The Environment Institute Where ideas grow Putting a price on water Will markets work? Mike Young Executive Director, The Environment Institute

The Environment Institute Life Impact The University of Adelaide Will markets work? Depends on how prices influence decisions – Investment in infrastructure? Individual households Water-intensive businesses Energy-intensive businesses – Use? Willingness to conserve Not the panacea – Low prices can mean under-investment in infrastructure and encourage over-use when entitlements are not used to limit use – Regulations impose high costs on users

The Environment Institute Life Impact The University of Adelaide Rural water independencies Competitive markets – Entitlements – Allocations Pricing principles for service delivery – Lower bound pricing – ACCC controlling restrictive practices Infrastructure – Grants (subsidies) still common – Undermining value of investments elsewhere – No level playing field Sharing regimes – Environment is becoming a new competitor – Robust sharing systems rare

The Environment Institute Life Impact The University of Adelaide Linguistics Different types of environmental water 1.In stream maintenance and conveyance 2.Supply for fauna and flora outside river stem If we are going to make progress, we need a more sophisticated language set

The Environment Institute Life Impact The University of Adelaide Recent urban water trends Shortages have driven investment in energy-intensive water supplies – Desalination – Recycling – Storm water capture – Private at high cost – Urban groundwater – Private at high cost Not prepared to send strong scarcity signals via the market place Little interest in urban water markets – For business - as minimal restrictions – For households – regulations seen as more equitable Some cities are investing in access to rural supplies – Adelaide, Perth, Melbourne Tangled understanding of the role of water in delivering equity objectives

The Environment Institute Life Impact The University of Adelaide Urban water independencies Infrastructure investment signals critical for – Industry – Urban design – Urban growth strategies Energy and water policies interact with one another Already trapped by infrastructure legacy – Sewage treatment plants – Desalination plants

The Environment Institute Life Impact The University of Adelaide Household water pricing Many households not exposed to any water or sewage price signal – Rented housing – Strata corporations Inclining block tariffs used widely – Often with perverse equity outcomes – Transfer wealth from poor to richer people – Grants distort investment Sewage charging rarely discussed

The Environment Institute Life Impact The University of Adelaide National Water Initiative Water Storage and Delivery Pricing 65. In accordance with NCP commitments, the States and Territories agree to bring into effect pricing policies for water storage and delivery in rural and urban systems that facilitate efficient water use and trade in water entitlements, including through the use of: i) consumption based pricing; ii) full cost recovery for water services to ensure business viability and avoid monopoly rents, including recovery of environmental externalities, where feasible and practical; and iii) consistency in pricing policies across sectors and jurisdictions where entitlements are able to be traded. 66. In particular, States and Territories agree to the following pricing actions: Metropolitan i)continued movement towards upper bound pricing by 2008; (stop using grants) ii)development of pricing policies for recycled water and stormwater that are congruent with pricing policies for potable water, and stimulate efficient water use no matter what the source, by 2006; iii).. iv) development of national guidelines for customers’ water accounts that provide information on their water use relative to equivalent households in the community by 2006; Rural and Regional v) full cost recovery for all rural surface and groundwater based systems, recognising that there will be some small community services that will never be economically viable but need to be maintained to meet social and public health obligations: a) achievement of lower bound pricing for all rural systems in line with existing NCP commitments; b) continued movement towards upper bound pricing for all rural systems, where practicable; and c) where full cost recovery is unlikely to be achieved in the long term and a Community Service Obligation (CSO) is deemed necessary, the size of the subsidy is to be reported publicly and, where practicable, jurisdictions to consider alternative management arrangements aimed at removing the need for an ongoing CSO.

The Environment Institute Life Impact The University of Adelaide COAG 2008 modified => Energy + Water To improve the security of urban water and energy supply by the adoption of the enhanced national urban water and energy reform framework, jurisdictions have agreed to: adopt national urban water and energy planning principles; establish and publish the levels of service for metropolitan water and energy supplies; publish guidance to facilitate best practice scenario planning for climate variability; finalise and adopt common NWI and National Energy and Carbon Initiative pricing principles; review consumer protection arrangements in relation to services provided by water and energy utilities; investigate possible enhancements to pricing reform, including scarcity values associated with water and greenhouse gas emissions in the context of the valuation and recovery of environmental externalities; explore the issue of establishing entitlements and associated trading systems for carbon emissions, carbon sequestration, recycling, stormwater and managed aquifer recharge; promote the use of competition through an examination of barriers to third party access and the costs and benefits of establishing a nationally consistent regime; examine the case for a micro-economic reform agenda in the urban water and energy sector with particular attention to opportunities for households and business to supply energy; examine the role of improved urban water, energy metering and billing practices in the allocation, use and management of water and supply of energy; finalise a review of water restrictions in Australia; investigate the establishment of a national clearing house for best practice urban water management and energy supply; investigate the development of a national system for reporting urban water and energy consumption;

The Environment Institute Life Impact The University of Adelaide Aligning Energy and Water Reform Consistent pricing principles – a signal to all – Full cost recovery – operating & infrastructure – Full management of externalities – Scarcity pricing – Urban entitlements to large users so they can manage risk Reform sequence designed to avoid perverse outcomes (eg meters to allow scarcity pricing) Attention to lock-in from large scale infrastructure and in the urban sector – Urban design and planning for infrastructure renewal – Population policy (Immigration Policy)

The Environment Institute Life Impact The University of Adelaide Conclusions Should we use price as a policy instrument? – Yes, much more than we do – Less as a means to achieve equity objectives Will markets work? – Not on their own – Investment and growth if Australia takes a consistent approach to the management of energy and water

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