Why only focusing on water’s current cost is a mistake
We increasingly hear about the disconnect between the cost and value of water. This is a real issue as all too often the cost of water is used in decision-making for investing in water projects in the areas of efficiency and reuse and recycling.
This approach can lead to short-sighted decisions in addressing water-related business risks. Simply put, the value of water exceeds its cost. Companies should understand the value of water to address long-term, water-related risks.
There are several key principles in understanding the economic value of water and the costs associated with provisioning water. The cost of water consists of both direct and indirect costs. The value of water is derived from the use of water and affected by factors such as quality and the reliability of supply.
A few definitions are provided below for context from “Water as a Social and Economic Good: How to Put Principle into Practice.”
• Full supply cost: The full supply cost includes the costs associated with the supply of water to a consumer without consideration of the externalities nor alternative uses of water. Full supply costs consist of operation and maintenance costs and capital costs.
• Full economic cost: The sum of the full supply cost and the opportunity cost associated with the alternative use of the same water resource and the economic externalities imposed upon others due to the consumption of water by a specific user.
• Value of water: The value of water depends on the use and user. Components are economic value and intrinsic value (such as stewardship) of water.
• Other issues for consideration include the effects of reliability of water supply on cost and value of water.
Often companies only consider the current cost of water without factoring in how water is used (value of water) and what a loss of water would mean to their business operations.
Water-related risks are typically framed as: physical risks (not having the volume and quality when and where it is needed); regulatory risks (changes in public policy, regulations and costs); and reputational risks (stakeholders’ view of how a company manages water).
By considering and quantifying these risk dimensions, companies can determine business value at risk and, in turn, devise a strategy to mitigate these risks. This strategy can include investment in technologies to increase water efficiency and reuse, as well as watershed level efforts, such as wetlands protection and water storage.
As part of this evaluation of business value at risk, companies also can build in an internal (shadow) cost for water. This internal cost can be developed by considering current local cost of water increased to reflect local scarcity conditions.
Increasingly companies are moving from water scarcity mapping to developing a deeper understanding of potential business impacts as a way to build and implement a water stewardship strategy. This water risk evaluation is also being built into enterprise-wide risk management programs.
By valuing water, companies can be in a better position to understand potential impacts to their business across the value chain and develop strategies to mitigate water-related risk.
Merely looking at the current cost for water may not capture the complete water risk picture for your company.