cost more money to purchase and install, although they save money in the long run because they consume fewer resources. The savings might be attractive but out of reach if homeowners do not have the money to pay up front for the installation. Also, consumers often do not have enough knowledge or confidence in the newer efficient options. By contrast, the utilities have both the expertise to know which options are available and the money that is necessary to install the more expensive items.
For the cost-based model, customers use inefficient lightbulbs and the utility’s money and expertise sit on the sidelines. For the service-based model, utilities want their customers to use the efficient LEDs. By switching the incentive, the utilities become a powerful partner for upgrading equipment in homes and buildings. The utilities can pay to install the better devices, and then collect money on the savings. Doing so aligns the utility’s profit incentives with conservation: the more efficient the devices, the higher the profit margins. Consequently, the customer, the utility, and the environment would all benefit.
This transition can be illustrated with two examples: a photocopier manufacturer and a car paint maker. For a manufacturer of photocopiers, the goal is to sell as many copiers as possible. As with all manufacturers, the perverse incentive is to make machinery that eventually breaks down, so customers need to buy new equipment. However, by switching from photocopier manufacturing to providing document services, a company can move from cost-based capitalism to value-based capitalism. For the new model, the company would make money based on delivered services that their equipment provided—such as copies made or documents scanned—rather than simply selling the equipment itself. For the new business model, it is in the company’s interest to manufacture equipment that lasts as long as possible. By switching from a cost-based manufacturing model to a value-based service model, the company’s incentive changes from consuming resources for manufacturing to extending the utility of those resources, by making their machines last as long as possible.
Car paint manufacturers could do something similar. In the cost-based volumetric sales model, they want to sell as much paint as possible to the automakers. When automakers are sloppy and spill paint on the factory floor, that is good for the paint company’s business and gives them a profit motive to hope that the car manufacturers are wasteful. But, instead of selling paint, the company could sell painted cars. By being integrated with the manufacturers’ assembly lines, the paint company could make the paint and also apply it. Doing so leverages their expertise at how to most efficiently apply the coatings. And, in the service model, they have an incentive to make sure that not a single drop of paint is wasted. Before, every bit of wasted paint was good for sales, but with the paint company in charge of applying the paint, every drop of wasted paint means smaller profit margins for them.
This arrangement is similar to what could happen with utilities: in the cost-based model, they want us to be wasteful and buy as much electricity, natural gas, and water as possible. But in the services model, if they use their expertise they could implement more efficiency to increase their profit margins.
Even better would be an integrated service utility. In many locations the electrical, water, and gas utilities are separate. However, the better solution might require cooperation among all three. Take water heating, for example. The electric utility that shifts to a service model would help consumers save energy for their water heating needs. They could get a much more efficient electric water heater that is better insulated and has a larger tank. The better insulation will save the consumer money because less heat is lost to the atmosphere, and the larger tank means the water heater is less likely to be on during peak hours, which would help the utility with grid management and help the consumer avoid peak-time prices. Because these better water heaters are more expensive than conventional water heaters, the cheaper, less efficient, smaller systems are usually installed instead. This case is the typical consequence of what happens when the person who pays for the installation of the water heater—usually the home builder—is different from the person who pays for the operation of the water heater, which is the homeowner. Reducing operational costs for the homeowner requires the home builder to spend more money on the appliance. When they are building a custom home, owners can easily specify to the builder that they want a better heating system, but most homes are not custom built. Overcoming the cost barrier of the more expensive and efficient system is one of the main advantages of having a utility as a partner.
With the electric utility as a partner, the consumer could have a more efficient electric water heater installed. But even better would be an efficient natural gas water heater, which can avoid the losses at the power plant. Although an electric utility with a service model could implement more efficient electric water heaters as part of its business plan, it is unlikely to recommend a natural gas water heater, because that would cut into their service. An integrated electric and gas utility, however, could do it. Best of all, an integrated electric, gas, and water utility might recommend a solar water heater with gas backup and double-redundancy with electric backup to the gas backup. That approach would save even more gas and electricity while still making the utility money.
The switch from cost-based capitalism (the manufacturing model) to value-based capitalism (the service model) could be very profitable. To use a rough analogy from the world of computers, most computer makers operate on the cost-based model: they strive to make the world’s most sophisticated supply chains as a way to reduce costs. After they determine the cost to customize, manufacture, and deliver their computers, they add a small markup for profit and determine the sales price. In contrast, Apple operates on a value-based model. Rather than focusing on cost, they strive to improve the user experience for the consumer. Then they figure out how much their products are worth to consumers, set the price at that amount, and then strive to reduce their manufacturing costs as a way to improve price margins.
For this simple example, the service model appears to be much more profitable. Apple’s profit margins are much higher, and sales outputs per square foot of retail space are the highest in the world (at more than $6,000 per square foot, about double that of luxury retailer Tiffany).9 Apple often competes to be the world’s most profitable and valuable company, serving as an example of the profit potential for value-based approaches to business. If the same possibilities can be applied to the world of energy and water, then profit margins will increase for those sectors because of efficiency and conservation, rather than in spite of it.
At their core, these nontechnical solutions aim to address the following policy and ethical conundrums that our society must strive to address for the energy-water nexus. Some of these conundrums and questions are exacerbated by climate change.
One of those is the tension between availability and price, and the human right to water and energy versus the commodity value of water and energy. How should energy and water planners prioritize ensuring some minimum availability at a price that is affordable, while also meeting the needs to be environmentally and economically sustainable? Is there a way to use markets to increase the availability of these resources and to foster a culture of conservation without pricing people out of the market? If energy or water is too expensive, people cannot afford it, putting their life, liberty, and economic interests at stake. If the resources are too cheap, then society wastes them, draining reserves and degrading the environment. Are energy and water a human right, one that everyone deserves guaranteed access to, or are they commodities whose availability, price, quantity, and quality should be determined by the markets? Can we combine both concepts with some minimum threshold of the human right to water and energy, above which they are commodities? Who owns the water: nature or people? All humans equally, or individuals based on their wealth or position of authority?
What about balancing the struggle of quantity and quality? How do we ensure that energy and water are available at the right quantity without compromising the quality? For decades, “dilution is the solution” was a mantra to improving water quality. By diluting water with additional quantities, the polluted or degraded water would improve. But, increasing the quantity takes energy and money, which has its own impacts on water quality from secondary pollution. Do we need more water and energy? Or simply cleaner water and energy?
Which societal structures—privatized or socialized—are best suited to meeting our energy and water needs in the long term? Socialized structures with centrally owned water systems, which is what the United States has used for a century, or private markets that can raise the capital necessary for investments and innovation? Socialized systems have the advantage of pooling resources to the benefit of society with less risk of making water too expensive for the poor. But socialized systems innovate slowly and are clumsy at best. Privatized systems are more nimble and advanced, but raise the specter of concern about prices going too high for most people.
All of these tensions will only worsen due to our shifting climate, which will heighten intergenerational and intercontinental disparity. To avoid the accumulating exacerbation of these problems, we must change today. It’s hard enough to clean up our own backyards for our own benefit; do we have the discipline to clean up our yard for the benefit of people who live around the world and people who haven’t been born yet? Making matters trickier, it is the rich part of the world that consumes the most energy and emits the most greenhouse gases. That means it is the rich who must change for the benefit of the poor. If recent political alignments are any indicator, this is a tough proposition.
Despite decades of calls for using less freshwater, this conservation measure hasn’t taken root everywhere. Generally, using a professional car wash can dramatically reduce the amount of water required per car. While a normal citizen might use 150 gallons of water to wash a car at home, a professional service with reclamation uses less water to wash a car than is used for a shower.10 Unfortunately, not every car wash follows this approach.
One of my favorite barbecue restaurants in Austin is combined with a gasoline station. They have a car wash on-site as part of their mix of services and advertise their use of 100 percent nonrecycled hot water. They proudly proclaim, “All water is fresh—we never reuse dirty water.” This company considers it a selling point not to recycle its resources. What is particularly striking is that this car wash is in the middle of a drought-prone state. The good news is that not every car wash has that attitude. Another car wash in my neighborhood brags on its website about its water conservation programs. This one proudly advertises that it has been using reclaimed water since 2006 as a way to reduce water needs per car.
A car wash in Texas advertises its use of hot water and its decision not to recycle it. [Photo by Jeffrey M. Phillips, November 2014]
Overall, changing our attitudes will be the shift we need to make. We need to change the way we think about energy and water. All of these problems and all of these solutions—technical and nontechnical—point to an obvious starting point: conservation. The good news of the energy-water nexus is that water conservation saves energy and energy conservation saves water. Conservation is a cross-cutting solution, but one that hasn’t been fully adopted, despite advocacy going as far back as the 1960s.
Thankfully, younger generations are already there. I see it with my college students who use the same water bottle for a year, take the bus to school, and join ridesharing programs. Even younger—and more promising—are schoolchildren.
A stamp encouraging water conservation from 1960. [United States Postal Service, © Can Stock Photo Inc./AlexanderZam]
When my daughter was seven years old, we had a nightly ritual of brushing our teeth together. We would turn on the faucet to wet our toothbrushes, turn it off while we brushed to save water, then turn it back on again to rinse. One night I didn’t turn the faucet off quickly enough to meet her satisfaction. She glared at me, turned the faucet off abruptly, then told me adamantly: “Turn off the water, Daddy. The scientists need time.”
I was dumbstruck. Her statement summed it up nicely. Conservation doesn’t solve all of our problems—it’s hard to light a lightbulb with conservation, for example—but it sure does buy us some badly needed time. Scientists can use that time to invent the technologies we need, and society can use that time to implement a paradigm shift.
Conservation is the obvious solution. It’s the critical starting point that buys us time. It is also one of the few solutions that works on a very small scale and a very large scale. And there are many ways to make a huge impact. Turning off the faucet while brushing teeth is one of those simple conservation acts that cost nothing—they save money—though in all honesty, that action saves very little water. But every little bit helps. If we all do it, then it will save billions of gallons cumulatively.
There are even better opportunities. If we really want to save water, we shouldn’t plant thirsty lawns that require water to grow and gasoline to mow, and we should change our entire approach to irrigated agriculture. If we want to save energy, we need better and smarter power plants, cities, and vehicles. We should stop leaks of energy and water, install water-efficient and energy-efficient technologies, update our markets, and shift our mindsets. When we start thinking about the world with the clarity of my seven-year-old daughter, then we will be well on our way toward our destination: a cleaner, more prosperous, and more sustainable world.
