Feature: Sydney desal bad decision set to become worse

Background

The 2006 Sydney Metropolitan Water Strategy indicated that construction on a 500 ML/day desalination plant should be commence when Sydney’s storages fall below 30 per cent.

In 2006 NSW Premier Morris Iemma panicked when the levels fell to 34 per cent and commenced planning, contract letting and construction of the plant, even though water storage levels have remained consistently well above 30 per cent.

With storage levels currently about 50 per cent, a rerun of the last ten year’s rainfall, including the long drought and appropriate water restrictions, would almost certainly have seen water levels remain above 30 per cent without the additional water from desalination. Additional water management measures would allow for at least fifteen years of repeated weather conditions.

Higher rainfalls could mean the plant is not needed for the foreseeable future or ever.

Sydney pays for Iemma’s mistake: The opportunity cost of a panicked decision

Residents and businesses in Sydney, the Illawarra and the Blue Mountains are now required to pay for the $1.9 billion cost of the plant and the connecting pipelines to Sydney’s eastern suburbs, even though the plant is unnecessary. Bills have been increased to cover the capital costs.

Each year of unnecessary desalination incurs an opportunity cost [1]  on $114 million dollars. This is money that could have been used for other purposes by households, businesses or Sydney Water if the expenditure on desal had been delayed until it was required to maintain supply security.

Once the plant is constructed, it is required to be operated for two years for technological proving, costing [2] about $90 million. Each year that the plant was built before it was needed incurs an opportunity cost [3] of $5.4 million.

A ten year early decision would incur a total opportunity cost [4] of $1.194 billion.

The table below shows the holding costs associated with the decision if it proves to have been 5, 10 or 15 years too early.

Adding insult to injury: the costs of unnecessary operations

Decisions about when to operate Sydney’s desal plant will have to be made in the near future and the battle is on for Veolia to maximise its profits.

For two years, the Kurnell 250 ML/day plant will be operated at full capacity (for about 300 days/year) as part of technology proving.

After that, it will be dispatched as part of Sydney’s suite of water management options, which include the dams and setting and releasing water restrictions.

In the past, the NSW government and Sydney Water have tried to justify the running of the plant on the basis of cost, suggesting that water from Kurnell desal  would be comparable in price to water from the Sydney Catchment Authority (Warragamba etc.). This is incorrect.

In a December 2009 Sydney Morning Herald article [5] , Sydney Water managing director Kerry Schott maintained that the plant will be run at a ‘pump mark’ [6] well above 40 percent. The article suggested the corporation would seek a 70 percent threshold.

According to the Metropolitan Water Plan (as at 2006), a 500 ML/day plant built when dam levels reached  30% would have kept Sydney out of trouble, allowing about 2 years to build the plant and the connecting tunnels under Botany Bay.

In the event, a plant of half that capacity has been constructed at 250 ML/day.

Not operating that plant until water levels had reached 30% (or even 20%) would still provide more than adequate levels of water security for Sydney because:

• the construction of an additional 250 ML/day desal would take less than 6 months (given that the most time consuming part of the process, building the tunnel, is completed. Note that the existing tunnel was built to handle 500 ML/day), and
• operating the existing 250 ML/day after levels had fallen below 30% would in fact provide even more buffer, suggesting that 30% is conservative.

Running the plant when it is not required to secure Sydney’s water supply incurs a $45 million a year cost [7]. If the decision proves to have been ten years too early and the plant is thus run for 8 years unnecessarily, then the squandered opportunity cost will be 8 years x $45 million/year = $360 million. On top of $1,193 million capital holding cost, the total bad decision impacts on Sydney households and businesses will be $1,554 million.

The proposal to run the plant when it is not needed will:

• boost profits for Veolia who are paid both a holding cost and a per ML amount,
• push up bills for Sydney Water residents, and
• unnecessarily increase the environmental damage from the plant, including increased energy usage, squandering renewable energy, impingement and entrapment of marine life and saline plumes.

Note:
This analysis tends to understate the costs associated with the running of the plant.  Desalination operating costs have been set at 60 cents/kL which is on the low side of the expected range of 60 to 70 cents/kL.

John's Comments

Greens NSW MP John Kaye said: “The Keneally government is about to compound the myth that the desalination plant is needed by planning to run it whenever storage levels fall below 70 percent.

“Sydney households are already committed to a $1.2 billion penalty for Morris Iemma’s mistake in building the desalination plant too early. Kristina Keneally should not heap another $360 million on top of that by running the white elephant when it does not contribute to water security.

“After the proving period, the plant should be put on ice until storage levels fall to 30 percent or less.

“The running threshold should be determined by a rigorous analysis of water shortage risks, not by politics or favours for Veolia.

“If the Keneally government sets operation thresholds purely to cover up their previous mistake of building the plant, then Sydney households will be paying $360 million for the political convenience of the government.

“Rather than digging themselves in even deeper, the Labor government should admit their original error and put the plant on ice after the run-in period. 

“Veolia and its associated companies have a strong track record of donating to NSW Labor. Having boosted the party’s coffers by $58,590 over the last seven years, the desalination operator will no doubt be looking for a return on their investment at the expense of Sydney households.

“Running it now will not improve water security in any meaningful way. All it will do is make Sydney householders pay to boost Veolia’s profits, cover a previous Labor blunder and increase environmental impacts.

“The plant is a white elephant that will become even more expensive if Sydney Water and the Keneally government get away with a 70 percent threshold.

“Sydney households are already paying for the plant. They should not have to pay for unnecessary and wasteful operations that do not contribute to water security,” Dr Kaye said.

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References:

1. $1.9 billion at 6 percent per annum.
2. 60 cents/kL x 250 ML/day x 300 days/year x 2 years = $90 million.
3.  6% of $90 million = $5.4 million
4. 10 years x $114 million/year + 10 years x $5.4 million/year = $1,194 million
5. http://www.smh.com.au/environment/water-issues/desalination-wont-ease-water-restrictions-20091221-la29.html
6. Pump marks are the threshold levels of Sydney’s storages, principally Warragamba, below which the desalination plant is turned on.
7. 60 cents/kL x 250 ML/day x 300 days/year = $45 million.