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January 24, 2020

Freshwater in New Zealand (5) – How much would you pay?

Which water uses could reasonably be expected to pay a resource rental for freshwater?

The purpose of this current BERL initiative is to outline the water resource situation in New Zealand, to describe the main classes of the range of uses, and identify some of the uses for which water’s resource rental can be valued and/or charging is feasible. The first article posed the question whether water is the economists’ ‘free good’ or is it valuable? We argue that in some uses the water is valuable, and the resource owner, Crown or Treaty partner, should be paid a resource rental for the water.

Our second article described the big picture of what our annual water quota could be in the global context. We also provided a perspective of where New Zealand’s water endowment by land area and per person sits compared with water in other countries.

The third article showed that the measured total New Zealand freshwater withdrawals increased from just over one billion cubic metres per year in 1980 to over five billion cubic metres per year in 2010. Agricultural withdrawals and industrial use both increased strongly. 

And the fourth article outlined the conditions for charging for water, noting that other countries charge significant royalties from extraction and use of their natural resources. For example the mining companies in Australia pay $A12 billion a year for royalties on coal, iron ore and other minerals.

In the current, final article we wish to contribute to the discussion on water uses which could reasonably be expected to pay a resource rental for their freshwater, reflecting a value that is economically justified.

To provide a basis for this discussion we have listed 18 of the main uses for freshwater and discuss them in the simple classification suggested in our previous article.

Some water uses which could be valued and/or charged for

In the following list of uses, we provide some indicative values from a range of sources where we are aware of them. The values are expressed in prices per cubic metre which is 1,000 litres. Others will have different approaches and different values to advance the discussion. For some of our more interesting approaches to valuing, there will later be more detailed examples of estimates on the BERL website.

Class 1    Potable water use, consumptive, stays in NZ Water Cycle

There is the potential that efficient irrigation does not actually 'consume' water. The water sprayed on plants partly evaporates back into the air. The plant's transpiration also returns water into the air.

1. Household use: A provision cost in New Zealand was about $1 to $3 per cubic metre of potable water in 30 out of 39 Local Authorities providing data to WaterNZ in 2016-17

2. Irrigating urban landscape: An estimate was made in the Wakatipu Basin with irrigation for golf courses and residential amenity. Comparison of values with other Central Otago towns led to an estimate of approximately $20 million per annum contribution to GDP from tourists and high-spending residents attracted to the area. The area involved is about 600 hectares and would need close to 500,000 cubic metres of water to avoid a 20-day drought period and retain the value to the tourists and residents. This implies an average value of about $40 per cubic metre of irrigation water. The water has clearly added significantly to the value of golf resorts and residential developments in this area, and will also do so in Cardrona.

3. Irrigating horticulture: The values here can vary widely depending upon the crop, the market, the season and the irrigation method used. Probably the highest value would be irrigating Kiwifruit, especially if nutrients are included in ‘Fertigation’. Values are quite high also for avocados where they are expanding in the North. We have seen numbers of gross margins from $2 to $16 per cubic metre for these crops. The gross margins are required to cover overhead costs including a normal return to the capital employed in production. Only when these overheads and normal returns are covered and there is still an ‘accounting residual’ is this an economically justified resource rental generated by the water.

4. Irrigating high country drought feed: Our research in the Lindis catchment in Central Otago of hill to high country farms of 3,000 hectares showed that the main function of the 200 to 300 hectares irrigated was to enable the higher country to be suitably rested in the summer and winter droughts. Continued viability of farming in the area also provides the resource to manage and reduce environmental risk from pests like rabbits, briar rose etc. Our conclusion is that the value of this irrigation is mostly environmental, and there is no justification to charge for this irrigation water.

5. Pastoral irrigating dry land: This is one of the more-contentious and complex situations. The obvious example is high-tech irrigation enabling intensive dairy production on sandy soils across the Canterbury Plains. The level of production in Canterbury has increased according to Dairy NZ data from 48,000 tonnes of milk solids (MS) in 1996 to 430,000 tonnes MS in 2018, an increase from $0.3 billion at farmgate, to $2.6 billion at today’s prices.  An indication is that one cubic metre of irrigation water used generates something over $2 of farmgate revenue from milk solids. Reducing this to the value added or gross margin, the amount is about $1 of gross margin per cubic metre of irrigation water.  

A net value would require estimates of these impacts on the whole economy, and valuation of the costs of mitigation of any environmental impacts caused by the irrigated production.

Class 2    Potable water use, consumptive, water removed from NZ Water Cycle

6. Water bottled for export: There has been a major increase in recent years in the volumes of potable water “bottled” in New Zealand for export. This water is then lost to the water cycle in New Zealand. A recent headline stated “China looks to NZ for water-bottling tsunami”. The article described a Chinese company’s establishment of a bottling plant for Cloud Ocean water on a disused wool scour site in Belfast, Christchurch, taking 1.6 billion litres of freshwater per annum.

Where there is a strong world demand for a New Zealand resource, if export of that resource can generate a super-normal profit to the exporter then this should accrue as a resource rental to the owner of the resource, the water in this case. The owner is the Crown or Treaty partner. An order-of-magnitude estimate could indicate whether or not an accounting residual calculation of the resource rental from ‘bottling’ water for export is justified.

Market revenue for bottled water in China can be very high as with a luxury Swiss brand Valser launched by Coca-Cola in 2017 with a price of $NZ 14.30 per bottle of 750ml. However, other international brands, Evian and Fiji sell for about $NZ2.25, and local China water for $NZ0.80 cents for 750ml bottles. A conservative retail price for New Zealand water could be $NZ1.00 to $NZ1.50. With 1,333 bottles of 750ml per cubic metre of freshwater, that retail value could be $1,500 per cubic metre. If the retail margin for distribution is 50 percent of landed value, that makes landed value of about $1,000.

A rough estimate for cost of bottled water landed in China is about $600 per cubic metre of water content. This includes published freight rates, packaging, the stated Cloud Ocean processing labour costs for the Belfast plant, and a return at, say, 20 percent on the stated owners’ capital investment.

Those order-of-magnitude numbers could reflect a resource rental of up to $400 per cubic metre. This ‘back-of-the-envelope’ estimate indicates that potentially the relative scarcity of freshwater in some market countries may be driving a strong resource value for freshwater for export. In that case, the accurate estimate of an Accounting Residual value of the freshwater in that use could be justified.

7. Water exported as milk, wine: Provision cost.
The economic value added return comes from the nature of the milk, or wine, not the water content.

Class 3    Extraction of water’s physical property, no consumption

8. Extracting energy for electricity: Accounting residual if privately owned, or ‘Social’ benefit if publicly owned (?)

The value of energy at the hydro dams: The latent energy in the water held at altitude in the lakes behind the hydro dams can generate a high value without the water being consumed. As the water is allowed to ‘flow’ to lower altitude through the turbines, the latent energy is converted to kinetic energy as it turns the turbines, and the turbine shafts drive the generators producing electric energy.

In a fundamental sense it could be claimed that the value of latent energy in the water at altitude should accrue to the owners of the hills or mountains, or the owners of the beds of natural lakes which intercepted the rain or snow at an altitude above sea level. These owners are generally the Crown and/or Treaty partners.  The owners of the hydro dams, the turbines and generators could also claim a ‘normal’ return on the capital employed in that physical capital.

What is the value of the resource rental of the latent energy taken from water at the hydro dams on rivers flowing from the Southern Alps? From Lake Waikaremoana water at Kaitawa and Tuai power stations? From the Waikato and Tongariro power stations using latent energy from Lake Taupo and Mts Ruapehu, Ngauruhoe and Tongariro? I am sure Ngāi Tahu, Ngāi Tuhoe and Ngāti Tuwharetoa would be keen to hear the value and to share some of it!

Is this a logical study for the Commerce Commission, like the charges for electricity distribution?

9. Cooling using ice: Extraction of energy by water changing state from ice to water or water to water-vapour. ‘Evaporation is a cooling process’. It is not really practical to charge.

Class 4    Use water’s liquid property, reclaim it 

10. Food, fibre processing: Cost of provision.

11. Medical, dental hygiene: Cost of provision.

12. Industrial abrasive medium: Cost of provision.

Class 5    Active use of water bodies

13. Water transport routes: Channel maintained. Cost recovery?

14. Boating, water sports: Travel Cost Method (TCM) value.

15. Fishing/angling: Travel Cost Method (TCM) value.

Recreational value of angling: The probable scale of benefit from two rivers illustrate this value.  In the Lindis Catchment, Central Otago, the TCM using NZTA data for travel time and cost estimated the value to the community of angling in the catchment at about $40 per angler-day.  The Fish & Game NZ survey indicates that there are about 200 angler-days in the catchment annually.  The TCM value from angling is thus about $8,000 per year.  

On the much larger Rakaia River in Canterbury, with between 50,000 and 80,000 angling days in the ‘Salmon Capital of the world’, in another study the total TCM benefit to the angling community came to $2.5 million to $3.5 million per year.  The small scale of benefit in comparison with other environmental and economic benefits from the water from these rivers probably would not justify introducing a resource rental revenue collection system.

Class 6    Passive existence value of water bodies

16. Biodiversity around water: No charge, ‘Social’ benefit.

17. Landscape amenity of water: No charge, ‘Social’ benefit.

Class 7    Water used in chemical production

18. Production of hydrogen fuels: Accounting Residual less ‘Social’ benefit.

An area ripe for research.

Water uses and potential charges

The summary is that in the seven suggested Classes of use, there are 18 types of use identified.

Four to six uses logically justify charging the cost of provision: 1: Household use, 7: Water exported as milk, wine, 10, 11 and 12: Food processing and other local services and industries, and 13: water transport routes.

Four to six uses could possibly pay an economically justified resource rental for their benefit: 2: Irrigating urban landscape, 3: Irrigating horticulture, 5: Pastoral irrigating dry land, 6: Water bottled for export, and possibly 8: Extracting energy for electricity by private owners, and 18: Production of hydrogen fuels.

Seven types of uses with social or environmental benefits which preclude any charges could be: 4: Irrigating high country drought feed, 8: Publicly owned extracting energy for electricity, 13, 14, 15: Transport and recreation on water bodies, and 16 and 17: Biodiversity and landscape amenity value of water.

See the other articles in our Freshwater in New Zealand series:

1. Free or valuable?

2. New Zealand in a world of water

3. 30 years of expanding uses

4. How can we charge for it?