CleanBeta

Water Industry Catching Fire

Today, global water prices do not fully reflect all water-related costs as 90% of water services are still managed by public authorities who tend to subsidize water for political reasons. Water scarcity will progressively trigger tariffs to climb toward full production costs, in some countries even up to the cost of desalination. The huge level of required investment and the subsequent privatization trend will undoubtedly turn water into a precious commodity, as we have seen with electricity since liberalization. When private companies step in, it will be hard for governments to sustain subsidized water tariff systems. Regulation will continue to exist albeit limited to the distribution pipes only.

Water prices in the UK, which is a fully privatized market, are probably the closest reflection of actual water costs. Denmark (€ 1.72/m³), Sweden (€ 1.50/m³), the Netherlands (€ 1.30/m³), Germany (€ 1.72/m³) and France (€ 1.11/m³) also have more accurate water pricing models.  If the legal basis for full-cost recovery is added to the costs of water, Spain and Italy could see the most dramatic growth in prices. Water prices in Spain could even skyrocket upon legal recovery of desalination costs (€ 1.44/m³).

The US enjoys among the lowest water prices (€ 0.48/m³) far below the full-cost of existing production (€ 0.70/m³) and desalination (€ 1.26/m³). The country’s high level of investment needs and growing need for desalination in some coastal areas could drive up prices. The US market is still immature with 16% of the water market privatized. But it seems that the privatization process has been accelerating since the 1997 regulatory change authorized long-term contracts in municipalities. The US has not adopted a single model since in some states water activities are regulated by regional authorities like in the UK while there is no regulatory authority in some other states.

Considering huge investment needs of $220 billion stemming from aging infrastructure coupled with low privatization rate, growth opportunities for private water companies remain significantly strong in the US. Since 2002 Veolia has been providing water management services to 1.1m people in Indianapolis, which is the twelfth largest city in the US. Despite the huge investment needs only 10% of water services is operated by private companies.