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Funding the circular economy: adding up the value of Integrated Water Management

Integrated water management (IWM) offers an opportunity to embed the circular economy into water sector operations. But funding the often costly projects needed to transition towards a closed-loop approach presents a challenge to many water businesses. 

Presenting at Ozwater’24 on opportunities for funding the circular economy, Frontier Economics’ Ben Mason said IWM projects typically cost more than business-as-usual solutions, but the value in increasing efficiency around how we use water is also on the rise.

“Water is fundamentally circular, when left to its own devices. It falls from the sky, it evaporates and the cycle keeps going. And the circular nature of water is fundamental to human existence.

Typically, the issue really is in our linear use,” he said.

“When humans get involved, we take water from a reservoir, we treat it, we use it once, and then it either runs back into the water course or we treat it again and dispose of it.

“With climate change and population growth, we are getting to the limits of our water supply. And the linear interventions available to address this issue are expensive.”

Mason said that while desalination is considered one of the main augmentation options, it’s an approach that can be expensive and not suited to all locations, particularly inland areas with small populations.

“It’s timely to think more about IWM. From an economic point of view, anything we can do to get more out of the existing supply becomes more valuable when we are getting close to taking big investment steps,” he said.

“There are also more co-benefits involved in a more circular approach. There are opportunities and benefits around urban greening and cooling, and water for the environment.

“IWM solutions are very important to consider in terms of those extra benefits, which are becoming more important as the climate becomes hotter and drier. There are many social and environmental benefits that come from a circular approach, it’s just challenging to unlock it.

“But there are quite a few things lining up and these options are starting to make sense. That’s not to say we should always choose IWM in places where it doesn’t stack up. But we are seeing increasing value in saving water and what it means in terms of outcomes.”

Building a business case

When it comes to unlocking the circular economy within the water sector, Mason said it’s important to start considering IWM solutions from a systems approach, to derive as much value as possible from the potential investment. That is, to consider all system wide costs and benefits when evaluating options.

“The vast majority of water providers in Australia are regulated entities, or monopoly providers, and they come under economic regulation. As a result, their overarching requirement is to prove that their investments are efficient,” he said.

“We need to be able to prove how the benefits outweigh the costs of IWM. We need to be able to think about these things at a system level.

“While a project incurs costs in one part of the system, it can also defer or avoid costs in other parts. One of the case studies we will be discussing at Ozwater’24 is the South Creek Advanced Water Recycling Centre in the west of Sydney.

“It’s a really big and exciting IWM project. We have done a cost-benefit analysis, and one of the important drivers is the system’s current reliance on a constrained, linear wastewater solution in the Malabar wastewater system, which is an old system and located in a highly developed area – you can’t simply expand it.

“The cost of the South Creek Advanced Water Recycling Centre made sense, as it was removing the need for costly upgrades to the Malabar wastewater system, while also creating co-benefits.

“A business case into integrated water cycle management as part of a broader suite of urban design options for the South Creek catchment (Western Parkland City) estimated net economic benefits of $1,819 million.

“We need to take a systems approach to thinking about our options, it’s important in proving the value proposition of IWM. We need to be thinking more broadly in terms of whether the investment is justified or not.”

From a practical perspective, Mason said it takes a lot more effort to get IWM projects off the ground – there is a lot of work in accounting for and quantifying the system-wide impacts.

“With more linear solutions, we already know exactly what it looks like and the result we will get. Whereas with IWM, the solution or engineering might be okay, but nailing down exactly what those outcomes are is hard to do,” he said.

“It takes quite a lot of effort to fully develop and form that picture to be able to make the value proposition. And the novel nature of the process in some instances makes things even trickier.

“People often ask about the difficulty of valuing the benefits involved in IWM. We are normally able to value the outcomes, it’s really around having confidence in being able to say what those outcomes will be.

“The assumption is often that the issue is the price when valuing the benefits. But our experience is that it is often the quantity. This is new, it is novel, and it can be difficult to be sure what the specific outcomes will look like. For example, having clarity on additional water volumes available for environmental flows.”

Funding pathways

Funding is one of the key issues that needs to be overcome in the pathway towards IWM, Mason said, but there are avenues available to explore.

“If we are suggesting a solution that is a more expensive way of providing the water service than an alternative, either we need to find someone willing to pay the extra money, or we need a very good reason to place that cost on the water customer,” he said.

“A win-win situation is where there is a pure value proposition in an IWM project. The South Creek Recycling Centre is a great example of that.

“Yes, there is an additional cost, but in terms of what the asset means for the area and potential uses, and avoided downstream costs, it does stack up in economic terms and value to the customer – once system wide impacts are considered. It’s an example of where IWM is the best option and will be approved by the economic regulator.”

Mason said IWM can also work well in scenarios where there is a clear beneficiary who can shoulder some of the costs of the project.

“Sydney Water’s Malabar treatment plant has been in operation for decades, but Sydney Water has recently started a partnership with Jemena to produce biomethane with byproducts from the wastewater treatment and put it into Jemena’s gas network. We are increasingly seeing this type of thing,” he said.

“While we are talking about the circular economy in regards to water itself, there are clearly other avenues within the water sector around resources that have historically been considered a waste product – including, for example, biosolids.

“Water companies are increasingly finding opportunities to work with other parties to create value from material previously considered waste under the linear view of the world.

“When a circular economy works properly, there are many different cogs. It’s all about finding how a waste product in one production stream can have great value and input into another stream. And that’s where water can really add a lot of value.

“Identifying beneficiaries that will pay for products that come from the water stream, finding those opportunities and making them more part-and-parcel of how we work and think will be important when it comes to funding IWM solutions.”

Interested in learning more from Ben Mason about funding opportunities for a circular economy? Register for Ozwater’24 here.