Water is too precious to be so cheap

Dr Eric Crampton
2 June, 2020

The North Island’s drought is getting rather serious.

Auckland’s urban water users have been urged to take shorter showers and only to use dishwashers and clothes washing machines when they’re full; they also have been banned from using water-blasters and garden hoses.

Out in the countryside, things are rather worse; farmers have had to organise emergency shipments of cattle feed from parts of the country less badly affected.

Droughts do not just affect water destined for consumptive uses. They also affect the hydro lakes and flow in the rivers that generate the country’s electricity. The drought has been serious there too.

As of May 26, Lake Taupo’s levels were about half of their historic average – and overall controlled water storage in the North Island was a bit less than half of historic averages.

Despite the drought, we rarely hear exhortations to conserve energy use to avoid blackouts and brownouts.

Some of that is because the South Island lakes are in decent shape and the Cook Strait cable sends power up from the mainland. But it is also because, when electricity supplies are tighter, electricity prices increase.

Wholesale power prices dipped during lockdown as factories shut down, but have risen considerably since then. In the upper North Island, average weekly wholesale power prices are now over $200 per megawatt-hour; prices had been less than $150 per megawatt hour for most of the past year.

Droughts mean that sending water through the hydro dams is expensive; that same water could be saved to generate power tomorrow, when things could be even worse. When rainfall does not replace water stored in the lakes, power prices go up.

Rising prices tell all electricity users that it is time to conserve energy, without any need for campaigns urging us all to avoid turning on the jug at peak times. They also provide incentive for generators to invest in new generation capacity, like wind and solar, or thermal generation options, or even to consider greater lake storage capacity – if consenting made that possible. The prospect of high power prices in dry years make those kinds of investments pay off.

The country’s institutional structures around electricity generation are designed to ensure this all works well. Spot markets in electricity generation provide incentives for generators to bring capacity on-stream when it is most needed and industrial users able to vary electricity use have incentive to choose power contracts with provisions for cutting back use when prices are high.

If power prices rise over a more sustained period, retail consumers start seeing reason to invest in energy conservation – more energy-efficient appliances, rooftop solar generation, or shifting to retail contracts letting them save money by avoiding using the big appliances when power is in high demand.

Consequently, electricity consumption per household dropped from 7840 kilowatt hours in 2007 to 7141 kWh in 2019. And the whole thing is designed to encourage investment where it is needed.

Water for consumptive use could hardly be treated more differently.

In dry years, farmers have their resource consents scaled back. But there is little opportunity for farmers more able to reduce consumption to on-sell some of their remaining water to neighbours in more dire straits.

Residential users in Auckland at least are charged for water use – something not true in all cities. But there is no difference in the price of water in a dry year as compared to a wet one. A thousand litres of water in Auckland, from July 1, costs $1.594; WaterCare assumes that 78.5 per cent of that water finds its way to the wastewater system and adds additional wastewater fees.

All up, a thousand litres of water costs $3.77 – less than a flat white. Filling up a 60,000 litre swimming pool, in the middle of a drought, costs a bit more than two full tanks of petrol – unless the neighbours notice and dob you in and you’re fined for breaking the water rules.

The same water shortage affects power generation and residential water use. But because electricity prices rise in dry years, councils find no need to try to police households to make sure that electricity is only used for the most important purposes.

Instead, Government just makes sure that poorer households are not too badly affected by rising power prices through things like Winter Energy Payments.

Moving to a more responsive water pricing system would not just encourage households and businesses to conserve when conservation is most important. It would also provide incentives to build water storage facilities, filling them when water is cheap and selling the water when shortages make water more valuable.

Prices that do not reflect underlying scarcity are a recipe for shortages.

Water is too precious to be sold so cheaply.

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