The Coming Water-Electric Investment Wave

It may seem surprising, but after energy, water is the talk of the electric utility industry.

At least, that was the case at this week’s annual Edison Electric Institute Financial Conference, where utility executives, investment bankers, and intrepid Utility Forecaster analysts go to meet, greet, and eat (and learn the major investment themes for the coming year).

The other surprise was the prediction that electric utilities could become big investors in water assets. That means water stocks could get a lot more interesting in the coming years as the water and power utility industries converge.

The presentation that sparked such speculation came courtesy of Michael Webber, deputy director of the Energy Institute at the University of Texas at Austin and one of the keynote speakers at the conference.

It’s easy to lose sight of how energy and water affect each other’s respective markets. After all, the cushy lives we lead in the developed world have allowed us to become increasingly disconnected from how crucial resources are produced and distributed.

But scarcity is forcing us to turn our focus back to the basics. And one of those basic concepts is the nexus between energy and water.

“We use energy for water, and we use water for energy. The good news is that water makes energy more productive. We use water to cool power plants, which makes them more efficient, and we use energy to make water cleaner,” Webber observed.

But the bad news, the professor explained, is that, “If water is too scarce, too abundant, too cold or too hot, it introduces problems for the power sector.”

“And if you have an energy shortage, it’s a problem for the water sector. So you have constraints in one cascading through constraints in the other,” he continued.

Webber didn’t just throw together a provocative talk for the benefit of the conference. In fact, he’s written an entire book on the interdependence of these two resources, entitled “Thirst for Power,” which is slated to be published by Yale University Press next spring.

As such, it’s worth paying attention to what the professor has to say.

“In the United States, if you believe the EPA’s numbers, we need about a trillion dollars of investment in water to bring our resources up to standard,” Webber noted.

He added that the American Society of Civil Engineers has given U.S. water infrastructure poor marks because 100 years ago we built pipes that lasted 100 years, and 50 years ago we built another set of pipes that last 50 years. “If you do the math, you’ll realize that the whole system is crumbling,” he said.

And it isn’t just new water infrastructure that’s critically needed. Webber believes water will replace oil as the ultimate strategic resource of the 21st century. “We used to fight over oil. We used to fight over soil. We used to fight over salt. And now we might fight over water,” he argued.

Of course, while the need for more water infrastructure is without question, it remains to be seen how sleepy water utilities will rise to the bigger challenge that Webber described.

So I asked the professor about it. He suggested that electric utilities’ expertise in developing energy markets and new technology could be extremely useful to water utilities in this regard. And since water is already a critical resource for the power industry, there is an opportunity for partnerships between electric and water utilities.

For global investors, Webber said such convergence has already started to happen in other countries, particularly those dealing with water scarcity, such as Mexico, Israel and France. And the droughts in Australia have forced that country to completely revamp its water markets.

Is it America’s turn? The professor thinks so. He says that the hundreds of billions of dollars that were invested in the Shale Revolution are now looking for a new home. And water is looking mighty inviting.

One of our top water plays is just a click away.

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