Delta Conveyance Facility (DCF) Water Is More Expensive Than Desalination, Not Less As DWR Claims

The Department of Water Resources (DWR) puts out a lot of misleading information around the Delta Conveyance Facility (DCF).  When DWR released its updated construction cost estimate and benefit-cost analysis for the DCF, the featured graphic states that DCF water supplies have costs comparable to conservation programs and less than half the cost of desalination.  Specifically, DWR takes a $1325/af 100-year levelized cost from their DCF benefit-cost analysis out of context, and lays it next to estimates from other studies that make very different assumptions about interest rates, project life and other key inputs.  

DWR's cost comparison is garbage.  You don't have to be an economist or engineer to see why.  Simply compare the basic cost drivers of a desalination plant (the most expensive alternative) and the DCF: capital costs, energy use, and water yield.

Capital Cost:  Recent large scale desalination projects/proposals in southern California (Huntington Beach, Carlsbad) have capital cost estimates of about $1.5 billion in 2023 dollars for about 50,000 acre feet (af) of reliable water supply ($30,000 per annual af).  The DCF is $20 billion for highly variable water yield that is projected to average about 400,000 af ($50,000 per annual af ). (Advantage: Desal)

Time to Build:  Large-scale Desalination, about 5 years.  DCF, about 15 years.  (Advantage: Desal)

Energy Use:  Desalination uses about 5 megawatt hours of electricity per af.  Energy use of the State Water Project are 3-5 megawatt hours per acre foot, depending on final delivery site.  Additional water supplies from the DCF have to be pumped hundreds of miles through the SWP to users whereas Desal plants are located near users.  DCF operations (pushing water through the Delta tunnel) would add energy costs to the SWP total.  The bottom line is that getting water through the DCF and to its end users will have electricity requirements similar to desalination.  They are the most energy intensive water sources in California, desalination forcing water through membranes, whereas DCF water must be pumped hundreds of miles and over mountain ranges.  (Advantage: DCF somewhat lower energy use for some locations, and even for other locations)

As the above make clear, DCF water supply is likely to be more expensive than desalination, not less.  And if DCF is at or above desalination costs, DCF water is way more expensive than conservation, recycling, brackish water desalination, and stormwater capture.  How does DWR get the opposite result?

Taking cost inputs and calculating a levelized cost per acre foot requires a few additional assumptions which need to be consistently applied.  The DCF assumptions from its benefit-cost analysis are wildly different than those used in the reports they are using for comparison.

1. Interest rates:  The DCF estimate is based on a social discount rate that starts at 2% and declines over time.  The cost comparison estimates are based on studies by Pacific Institute, PPIC, and CPUC that base their interest rate on the cost of capital.  I don't have the CPUC report, but the Pacific institute report uses 6% and PPIC 3.5%.  So the comparison studies are using interest rates two to three times higher than the DWR's DCF analysis.

2.  Assumed project lifespan:  The DCF report spreads its cost over 100years.  These other studies spread the project costs over 25 to 50 year time periods.   

If you use an interest rate that is one-half or one-third the level in the comparison study, and spread the project costs over 2-4 times more years than the comparisons, you can make the most expensive water supply look like the least expensive.  

Reasonable people can disagree on the exact values for these interest rate and lifespan assumptions, but consistency is required.  DWR is not doing this.  They are comparing their cost estimates to studies with wildly different assumptions about interest rates and operating lifespan so they can make a graph that claims up is down.

The bottom line is that water agencies evaluating the cost-effectiveness of the DCF should do their own math.  DWR's comparative cost analysis is not credible.

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May 20 Addendum:  After posting this, I decided to calculate an estimated a levelized cost with 50 years of operations, the costs, timing and water supply listed in the benefit-cost report, at a 2%, 3.5%, 6% rate.  The 50 year operations and 3.5% and 6% rates make these estimates more comparable to the PPIC and Pacific Institute estimates shown.  If you are going to use this graph for comparison, these are the values you would use (with a big caveat that this is untreated water at the Delta).

2% = $1,971

3.5% = $2,889

6% = $5,089

For a more accurate comparison, you could put $2,889 to $5,089 as the DCP values on the DWR figure below that is the subject of this blog.  However, that is too low because that is the cost of untreated water at the opposite end of the California aquaduct.  I am not sure of exactly what to add on for that, I have heard estimates of up to $600 af to move water from the Delta to SoCal.  At minimum, one would add the cost of 3-5 megawatt hours of electricity per acre foot to the operating costs.  Whatever the additional costs of conveyance, the results are consistent with my initial argument that the DCP is more expensive than desalination, and substantially more expensive than other alternatives.   

Quick Reaction to Delta Conveyance Benefit-Cost Analysis

Received the B-C analysis about 2 hours ago, and I am getting requests for instant reaction.  Posting here rather than respond to individual messages.  Three quick observations.    

1.  Seismic risk reduction benefits are low.  They are about 2.5% of the project's benefits according to Sunding and quite small relative to costs.  

Sunding's analysis confirms that earthquake risk is not a compelling reason to build the tunnel, a consistent finding over time.  

Can tunnel advocates stop hyping this point.  Even DWR's own analysis shows the tunnel is a lousy way to address earthquakes and flood risk.

2.  The project is all about urban water supply.  It accounts for virtually all the benefits, and urban water agencies (mostly Metropolitan Water District) will be pay the vast majority of costs. 

Urban water agencies, their decision makers and stakeholders need to take a critical eye at these estimates.  The value placed on this urban water seems extremely high.

3. Comparison to 2018 single-tunnel analysis raises questions about whether the benefits are overestimated.  

In 2018, he estimated 850,000 af of annual water yield from a tunnel, and in this analysis is it is 400,000 af.  

In 2018 analysis, urban users valued a larger water supply at $9.9 billion (2018$).

Now, a much smaller amount of water is valued at $33.3 billion to urban users (2023$)

It's a massive increase for less water.

A good chunk of the difference is due to inflation (2023$) and a lower discount rate (2% vs 3%) based on revised federal guidance.  If that 2018 analysis was redone with 2% discount rate and 2023$, that $9.9 billion would nearly double by my back of envelope math, let's call it $20 billion.  So consistency on inflation and discounting covers about half the gap.

But how do we get from $20billion to $33 billion urban water supply value, especially when the new project has a lower increase in water deliveries?  In other words, this report shows 50% more value from 50% less water.  

I will note that the urban water values are based on future urban water demand as estimated in agencies 2020 urban water management plans.  Experience shows those plans consistently overestimate demand growth, and I suspect that piece requires a lot of scrutiny.  He estimates the tunnel will reduce future water shortages in urban areas from 9% to 5%.  However, future urban water shortages are likely to be much lower with an updated or alternative estimate of demand growth.

Please note that this is instant reaction. I have not had time to review carefully.

Questions for the release of the Delta Conveyance benefit-cost analysis

This evening, I learned that the long-awaited benefit-cost analysis for the Delta Conveyance Facility (DCF) is being released tomorrow morning.  DWR put out an FAQ in advance of the release last week, but it didn't include any of the questions below - so perhaps someone who is invited can ask them directly.  Dr. Sunding did these analyses in the 2010s for the WaterFix, including an analysis of a single-tunnel option.  His old analysis of a single-tunnel WaterFix suggests the current single-tunnel DCF would fail his own benefit-cost analysis, as I explained in the past here and here, because the DCF water supply benefits are lower and the costs higher than in 2018.  Perhaps this is why we have had to wait so long for this update, it must take a lot of time and creativity to figure out a way to increase the benefits. (Note: This first paragraph was revised 5/16 9:30 AM, the morning after the original post.)

This report is being released over five years after Governor Newsom directed DWR to switch to a single-tunnel plan, and nearly two years after DWR released the details of its preferred project design in the Draft EIR.  The Final EIR was released last year.  

• Should benefit-cost analysis be conducted before or after an alternative is selected?

When WaterFix considered switching to a single-tunnel, staged implementation, you produced a benefit-cost analysis for a single-tunnel alternative in a few months.  

• Why did it take so long to release this report?  

In your WaterFix benefit-cost analyses in the 2010s, you did not use the same no-tunnel baseline and project description as the EIR, and you did not include any environmental costs.

• In this analysis of the DCF, are you being consistent with the EIR baseline and project description?  

• If not following the EIR.  Why?  

• Does this analysis include environmental costs of the tunnel?

None of the previous analyses you did for the WaterFix were ever submitted to the State Water Board or the Delta Stewardship Council as evidence that the WaterFix was in the public interest.

• Why not?  

• Will this analysis be added to the current petition before the State Board?  

In your WaterFix benefit-cost analysis, you found that expected economic benefits from earthquake risk reduction due to the tunnels were relatively small.

• Are your current findings the same?  If not, why?

• Considering the fatalities, infrastructure and property loss from mass levee failure, is a water tunnel the best way for the State to address this risk?

• Have you done benefit-cost analysis comparing levee investments to a water tunnel to address earthquakes and flood risk?

The Central Valley Project, which was supposed to pay 45% of the cost of WaterFix, has already decided not to participate in the DCF due to cost.  Several agriculture serving State Water Project agencies are also declining to participate due to costs.

• What does your analysis say about whether the remaining agricultural water suppliers can afford their share of the DCF?

• Does your analysis predict that agricultural water agencies will stick with the project, or does it predict that more agricultural water users will drop out of the project?

Metropolitan Water District’s sales have declined in recent years, and population has declined in its service area.  Its 10-year financial projection forecasts rates will increase at 3-times the expected rate of inflation over the next decade with flat or declining water sales.  

• Does your analysis project increasing or decreasing water demand for MWD?

• Have you analyzed its ratepayers and member agencies capacity to pay for the tunnel?

In your other work, you have written a lot about how uncertainty reduces the benefits of investing in a project, including regulatory uncertainty.  There is a lot of uncertainty about how the DCF will be operated, including uncertainty about environmental effects.  Adaptive management is part of the plan.  

• Did you reduce your estimates of benefits to account for uncertainty?

• Did you account for uncertainty in the estimates of cost?

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Last week, DWR released an FAQ document that reserved its only call-out for 4 bullet points describing “benefits of the Delta Conveyance Project will not be quantified in the benefit-cost analysis and yet are also compelling for decisions-makers.”  These comments and questions are regarding these four bullet points in the FAQ.  

Groundwater supplies.  In previous studies of WaterFix benefits and costs, Dr. Sunding explicitly accounted for constrained ground water supplies and limits on groundwater pumping, it significantly increased the value of water supplies to farms. It seems likely that DWR’s statement about this in its FAQ is false and these benefits are quantified in the benefit-cost analysis.

• Are constraints on groundwater included in the valuation of water supply benefits?

Job creation.  You have estimated jobs created from tunnel construction, which DWR calls a benefit in its FAQ document describing your report. 

• If the costs increased, wouldn’t the jobs increase too? 

• Have you ever said that jobs are a measure of costs not benefits with respect to benefit-cost analysis?

• If funds were spent on tunnel alternatives instead of DCF, how many jobs would be created? 

• When higher water rates reduce household income, how many jobs are lost?

• For every dollar spent, do tunnel alternatives create more or fewer jobs than the tunnel?

Increased Operational Flexibility:  Like groundwater benefits, this could be included in the benefit estimates for water supply and water quality.  This issue does raise questions about whether DWR intends to actually operate the tunnels as described in the EIR.  Regarding tunnel operations, the EIR states that “Shifting from south Delta intakes to proposed north Delta intakes has trade-offs and is not expected…” 

• Do your benefit estimates reflect flexibility from the project operations in the EIR?

Delta Community Benefits Program:  The program is speculative and undefined.  Funding is expected to be minimal.  Is funding for this undefined program included in the cost estimate? If not, it shouldn’t be mentioned here. 

[5/19 Note: I have seen the report now and it is a lot different than the WaterFix reports, and thus it answered quite a few of these questions. Most importantly, it doesn't change the project description from the EIR, the biggest problem with the old WaterFix reports.  But the new analysis does some new things that are also very questionable.  I'll leave this post up as the blog is a personal journal, but note the date, 5/15.  There will be more analysis, some of it on this blog.]