The future price of water in Europe
With a predicted gap of 40% between supply and demand of fresh water withdrawals by 2030 (excluding the effects of the climate change – see publications of the UN and the Water Resources Group), the way we use water this will change. We will have to accelerate investments into a better water infrastructure, invest in improving consumption efficiency and find new more expensive sources of water. An important result of these measures, especially combined with water stress : the water price will go up.
In this article, I look at the water price in the past and today and try – especially in Western Europe - to understand the drivers and to make some first rough predictions of the price of water in 2030 in Europe.
Although a commodity, the water price inflation is rising 3 x faster than normal inflation since the nineties
Drinking water from the tap is a commodity. It is always available at very low prices. A cubicle meter water in Europe is easily 150 times cheaper than premium bottled water. Drinking water in Italy costs € 1,61 per m3 – one of the lowest in Europe, whereas in Denmark that same cubicle meter costs on average € 8,86 (pricing of 2017). The EU average is € 4,1/m3, in the US € 3,83/m3 and in Canada € 3,25/m3.
Water prices around the world are rising fast: where the overall inflation is somewhere between 0,5 to 2%, water prices increase year-on-year 3 to 6%. In the US, the water price inflation is higher than the inflation of energy, gas & telecommunication services (shown in the graph below by Beecher). This water inflation trend in Europe leads to price increases each decade of 35 to 80% (vs. inflation between 5 and 26%) : water in 2030 in Europe will cost at minimum between 2 and 16 euro per m3.
source : Beecher
Although increasing fast, water remains cheap, especially knowing that water efficiency (using less water in households, industry, … for the same comfort than before) is improving at a rate of 1% per year, partly compensating the increase. Yet it is not the price increase that cause efficiency gains : the price increases we see since years are nowhere drastic enough to induce change of consumption behaviour as short-term price elasticity for water price is low (Herrington 1987 – between 0,1 and 0,2).
What are the historical reasons for these increases?
Before we take into consideration upcoming influences impacting the water price, let’s first look at the factors that have impacted the rising prices in the past years.
The water infrastructure is getting more complex and costlier. Over the past decades, across Europe we have invested in a higher connection rate of drinking water supply, sewer and water treatment. More recently infrastructure to separate rainwater from black/grey water to improve the treatment levels came on top. Most of these infrastructure improvements follow a declining marginal benefits/increasing marginal cost curve where investing into difficult to reach areas is less beneficial, increasing the average costs of infrastructure and maintenance.
In the distribution of water, one fifth of the water is wasted. On average the Non-Revenue Water % (% of distributed drinking water that is not charged to consumers also known as NRW) in Europe is at 18% - which means around one fifth of high-quality drinking water is just wasted as the main part of NRW is leakage in the distribution. There is a pretty clear reverse correlation between the price of water (excluding and including the price for sewage and treatment) and the % of NRW. This means that higher efficiency, wasting less water, results in higher prices of water as investments in the infrastructure are higher.
source : Bert Depiere based on VMM
Lower consumption means higher pricing to cover rising costs. Water consumption in Europe, given the slower population growth and efficiency gains, is dropping by 1% per year, which means that utilities need to cover their rising infrastructure operating costs with declining revenues if pricing would not increase.
Country specific situations have an influence on the water price. In the UK, where the private sector is taking care of the drinking water supply, water prices are rising with 4,6% CAGR growth faster than in the rest of Europe. This might have to do with the fact that in the UK water companies get targets on leakage, pollution and flooding, not like in for example Flanders where investments and therefore pricing are more related to the available means to invest. Further, there is a easy to understand strong correlation between the VAT imposed on drinking water and the price of water.
And then comes Climate change…
The pricing window of € 2 (in Italy) to € 16 (in Denmark) per m3 by 2030 mentioned before is a calculation based on historical development. This means that the calculation does not include any climate change effects that are becoming more and more visible. With climate change, water stress in many areas will become permanent or at least seasonal. Today the effects are visible in cities like London and Paris in summer or even in larger areas like the river-adjacent areas of Meuse and Rhine. What could the price of water look like if we add the climate change impact on top?
Let’s first look at some of the drivers that could further increase the water price due to the climate crisis:
Investing in renewing and improving the current infrastructure. In Europe, the water (drinking water, sewer & treatment) infrastructure is ageing. It is estimated that double the investment rate (in EU alone around b€ 45 per year) is needed in the next years to maintain the current state, to save costs, to reduce leaks (reducing NRW) and negative impact of waste water on the environment and to replace pipes with hazardous materials like asbestos faster. Especially in water scarce periods, with peak demand, NRW rations of 20% are unacceptable: not only on the demand side, but also on the supply side, governments will develop legislation to improve.
Investing in new water production capacity and in the reuse of water. Water utilities in water scarce area’s need to develop a mixed production strategy of traditional ground/surface water based production combined with desalination. Remote locations should develop capabilities to produce water from air or recycle water locally. As these production methods are more expensive (desalination costs are factor 10 or more), they will increase the cost of production of water. For desalination, the price of energy is a crucial factor. Israel developed in the past 20 years a production strategy based on desalination, using aquifers only to manage peak demand. Up-cycling grey water for agriculture will become more and more important as well.
Developing new infrastructure to manage supply. In water scarce areas, governments and utilities will need to invest into bulk transport lines and aquifer re-filling infrastructure. Further, regulatory work and investments are needed in water storage during water peak times and improved water penetration which is expensive especially in urban areas.
Improved, digital water management at the point of use. Utilities are starting to invest in digital infrastructures to measure consumption. Problem is that – at least today - digital meters are up to 10 times more expensive than analog meters. Ideally in future water meters have both throttling and pressure reducing capabilities to manage water consumption – which further increases to cost.
The 1% water efficiency improvement on yearly basis on the demand side has a direct impact on the profitability of utilities and tax revenues of governments. This can only be compensated by increasing the price. Optimally, water utilities are merged to gain scale lowering fixed costs and are made independent so they can focus on economic viability.
With climate change based on the measures above, water prices will – especially in water scarce areas - increase faster than before. We can learn from areas that have dealt with a water crisis before what the impact can be on the price,
The impact of water scarcity on the water price in Israel and Cape Town.
Two cases from real life show us the impact on the water price due to water stress and measures to mitigate that situation. We can learn the short term effect from the CapeTown case and short and long term effects from the case of Israel.
The Short Term Effect - In Cape Town in 2018, “Day Zero” approached rapidly – the day no water would come out of the tap. Through a combination of massive PR/communication and municipality regulations on consumption by sector (residential, industrial and agricultural), water consumption dropped by 30 to 60% - Day Zero was avoided. The best is that the consumption reduction is now a permanent result. But after the crisis was mitigated, local municipality approved massive price increases (30% in 2019 and another 22% in 2021/22), more than doubling the price for water in less than 2 years versus a price inflation of 4% only, this to compensate the short term measures taken to deal with the water shortage and the drop in water related revenues due to lower consumption.
A Long Term Effect – Israel suffered in the nineties from water shortage in repeated dry periods, with a climax in 1998 where no water was coming out the taps during a very dry period. The government understood the urgency and potential impact on the people and the economy : it decided to radically focus on making water available always. The availability of oil (and in future solar power) allowed Israel to shift to desalination as base supply of water, even refilling aquifers that are now used only in case of peak demand. Supported by smart financial constructions for setting up new innovative infrastructures like bulk transport & desalination plants, targeted subsidising of certain water related activities like using recycled water for agriculture and developing a strategy for the growth of counter seasonal vegetables allowing higher prices and importing cheap seasonal vegetables, Israel evolved from water dependency to water independency – even in dry periods. Although there has been a temporary surge in the water price - when subsidies have been reduced or taken away – the water price inflation CAGR as at around 2% since 1996 with fairly low water price of around € 2,18 per m3. The combination of investments, subsidies and regulatory work has paid off.
source : World Bank
What does this mean for the water price in Europe’s water stress areas?
It means we have our destiny in our own hands, but that long-termism is required to plan for success. First and foremost, we need to develop an integrated radical focus plan, that copies the best practices from Israel, but translates it to the situation and the needs of Europe. This plan should focus both on the supply and on the demand side :
On the supply side, refilling of aquifers, desalination of water (ideally based on renewable energy) and bulk transport to more inland, water scarce areas could become the cornerstone of the strategy.
On the demand side a massive awareness campaign on European level, making water saving products/services more well known and easier/more affordable to buy will lead (as proven in the Cape-Town example and in the Israel case – see below) to a drop in water consumption that can easily be 20 – 30%.
Example above : water consumption reduction campaign in Israel in the years 2007-2008 lead to a significant drop in consumption per capita per year that is permanent.
And if we cannot mitigate the situation, and climate change accelerates and increases the water stress problems, water prices will rise faster. The price of water in 2030 we estimate by country, is calculated in 3 steps :
The basic price inflation – extrapolating the current price inflation for the next 10 years.
An improvement of NRW (as a proxy for infrastructure improvement on top of the current run rates), which will be imposed more and more by the country regulators, potentially by Europe – whereby all countries should achieve the NRW% of Denmark – the current best in class. Please note that we established a prediction of the water price based on 2 variables : VAT & NRW%.
A short term increase in price during or right after high water stress times : price x 2.
The result of this can be seen below : Best case in Belgium, my home country the price in 2030 would be around € 5,98 per m3 and worst case around € 12,86 – more than tripling the price. See the table below (with in red assumed inflation due to missing information).
Conclusion
What the real price will be, no one can predict. Let this article therefore be a first step to support efforts to achieve a more sustainable water infrastructure, as it is proven from Israel that this does not have to have a massive impact on the water price. Additionally, I hope that I helped clarifying the actual size and the causes of the historical water inflation and as well the future impact on water price due to water stress and climate change.
Let me know your comments/remarks on this one. Happy to get the discussion started
