The Energy Water Nexus

Profitable Investments in Water's Solutions

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Most energy solutions fail without water.

But all water solutions fail without energy.

Such was the theme at many breakout sessions during last week's Clean Technology 2008 conference in Boston, MA.

Those sessions dealt with what many industry professionals are now calling the energy-water nexus. A concept that, like the name suggests, deals with the vast issues of water consumed by energy, vice-versa, and everything in between.

The issues are complex, to say the least. And some would call it a zero sum game.

But just identifying some of the key problems can get the ball rolling on potential solutions and, in turn, massive opportunities for profit.

Here are the nuts and bolts of it all.

The Energy Water Nexus

At its core, the energy-water problem stems from the fact that we have a limited supply of each. We have a certain amount of both energy and water, and can't make or destroy either. So we have to find novel and efficient ways to use each of these precious resources.

Here's the 411 on the water situation, which may be a recap for some of you.

As any third-grader knows, the earth is covered 75% with water and 25% with land. That sometimes makes it hard for many to even consider the fact that the world is facing widespread water shortages.

But drilling down on the contents of that 75% water make-up makes it a little easier to understand.

You see, 97.5% of the water we have here on earth is saltwater, leaving only 2.5% as usable freshwater.

Of that tiny 2.5%, 79% is perpetually frozen in the form of polar ice caps and glaciers, making it inaccessible, even at high costs.

Another 20% is groundwater, some in the form of aquifers, which we've been tapping successfully for some time via wells and mains and such.

And the remaining 1% is surface water, or the lakes, rivers and streams that dot landscapes around the globe.

It also doesn't help that we've constantly polluted the tiny fraction of surface water we have for years with the dumping of chemicals, fertilizers, sewage and other pollutants.

So that's the water side of things in a nutshell. We aren't getting any more of it.

The energy connection is a bit more clandestine, especially since we don't see that side of things on a daily basis. Here are just a few of those relationships, though they can certainly be applied to numerous industries and energy-related activities.

  • It takes, for example, 4 barrels of water to produce just one barrel of oil. This could be water used for well-injection, cooling or a variety of other applications

  • The Canadian tar sands use more water than the entire population of Alberta (where they're located) on an annual basis

  • In the U.S., the transportation and purification of water consumers 4% of all electricity

  • In California, water consumes 19% of the state's electricity and 31% of its natural gas

  • 50%-80% of desalination costs are for energy

Of course, examples like that could fill an entire page, especially if you track water use all the way back to manufacturing processes that make parts for the energy industry. But you get the picture.

The Problem with Water

So we know that water consumes energy and energy consumes water.

We also know the problems, both current and future, with energy security and supply, as they've been chronicled in these pages for years.

What may not be as obvious are the countless problems surrounding the water industry, which, if you like to live, are equally important.

So here are some of those issues.

Water systems are failing. Most water pipes in this country were laid in years following World War II, from 1945-1965, and are now past their useful life—a fact many know, but are unwilling to deal with.

It is these inferior post-War pipes—pre-War pipe were actually better quality—that are responsible for 50% of all leaks in the U.S. A huge number when you consider, though you may not believe it at first, that 20%-40% of all drinking water is lost through leaky pipes.

The aging water infrastructure is also evidence by the 300,000+ water main breaks that occur each year.

And there's more. . .

Water tables and aquifers are falling. Here are just three examples of current water table levels of three major metropolises, compared to their historical average:

  • Chicago/Milwaukee down 900 feet

  • Tuscon/Phoenix down 500 feet

  • Houston down 400 feet

You've also undoubtedly heard of the severe and ongoing droughts in the arid southwest and southeast—for which watering your yard only once a week is an inadequate solution, to say the least.

We're also facing drastic rises in consumption, which the U.S. has led for years. And this is where the zero sum game comes into play.

You see, China, India and Eastern Europe are host to about 2.6 billion people, or 40% of the world's population. The ongoing creation of an ever-growing middle class in those areas brings with it a massive increase in water demand.

Right now, Americans use about 158 gallons per day to take showers, flush toilets, brush their teeth and wash their clothes and dishes. This doesn't take into account the water used to make our goods and grow our food.

In developing nations, water use stands at about 13 gallons per day. But you can bet they'd like an American's share of water, and they're trying to get it.

And these numbers don't include the nearly 1.1 billion people that lack access to fresh drinking water. They too are seeking their share of the world's water.

But if we can't make water, American water use has to go down for others' to go up, right? Hence, zero sum.

Naturally, that's the $64,000. . .ahem. . . $22.6 trillion question.

Profiting from the Water Solutions

Obviously, American's aren't going to curtail their water use independently. Having a green lawn in July is much too important for that.

Nonetheless, something is going to have to be done to overhaul the way we use water. Like in energy (which some have forgotten), the first and cheapest way to do that is through efficiency.

We're seeing this through low-flow toilets and shower heads that use much less water than their predecessors. But for all their benefits, there's really no investor money in toilets.

As investors, we need to be focused on water infrastructure, which was recently given a grade of D- by the American Society of Civil Engineers. By fixing those leaky pipes that cost us 20%-40% ofour drinking water every year, it becomes less critical—though still important—to make large water-use reductions at the individual level.

To that effect, Booz Allen Hamilton, a private government consulting firm, estimates that $22.6 trillion needs to be invested in water and related infrastructure to quell a large portion of the problems.

Add to that the fact that water is undervalued by 300%-500% (just compare a gallon of Deere Park to a gallon of gas) and you're looking at an investor's dream.

Now water is a widespread business, encompassing thousands of companies in hundreds of sectors. So you'll need to weed through them until you find the profitable opportunities.

Of course, that's what I do for members of the Alternative Energy Speculator every week.

Members of that service received their first water-related stock recommendation about one month ago, and have already seen gains in excess of 10%.

And we'll have plenty more double- and triple-digit water winners to come. One stock in the Green Chip Water Index has gained 260% in 14 months.

If you want to get in on these types of water plays to compliment the already hefty profits being taken in the alternative energy markets, you should definitely check out the Alternative Energy Speculator.

In the mean time, take a look at Itron Inc. (NASDAQ: ITRI) and Veolia Envriontment (NYSE: VE)—two all-but-guaranteed winners as this water issue continues to play out.

Call it like you see it,

nick hodge

Nick


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