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density and lower price points,2 this approach requires significant investments of energy (Section 2.3) and is not economically feasible for bulk water. In terms of infrastructure and operation, the most significant costs for energy services are related to capital investment in generating capacity and fuel. The cost for water provision is generally relatively low, but the risk arising from interruption of supplies can be significant. For water, the most significant costs are investment in networks and operation (including energy) and maintenance. In many critical installations the risk of energy supply interruption is also important, hence the existence of standby generation plants in many systems. An additional challenge is that the water and energy communities have significantly different fundamental views and conceptual approaches. There is a need to create consistent frameworks for analysis, vocabularies and datasets that enable the two domains to understand each other and to communicate coherently with one another’s decision-makers. 1.3 An economic comparison The highly varied nature of both energy and water means that comparisons and differences have to be discussed at a high level of generality. The obvious similarities of networked urban supply in both do not mean that other aspects of the two domains can be treated alike. It is particularly important to differentiate water as a service and water as a resource, and similar considerations apply to energy as raw materials and as services (or primary and secondary energy). Also, the ‘market for water services’ should not be confused with ‘water trading markets’3 in the sense of trading rights to use raw water. 1.3.1 Economic similarities Energy and water services are often (though by no means universally) structured as national, regional or local monopolies and are frequently publicly owned (though this is becoming less true of energy). Both energy and water have large fixed costs of supply in extraction, transmission and distribution, typically with heavy ‘sunk costs’ in facilities that have no alternative uses. These fixed costs form a large proportion of the total cost of supply. The ‘marginal cost’ of supplying extra units from existing capacity, particularly for networked services, is relatively low; conversely, the marginal cost of extra output once capacity is fully taken up is high, because new capacity has to be created. This implies that tariffs should (a) be flexible, reflecting the amount and timing of consumption; and (b) contain both fixed and variable elements, to ensure that fixed costs are covered whatever the level of demand. For users not connected to a network, self-supply is necessary, frequently at a high cost compared to that of the public networked service. Thus there are large benefits from connection. However, the option of self-provision, whether for heat (wood), water (own sources), or sewerage and household sanitation, affects what the public supplier can charge. Large businesses and institutions have the economic resources to support options to provide their own services, which limits how much they can be asked to subsidize other users. The recurrent operating costs of both water and energy comprise administrative overheads, labour, raw materials, power (in the case of water) and water (in the case of power and other forms of energy). In publicly owned utilities, administrative and labour costs tend to be proportionately higher than in privately owned utilities. In certain instances this may be due to political patronage, which inflates headcount and can impede reforms. Relatively high staff costs often leaves insufficient budget for materials, spare parts, electricity and other consumables. In Africa, and to varying degrees in other developing countries, maintenance is often insufficient or deferred, resulting in frequent outages, leakage and poor service. Power and water can have high levels of losses and inefficiency (AICD, 2012, for power p. 187, for water p. 309). Due to the high public profile of both services there is often serious political interference with tariff setting, resulting in a high proportion of power and water utilities charging uneconomic tariffs (or failing to collect them) and posting financial losses. Farmers typically benefit from low charges for both power and irrigation water. Another way of describing this situation is that the energy and water domains both attract large perverse subsidies (Box 16.1), in the sense that they encourage greater consumption of natural resources that are, in different ways, scarce and costly (Komives et al., 2005). The operation of services allows for involvement of the private sector to varying degrees in both energy and water, subject to regulation due to the monopoly element 2 Price points are prices at which demand for a given product is supposed to stay relatively high. 3 Water trading is a voluntary exchange or transfer of a quantifiable water allocation between a willing buyer and seller. 18 CHAPTER 1 STATUS, TRENDS AND CHALLENGESPDF Image | Water and Energy
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