NCEDA analysis of IDA World Congress technical sessions
Cost modeling of desalination systems
The main thread shared by papers in this Session was that project financing, particularly in current markets, has become very difficult and the industry needs to be prepared to face new and more stringent rules in project financing and project delivery. The increasing intrusion of privatization in desalination and water reuse, from necessity as a result of rationing on funds provided by governments and the traditional financial institutions, has been a key element to the booming developments that have been observed in the last decade yet it has contributed to diversifying the technology and identifying correct trade-offs between reliability, technical risks and price competitiveness.
A useful paper delivered by Rob Huehmer, Cost Modeling of Desalination Systems, (Authors: Kenneth Moore, Robert Huehmer, Juan Gomez, Jason Curl) identified several commercially available and/or non-proprietary desalination cost models currently existing in the desalination market. The cost models most frequently quoted in the grey literature are WTCost and cost curves contained the publication entitled Desalting Handbook for Planners. Other models described include Global Water Intelligence Desalination SWRO Cost Estimator, Desalination Economic Evaluation Program (DEEP), AUDESSY, WRA models and the Kawamura model.
Rob Huehmer, who delivered the group presentation focused on three cost classes of models – the empirical, parametric and his favoured model, an automatic design and cost program. His criticisms of the empirical model were that too many variables were involved and but this did not tend to lead to greater reliability.
For the parametric model, Rob Huehmer considered it was acceptable but was critical of the amount of data it required and the consequent complexity. He saw the future lying with automatic design and cost platforms. However, there were difficulties in trying to convince clients to adopt it. These ranged from the suspected limitations to the IT involved from prospective clients, insufficient engineering sophistication, union truculence, and clients’ attitudes to use of automatic cost models.
The presentation brought forth some spirited discussion. The first speaker pointed out that the model was not a reliable approach for thermal plants and he considered it should be confined to RO systems. The second pointed out that inputs are different for different locations so the method has inherent limitations. Session co-chair Graham Dooley pointed to the key role of the client in any commercial arrangements and the importance of a positive and productive relationship between client and participating partners.
Commercial issues plenary session
The plenary session was co-chaired by Ghassan Ejjeh and Graham Dooley. Ghassan Ejjeh introduced the topic for the Plenary “Is privately financed desalination/water reuse still relevant/possible?”. He began by focusing on project risk in the context of the recent financial crisis which has led initially to reluctance and now abandonment of long term finance to major water sup=ply projects by banks and financial institutions. The quality of sponsors and proponents of promoters were the only one which proceeded – the Bahrain STP went ahead as did the AbuDhabi-Suez project but many were shelved.
Mr Ejjeh drew attention to the dislocation occasioned by the “Arab Spring” series of uprising in north Africa which had put a number of major projects on hold, a situation likely to take some time to be resolved.
Unlike energy projects for which customers were prepared to pay for supply, water customers persisted in the view that water should be free or low cost. As a result, the commercial suppliers of water are ever inclined to keep costs low so as to maintain relationships with them. This means that they are not able to offer the same level of returns on water projects to funding bodies with the consequence that water projects are less attractive to those seeking a reliable and increasing return.
A series of panellists followed with the highlight being the comments by Graham Dooley who focused on the financing difficulties experienced by smaller plants. He pointed out that there was a perception of capital scarcity in Australia because of the very issues previously identified by Ghassan Ejjeh associated with the returns available to funding bodies from comparable infrastructure investments. To put some numbers on this calim, Graham quoted a 15% internal rate of return (IRR) for water projects competing against 35% and above for mining related infrastructure and the like.
Getting to his key issue, Graham Dooley pointed to the special funding difficulties faced by small water projects which are inherently more risky to the financier, than larger plants. These themselves, were turning to seek equity partners who would share project risks and funding. He pointed to three forms of equity which are being considered
(i) Corporate sheet equity seeking partners with strong balance sheets)
(ii) Private equity finance with entities such as superannuation funds, that are looking for better returns than those offered by bonds . For these partners, the risk equation has to be structured to suit them not the technology and its limits and this puts an understandable pressure on projects participants which, in actuality can produce a superior outcome.
(iii) Bundling projects – a number of smaller projects with mixed sizes and risk profiles are put together into a package which is more attractive to banks.
Graham Dooley closed with a gentle chiding of Australian proponents who tend to push too much risk on to the project and the project delivery team.
