The Water Energy Nexus: Business Risks & Rewards

Water scarcity presents a serious challenge to individuals, communities and industries around the world. The statistics are startling: Water demand exceeds supply in regions that are home to more than 40 percent of the world's population. Currently 660 million people do not have access to improved sources of drinking water, and a billion do not have electricity. By 2025, an estimated two-thirds of the global population will not have access to clean water, and by 2050 the world will demand 55 percent more water and 70 percent more energy.

According to the United Nations, the world's population is projected to grow from today's 7 billion to 9 billion by 2040. That growth—combined with trends in urbanization, mobility, economic development, international trade, cultural and technological changes, and climate change—is driving increased competition among water, energy, agriculture and other sectors. Companies in water- and energy-intensive industries have an increasing interest in evaluating and managing the risks while identifying opportunities associated with the interdependencies of water and energy.

The Water-Energy Nexus

Water and energy resources are interconnected in what is referred to as the water-energy nexus (see Figure 1). Significant amounts of freshwater are needed to cool thermoelectric power plants, drive turbines that create hydropower, and extract and process oil, gas, coal, metals and chemicals. Similarly, significant energy resources are needed to heat, treat, desalinate and transport water.

Figure 1. The water-energy nexus shows the connections between these two crucial resources. (Graphics courtesy of GE)

Increasing demand and competition for water and energy have implications for many of the world's largest industries (see Figure 2). Energy utilities and producers of metals, chemicals, oil, gas and coal are the most energy- and water-intensive industries. Others, including the automotive industry, create products that rely on metals, chemicals, oil and gas. Technology, health care and telecommunication companies are major customers of—and suppliers to—these industries. Water and energy are drivers of value-chain risk and opportunity.

Figure 2. Water and energy intensity of major industries

The business risks and opportunities associated with the water-energy nexus are still unknown. Specifically, industries face risks when their supplies of freshwater and energy become more volatile and costly. "Water crises" and "energy price shock" now consistently rank in the top 10 (numbers 1 and 6, respectively, in 2015) of the World Economic Forum's annual Global Risks report.

Companies face regional, national and local barriers when doing business at the water-energy nexus. Energy and water infrastructure development is not typically well-coordinated across jurisdictions. Constraints on water and energy resources are rarely integrated into infrastructure development. In the U.S., an extrapolation of the funding gap for water and wastewater infrastructure suggests that it could reach $144 billion by 2040. Water—and sometimes energy—is not typically priced to reflect its true scarcity, societal costs or value to business. This makes building a business case on traditional return on investment difficult and requires companies to factor in future costs and other risks that will emerge. Companies will need innovative business models, technologies and partnerships to overcome today's barriers.

Business Risks & Rewards

Companies can look to industries and regions now facing risks at the water-energy nexus for insights on the challenges coming to their own regions or value chains. Increasing demand for water and energy is forcing tradeoffs in arid or water-stressed areas like the Middle East and North Africa (MENA), the U.S. and China. Industries that face risks related to water and energy supply are already finding emerging solutions to address their reliance on scarce resources.

MENA countries face extreme water stress and are using oil and gas to power desalination plants in an effort to address the widening freshwater supply gap. One country is projected to use all of its current energy production for desalination by 2035. To meet future needs, water providers will need desalination solutions that increase energy efficiency and tap cleaner energy sources. They also need to look for innovative, affordable water solutions beyond desalination.

As China builds new power plants to meet future electricity needs, the country is confronting tradeoffs between energy and power—water scarcity becomes a risk as the country builds more power plants. China is home to the world's largest fleet of thermoelectric power plants, most of which are coal-fired and require a significant supply of freshwater for cooling. Nearly 60 percent of China's coal-fired power generation is in regions that face high or extremely high water stress. Water scarcity is likely to become an increasingly important risk factor for power providers to manage, and they are exploring opportunities to reduce their reliance on scarce freshwater resources.

Figure 3. Projections of water stress in 2020 under business-as-usual climate and socioeconomic scenarios shown by country

As the U.S. develops its domestic shale gas and tight oil reserves, it confronts tradeoffs between water and energy. The U.S. is the world's largest consumer of natural gas and oil, and is rapidly developing new resources. These resources can be extremely water-intensive and are often found in areas where local water supplies are stressed. Estimates suggest that 60 percent of shale gas plays will face arid conditions or high or extremely high water stress by 2020. In these areas, developers can use alternatives to freshwater and leverage new data and analytics to track, manage and minimize water supply risks.

Operating at the Water-Energy Nexus

Risks and opportunities in these regions are a wakeup call to other regions. Industries and regions currently facing risks offer a high-level checklist for companies operating at the water-energy nexus:

• Acknowledge risks to supplies of water and energy, but don't overlook solutions that address demand.
• Take full advantage of water conservation, water reuse and energy recovery.
• Shift demand to alternative water options and clean energy resources.
• Create new partnerships and business models.

New Ideas & Approaches

Instead of trying to expand the supply of limited freshwater and fossil fuel resources, companies can find opportunity in reducing demand and scaling alternatives. Some options include:

• Inclusive approaches that recognize the benefits of gender mainstreaming and local stakeholder engagement in water and energy resource decisions
• Ambitious cross-sector goals for end-use energy efficiency, water reuse, decentralized clean energy and smart infrastructure
• Financial due diligence with innovative approaches to pricing carbon and valuing water

Participating in partnerships to test these ideas can help turn them into reality. Companies can share costs and risks while learning about new technologies. They can create joint data and reporting protocols, share best practices and work in public-private partnerships. These types of efforts are needed to scale the solutions that will help ensure water and energy resources are available.

This article is a summary of a white paper titled "Water-Energy Nexus: Business Risks and Rewards" authored by Eliot Metzger, Brandon Owens, Paul Reig, William Hua Wen and Robert Young.