Analyzing the economic value of thermal power plant cooling water consumption

The consumption of water by thermal power plants for cooling purposes has presented several policy and resource allocation challenges in the recent past. There is need for improved economic understanding of thermal power plant water consumption to better address these challenges. In this paper, we examine the economic efficiency of water consumption substitutes for existing thermal power plants. In the long run, a power plant could reduce water consumption by investing in efficiency improvements. In the short run, a power plant could reduce water consumption by curtailing power output. The analysis presented in this paper demonstrates that these substitutes are not economically efficient; water prices in excess of $1.00/m(3) would be required for power plants to make efficiency investments or curtail output. Thermal power plants are therefore not attractive targets for water consumption reduction initiatives based on pricing alone. Furthermore, in the long run, efficiency improvements only show significant water reduction potential for the most inefficient plants. However, the findings of the short run analysis indicate that since thermal power plants are willing to pay water prices in excess of $1.00/m(3) before curtailing output, these power plants do not require free reallocation of water from senior water rights holders during periods of scarcity, as has been the practice in several regions. Instead, a more efficient water policy focus would be creation of enabling environments for water market transactions. Such water market transactions could help balance competing water demands during periods of scarcity, while maintaining reliable electricity supply.