Pricing for recycling

Many water recycling schemes propose to provide customers with two distinct water supplies: A potable supply and a lower-quality recycled supply.

Isolated financial analyses of many such proposals often appear highly unfavourable. This is the result of the high infrastructure and operational costs associated with most advanced water treatment and distribution systems. Furthermore, revenue potential may appear low since recycled water is typically priced at a lower rate than the average cost-based rates for traditional potable supplies. Revenue projections in some areas may also suffer from a limited market of potential applications and customers for non-potable water supplies. Accordingly, it is often difficult for water supply agencies to make a ‘business case’ for water recycling projects based solely on an assessment of the agencies internal financial outcomes.

To address these difficulties, it is necessary to conduct some form of a ‘full social cost accounting’-based assessment of the benefits and costs of water recycling projects.

‘Full social cost accounting’ incorporates efforts to identify all the benefits and costs of a specified action or policy, regardless of who bears the impact, or whether the impact can be valued in terms of market prices. One application of this approach that has been widely adopted by Australian utilities and agencies is the ‘triple bottom line’ framework. This consists of a financial bottom line that reflects cash flow as well as second bottom line reflecting social impacts and a third ‘environmental’ bottom line.

A positive triple bottom line analysis of a proposed scheme may indicate an overall worth of a project. However, in most cases it is the single bottom line –the financial one- that will determine an agencies capability to implement such a scheme. A positive financial result for a water recycling scheme will almost always rely on recovering costs from a broader base than simply the sale of new alternative supply. Recovering the costs associated with additional treatment and distribution must be implemented in a manner that is perceived to be fair, sends appropriate price signals and effectively generates the necessary cash flow back to the agency.

Recycled water costs may be distributed between water and wastewater users, both through capital facility charges and usage rates. Carefully applied cost allocations can allow for economic incentives to attract current or future potable water users to replace some of this use with recycled water. The greatest challenge is to identify the most effective balance between pricing recycled water such that it is attractive while maintaining a nexus with the cost of service.

Tertiary treatment costs have historically been recovered from wastewater users (or ‘generators’), spreading the costs over the treatment authorities entire customer base. This approach has been logical since much of this tertiary treatment has been to facilitate a means of effluent disposal and thus a cost for managing wastewater. However, in many future situations, tertiary treatment may be implemented primarily to provide recycled water to offset demand on the drinking water supply. In such cases, the cost of tertiary treatment might logically be partially recovered from drinking water customers which may, or may not, be the same as the wastewater customers and may or may not be serviced by the same organisation.

A major obstacle to water recycling in Australia has been the widely acknowledged historic undervaluing and under-pricing of fresh water supplies. The relatively small financial costs incurred in the use and disposal of fresh water supplies have provided little market-force incentive for less competitive water recycling applications.

The low cost is partly the result of there being no requirement in pricing regimes to include catchment management and protection of effluent-receiving environments. In many cases, the consumer also pays sewerage charges that include the cost of treatment to a standard that is acceptable for discharge to the environment. These are separately accounted for and not integrated with the costs associated with producing and delivering potable water. The cost of producing and delivering recycled water is generally greater than the costs for fresh water. However, users are typically charged less for recycled water than for fresh water due it its more limited use.

My own recent water bill was for $133. Of this, $94 was a standard charge for access to the sewerage system. Nearly $20 was a further standard charge for access to the potable water service. That’s around $114 out of $133 that I have absolutely no control over regardless of how much potable water I use at home. My actual water usage cost was a mere $12. That leaves me with absolutely no (financial) incentive to save potable water. To save on this $12, I am going to need an extremely cost-effective solution. No on-site recycling system or dual reticulation scheme has any chance of recovering this $12 in a reasonable period of time.

But what about the largest component of my bill; -the $94? We could move some of that cost away from ‘access to the sewerage system’ and instead add it to the ‘water usage charge’. This would empower water consumers to make significant savings by minimising potable water use. Using recycled water as a replacement for potable water would instantly become more economically viable. Prolific water users may end up paying more, but efforts towards water frugality would be justly rewarded.

Such an alternative water-pricing framework would acknowledge the importance of applying consistent consideration of externalities associated with potable water, recycling water and sewage. It would include the provision of price signals that reflect the scarcity of resources as well as the costs associated with water treatment and delivery.

I’m no economist, but it makes a lot of sense to me.

Whadda you reckon?