Australia has overinvested in desalination says government report

Australia has overinvested in desalination in recent years, says a draft report from the Australian Productivity Commission, published on 13 April 2011. One alternative it recommends is indirect potable reuse.

The Productivity Commission is the Australian Government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians.

The report, titled Australia’s Urban Water Sector, concludes that “much of the recent investment in supply augmentation using desalination could have been smaller in scale and from a source other than desalination, while maintaining security of supply.” Lower-cost sources were available in many areas, says the commission, but large investments in desalination were preferred.

Admitting that it was difficult to estimate costs with precision, the report quotes the case of Sydney as an example:

In 2006, a review of plans to augment Sydney’s water supply estimated that expected savings of around Aus$ 1.1 billion (US$ 1.16 billion) were available from adopting a 30% (dam storage) trigger for augmentation, relative to a decision to proceed with augmentation when dam levels were at 48%. Subsequently, the government committed to proceeding when dam levels were 34% and signed the contract to proceed at a time when storages were at 57%, suggesting that even larger savings would have been possible from deferring the decision to invest.

Based on case-study modelling of Melbourne and Perth undertaken by the commission, it estimates that the costs to consumers and the community of proceeding with desalination plants ahead of lower-cost alternatives could be of the order of Aus$ 1.8 billion (US$ 1.9 billion) to $2.5 billion (US$ 2.64 billion) for the two cities combined over a 10-year period and Aus$ 3.1 billion (US$ 3.28 billion) to Aus$ 4.2 billion (US$ 4.44 billion) over a 20- year period, depending on modeling assumptions.

Evidence suggested, says the report, that inefficient investment in supply augmentation had also occurred in other capital cities, such as Adelaide.

However, the report also complains that planned indirect potable use of recycled water has so far been ruled out by governments in response to opposition by communities, even though the National Water Commission has stated there are no public health barriers, and it is used in countries like Singapore and the USA:

In such circumstances, it is important that the community and decision makers are properly informed about the costs, benefits and risks to water consumers, so that the best choices can be made. Community consultation needs to be a component of any decisions on supply augmentation.

There was also evidence to suggest that a more rigorous adoption of what the commission calls ‘real options’ or an adaptive approach to planning and delivering augmentation of supply would have reduced the cost of supply augmentation and lowered prices to consumers:

For example, the commission’s own modelling indicates that the difference between applying a real options approach and applying traditional approaches to investment could reduce the cost of supply for Melbourne and Perth collectively, by about Aus$ 1.1 billion (US$ 1.16 billion) over a 10-year period. This gain can be achieved independently of whether or not consumer prices are flexible.

Subsidies provided by the Australian Government were further distorting investment decisions, says the report. In Adelaide, the large investment in desalination capacity relative to demand was partly because of a grant of Aus$ 328 million (US$ 347 million) provided by the Australian Government.