Energy Finance Report

Water Energy/Nexus Series: Energy Project Due Diligence in an Era of Water Scarcity

Posted by Administrator on 6/24/15 6:12 AM

As part of our series on the water/energy nexus, this post discusses the need to include a water supply availability assessment as part of energy project due diligence and facility siting reviews. The post identifies the principal considerations that come into play when conducting water security due diligence.

It is widely understood that water plays a critical role in fossil-fuel based energy production. However, most renewable energy-based production also requires water for some aspect of its operations. Even solar energy production requires some water, principally to keep the panels clean and cool.

Drought s-487921873In addition, due to the intermittent nature of wind and solar power, most energy production of the renewable variety requires a water-intensive conventional power back-up system. In light of the foregoing, water will remain essential to the generation of power for the foreseeable future.

Until recent years, before the effects of climate change began to fundamentally alter the regional distribution of precipitation and thus stream flow, average precipitation and stream flow was remarkably predictable. Although the volume of water in a given water system tended to fluctuate based on seasonal variations and sometimes other considerations, average annual flows typically varied very little.

However, the consistency of precipitation patterns over extended periods no longer is the case in many regions. Although evidenced most dramatically in California in terms of reduced rates of precipitation and reduced stream flows, average annual flows are decreasing throughout western North America. This development is of potentially great import to energy project developers and financiers contemplating new projects, particularly those highly dependent on predictable water supplies.

Although project developers and financiers often focus on the implications of climate change on future water supplies, the reality is that many parts of the country are having difficulty meeting even existing demands on water resources. As water scarcity becomes an increasing concern, new policies, limitations, and restrictions will be imposed, and developers and financiers will need to understand how these policies will affect the risks and potential opportunities of potential energy projects.

The adequacy of water supplies to satisfy the short- and long-term needs of a prospective energy project would seem to be a reasonably straightforward inquiry, particularly when there is unencumbered access to a large, free-flowing river or stream or a significant, freshwater impoundment. But physical availability must be distinguished from legal availability and, particularly in the western states, the two can be very different. Federal regulatory programs can implicitly override pre-existing water rights claims for purposes as varied as encouraging hydroelectric projects, preserving habitat for endangered species, and minimizing environmental impacts associated with the construction of drinking water reservoirs.

Water availability assessments are an increasingly critical component of energy project development due diligence, and must be forward-looking to be fully effective. A proposed project may have in place the requisite water rights and governmental permits necessary to begin operations, but still not be completely protected from adverse impacts in the event that a new upstream water use is proposed or a new regulatory program is put in place.

Topics: Water Energy Nexus, Water, Energy Management

Sullivan

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The Energy Finance Report analyzes developments in energy finance as well as provides updates and perspectives on market trends and policies.

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