Alternative Energy: The Economics and Ethics of Water

While the deluge of debates about energy policies has passed with the election, questions about Alternative Energy sources remain – particularly for investors. Energy is a term that encompasses a broad range of resources for generating power beyond the traditional sources of gas, oil, coal and hydro.

Three of these “non-traditional” sources – solar, wind and water – gather most of the attention because they are ubiquitous, sustainable and free. As we consider alternative energy from an investment perspective, it is important to consider both the economic and ethical implications that energy sources such as water carry.

Fresh and salt water comprise two general types of water, and each has its own set of challenges and opportunities. In the course of our Investment Strategy Team’s research, we have concluded that salt water presents more risks than opportunities compared to fresh water. In other words, there are more return opportunities for private investors in fresh water, and the risks associated with salt water may be greater across a broad spectrum of areas.

Economic opportunities in each of these areas can be clearly defined by expected returns, the probability of achieving those returns and their volatility. The ethical issues associated with water are much softer, but they are generally categorized in one of several ways: moral obligations, disputes, social needs, cultural impact and ecological impact. Most often these issues become constraints rather than enhancers of returns and, for investment analysis, are usually treated as a risk.

Salt Water:  Issues and Opportunities

After examining opportunities associated with salt water, we have concluded that there are no significant investment opportunities worth pursuing at this time. Most of the investments are large and meet social needs such as desalination or are in the experimental stage for sustainable energy development, such as offshore wind turbines or machines to capture the energy from wave and tidal action. Generally, these are only economically viable with government subsidy.

Many of the risks in salt-water investments are associated with the ethical considerations that revolve around environmental or disputed uses. Environmental concerns include rising sea levels that impact both weather and coastal development, melting ice flows that tend to impact climate, damage to ecosystems from sewage, sod and irrigation runoff and heating from nuclear reactors (although there may be benefits here to fishing grounds). It is ironic that many environmental risks occur not because of the negative consequences (i.e. the increasing acidity in salt water) but because of the rapidity of the changes. As one marine biologist from Bigelow Labs in Maine explained, “A sustainable environment is built on change but not easily adaptable to rapid change.”

Other ethical risks revolve around disputes that arise from cultural history or social needs. Today, one of the most prominent of these disputes is in the South China Sea where several countries are making claims to wide swaths of the ocean. In today’s world, these disputes no longer remain local but become significant global risks.

Fresh Water Issues and Opportunities

The story for fresh water is alarming today, and the outlook dire for tomorrow. While seventy percent of the earth’s surface is covered in water, over 97% is salt water. Of the 3% left, less than 2% is available to provide for the needs of six billion people. The situation is alarming, because water is not evenly distributed. Less than 15% is available for household use (most going to irrigation and industrial use). Lack of access to fresh water is a major health problem; it is estimated that 90% of the deaths of the 5000 children who die daily are water related. Nearly 1 billion people do not have access to clean water. The future looks even worse as population growth is far exceeding water supply. One estimate suggests that the global demand for clean water will outstrip supply by over 40% in 2030.

The historical evolution of water supply has moved from free water to low cost municipal supplied water to private sector supplied water. Traditionally, the supplier controlled the sourcing, moving, filtration and reselling functions. However, there is recognition today that no singular source can meet future demands. Water has moved beyond the realm of just a “social good” to one where it is deemed an “economic good.”  This has led to a tension between societies’ basic need for water and the private sector’s goal of supplying a service at a profit. A paper published under the International Hydrological Programme of UNESCO outlines the new principles of dealing with international resources:

  1. Social equity;
  2. Economic efficiency; and
  3. Environmental protection.

Despite these obstacles, few investment opportunities have as many attractive attributes as water.

  1. Water has no economic substitute, at any price;
  2. We can neither create nor destroy water so there is a fixed supply; and
  3. Demand far exceeds supply.

Areas for investment will mostly revolve around water suppliers such as utilities and bottled water or suppliers of products, services and solutions for infrastructure, water management and waste management. There is a wide range of investments available from private companies, ETFs, mutual funds and unit investment trusts. As a believer in the long-term opportunity in natural resources, Balentine will include water as a major area to explore.

[1] EPRI’s 2004 estimate for Hawaii was along the northern boundary of the U.S. EEZ, as far west as the Midway Islands. The present estimate extends only as far west as Kauai, and encompassed the entire islands (not just their northern exposures).
[2] Source: Electrical Power Research Institute 2011 Technical Report: Mapping and Assessment of the United States Ocean Wave Energy Resource.

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