Energy

Abstract

Increasing prices for energy are affecting costs of water supply/disposal and aggregate levels of demand. Prices for gas and electricity, which reflect average rather than marginal costs of new supplies, will rise more than will prices for petroleum products. Future demands for water used in energy production should be less than 1.5 million acre-feet per year. If demands for energy continue to decline, then derived demands for water-for-energy will also decline, and vice versa. At any given quantity and quality of demand for energy, alternative mixes of supply technologies can vary by a factor of three in the amounts of water required. Public policies that influence choices of energy supply technologies, therefore, have strong implications for future demands for water. In the municipal and industrial sectors, rising costs of water will have small economic impact but will restrain demands for additional supplies. Most affected by higher costs of water will be those sectors of agriculture that depend on large quantities of low cost water-hay and pasture, cotton and rice, which together account for about 45 percent of water consumed in California. Future demands for water will depend not only on costs of energy/water, but also on changing costs of other factors of production-capital, labor, other resources, environmental necessities (e.g., clean air). No existing method of forecasting future demands adequately accounts for the direct, indirect, and induced demands for all critical resources in a complex interdependent economy. Environmental externalities that are resistant to internalization as costs or to regulatory control are now central to policy for both energy and water. On some time scale those externalities will constrain economic activity through either (1) self-imposed constraint on consumption or (2) degradation of the environmental systems that support production. Critical uncertainties concern the scale and rate of change of externalities. Future demands for water will be affected by factors that resist quantification, including changing lifestyles, attitudes toward government, national and international circumstances. Quantitative methods of forecasting demand are useful as "if., then... " constructs; factors not captured in the models, however, will have large impacts on future demands. Selection of any particular quantity of water as a basis for planning turns on subjective preferences or prior commitments. Economic effects of alternative supply scenarios are critically dependent on the extent to which other factors of production can be substituted for water. If substitutability is high, then large changes in water usage can be generated by small changes in relative prices of factors, and vice versa. Careful study of sector-specific substitutability is clearly important to development of water policy. Enough is known about substitutability, however, to indicate that existing water supplies could be used more productively if there were means of reallocating water from lower-valued to higher-valued purposes (as measured by value added in the course of using water in productive processes). Small reallocations of present supplies could achieve large improvements in economic efficiency. Existing water law virtually prohibits reallocations, even where they would be of mutual benefit to potential buyer and seller as well as to society at large. Existing law emphasizes security of tenure to preexistent rights, regardless of the social value of existing use. That constraint forces water supply organizations to seek additional supplies through construction of new and very expensive supply projects, rather than through reallocation of much cheaper existing supplies used for low-valued purposes. Institutional changes are required for more efficient use of California's water resources.