Sunday, February 19, 2012

Improving viability of desalination holds promise against water shortages

Improving viability of desalination holds promise against water shortages

Desalination of sea water to meet the industrial and residential water requirements has been in vogue for many decades now.  However, the cost of water obtained through this source has been very expensive, preventing large scale adoption of reverse osmosis (RO) technology commonly used in such plants. In the recent times, the costs are dropping significantly because of economies of scale, improvement in technology such as enhanced life of membranes used in such plants and sharp drop in membrane costs thereby improving viability of desalination plants.   This holds significant promise for both industries as well as municipal bodies to meet their acute water shortages currently prevalent in many parts of the country.

Global Scenario
97.5% of earth’s water is sea water, 2% is in the form of ice leaving only 0.5% as fresh water. While harnessing sea water could potentially end water scarcity forever, the costs have been prohibitively expensive in the past, preventing widespread adoption. Middle East has been the leader in this technology as vast arid landscape has left limited options for these countries; today about 50% of world’s desalination plants are located in Middle East.  The growth, however, is coming from Africa and China which are taking big leap in desalination for municipal water supply. Today, the world’s largest desalination plant is located in Magta, Algeria with a capacity of 500 million litres per day (MLD). This is almost 4 times increase in size of the largest plant in the last decade.  The increasing size of the desalination plants has improved economic viability of this technology significantly.

Power sector is driving costs lower in India
In India, most new power plants are coming up in coastal areas, mainly to meet their water requirements through desalination.  This has increased demand for desalination, and at the same time rapidly increased competition in the desalination industry. This has resulted in sharp drop in price of membranes, a key component in desalination plants accounting for almost one third of the total plant cost, by over 50% drop in the last decade. The life of membrane has also been steadily increasing because of improvement in technology such as ultra-filtration and pre-treatment processes.

Cost comparison
Increasing scale of desalination plants, sharp drop in membrane costs and enhanced life of membrane have together resulted in lower capital expenditure as well as operating costs per MLD capacity for a new plant. Today, a new plant can produce water at about 3-3.5 paise per litre; while it is still higher than 1-1.5 paise per litre from traditional sources, it is vastly cheaper than 7 paise per litre that consumers pay for water through tanker lorries.

Attracting Private sector capital
While the industrial sector has been quick to adopt desalination route to meet their water shortages, municipal bodies as well as central and state governments have shown lukewarm interest till date. Chennai Metro Water is the only municipal body in the country to have an operational desalination plant in the country, which meets about 7% of the city’s water needs.  Co-opting private sector participation through Public Private Partnership projects and BOOT model plants would attract significant capital to this sector.   Increasing cost of power, which accounts for 30% of operating costs and huge power deficits are serious concerns for such plants. A combination of solar energy units to power desalination plants can work eminently well in the near term as costs of solar energy as well as that of desalination plants are sharply declining, improving viability of such plants. In the long run, consumers would also be willing to paying meaningful tariff for good quality water and continuous water supply.

N. Muthuraman is ex-Director Ratings, CRISIL and Co-founder of RiverBridge Investment Advisors Pvt. Ltd., a boutique financial advisory firm.

This is the blog of the Print Version published in Business Line dated 20th Feb 2012

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