12.5. Estimation Cost of Water for Drinking Water Treatment Plant

Agenda 21 is a non-binding, voluntarily implemented action plan of the United Nations with regard to sustainable development. According to Agenda 21 of UNEP a prerequisite for the sustainable management of water as a scarce vulnerable resource is the obligation to acknowledge in all planning and development its full costs. Planning considerations should reflect benefits investment, environmental protection and operation costs, as well as the opportunity costs reflecting the most valuable alternative use of water. Actual charging need not necessarily burden all beneficiaries with the consequences of those considerations. Charging mechanisms should, however, reflect as far as possible both the true cost of water when used as an economic good and the ability of the communities to pay (UNEP, 1993). Water treatment plants function largely to bring raw water quality to potable standards. In fulfilling this function, treatment process costs vary depending on the quality and source of the raw water and the availability of treatment resources. For example, RO treatment cost of brackish water depends on salinity, peak demand, and local energy costs (Glueckstern, 1991; Avlonitis, 2002). The economics of potable water treatment are also impacted by the distribution of demand types (Stevie and Clark, 1982). Small systems tend to serve almost exclusively residential demands while larger systems serve increasingly smaller fractions of residential demands. In addition, treatment costs are impacted by a variety of design variables including flow rate, site constraints, water quality objectives, manufacturer quotes, and other factors. Due to the large number of variables, the same treatment train may have significantly different costs from one site to another (Plumlee et al., 2014). At this process, economic cost includes opportunity costs of diverting raw water from alternative uses to the household; storage and transmission of untreated water to the urban area; treatment of raw water to drinking water standards; distribution of treated water within the urban area to the household and any remaining costs or damages imposed on others by the treated water (Radke, 2013). Therefore, it is useful to provide a brief overview of a few key issues involved, as a means of introducing the general topic to understanding of the costs involved with the provision of water, both direct and indirect.

The "21" in Agenda 21 refers to the 21st Century.

Full Supply Costs

Full supply costs are composed of two separate items: Operation and Maintaince (O&M) Cost, and Capital charges, both of which should be evaluated at the full economic cost of inputs (Rogers at al 1988). Fully supply cost also can be classified as “financial costs”, which is included capital cost, operation and maintenance cost, and administrative cost (Figure 12.3). Treatment costs include operating and capital costs associated with the purification of source of water by the plant and distribution expenditures involve all costs incurred in delivery of the finished or treated drinking water to the consumer (Stevie & Clarck 1980).

Figure 12.3. General Principles for Cost of Water (Rogers et al., 1998)

Capital Costs Capital costs can occur during the operational lifetime of the system include installation, maintain building and the treatment plant itself and can be categorized as direct and indirect costs. Direct costs included purchase of equipment, land, construction charges and pre- treatment of water. These costs for the preparation and construction of the system up to the moment that the system becomes operational. Thus, include the costs related to the construction and equipment of the new system during the pre-investment (planning) stage. Generally, for the water treatment facility Building& Construction have the largest share in the total cost of the treatment plant and new mains network. According to European Commission, (2005) is about 75-80% of the total costs of during the construction phase of the project. In addition, a drinking-water system consists of a variety of fixed (constructed) installations, such as filter units, clear water reservoirs, and pipes. Installation cost assumed to be 30% of equipment costs (Plumlee at al. 2014). The project requires equipment, which will be a capital cost, for example items such as pumps and power systems. Indirect capital costs are costs that are not directly related to the treatment technology used or the amount or quality of the treated water produced, but are associated with the construction and installation of a treatment process and appurtenant water intake structures. They can be considerable and must be added to cost estimates if they are not included as a line item component or a factor in the major (cost driver) elements of a technology. They include indirect material costs (such as yard piping and wiring), indirect labor costs (such as process engineering) and indirect burden expenses (such as administrative costs) (EPA 2014). Capital charges include capital consumption (deprecation charges) and interest costs (Whittington & Hanemann 2006). Installition capital expense includes the deprecation and interest spent to make the plant operational. Depreciation is a particularly important aspect of fixed costs for this approach can allow for the build-up of funds to replace especially larger pieces of equipment and parts in the system i.e. pipes (Jagals, P. & Rietveld, 2011).

O&M Cost

O&M Cost means all actual cash operation, maintenance and administrative costs relating to the Projects. For example, labor, energy, chemicals, consumables spares etc. However, because of associated with the acquisition and treatment of water O&M cost will vary according to treatment technology, annual production volumes and the type of source water processed, raw water quality, local electricity costs etc.. According to EPA (2014) O&M Cost, include annual expenses for water treatment plants are:

• Labor to operate and maintain the new treatment equipment and buildings
• Chemicals and other expendable items (e.g., replacement media) required by the treatment technology
• Materials needed to carry out maintenance on equipment and buildings
• Energy to operate all equipment and provide building heating, cooling, lighting and ventilation
• Residuals discharge fees

Opportunity Cost

Opportunity Cost is the alternate use of the same water resource. Ignoring the opportunity cost undervalues water leads to failures to invest, and causes serious miss- allocations of resource between users (Rogers et al., 1998). So that achieving efficient water use is fundamentally about recognizing water’s opportunity costs. The opportunity cost of water is zero only when there is no alternative use; that is no shortage of water. Depending on the availability or scarcity, opportunity costs may vary widely in different conditions and locations.

[1] For example, Statictic Canada, examines the effect O&M costs for two drinking water treatment systems: conventional systems, which treated the most surface water and unfiltered systems, which treated the most groundwater. Their model suggest that O&M costs per ML for treating surface water are higher than those treating groundwater for annual production (URL 6).

For example, in a location with abundant fresh water the opportunity cost of diverting water from existing or future users be very low or even zero. However, it is seen rarely today condition, in more and more places these opportunity costs associated with water diversion and the externalities. In this perspective, the opportunity costs of water resource use and the economic value of the benefits can be compared in terms of whether the use is economically sustainable or socially optimal. It is also important to analyse the infrastructure’s opportunity costs of water project. Based on difference in costs of production, so it is a good technique to estimate value of water. In here opportunity cost of capital, reflects discounting rate. It is that rate of return, which can be earned from next best alternative investment opportunity with similar risk profile. The use of a single discount rate to account for both the social opportunity cost of capital and the social rate of time preference is appropriate for the water and sanitation infrastructure.

Economic Externalities

As indicated Chapter 11, externalities as an action that affects the welfare of people via a non-market process. Externalities may be positive or negative, and it is important to characterize the situation in a given context, estimate positive and negative externalities, and adjust full cost by the impacts (Rogers, et al). Existence of an environmental or social impact does not necessarily imply that an externality occurs. An externality only exists if there is also a cost or benefit associated with a particular impact where cost or benefit is not recognized in any markets (URL 7). Externalities affect of economic activity, because costs and values are not revealed and, hence, not taken fully into account in production process and in market-place transactions. Thus, externalities are “spillover” or “third-party” effects associated with economic activity. A failure to account correctly for externalities have very real and significant impacts of community well-being and hence efficiency, effectiveness and desirability of alternative options for resource use in society. For that reason, a large array of regulatory, community and political processes are used to reveal cost and value of externalities to water users. Some externalities can be quantified directly from market prices. For example, a change in water quality of a river could affect the magnitude of fish catches; the decline in fish catches could be quantified economically by considering the loss of income from commercial fishing, or by estimating the cost of a food substitute. Similarly, if drinking water quality is affected, economic costs might be equated to increased health costs for treating water-related sicknesses, or also to the costs of improved water treatment (UNEP 2015). There are also externalities due to over extraction from on contamination of, common pool resources such us lake, groundwater aquifers. In general, many of the externalities associated with common-pool resources are negative. Examples of upstream or supply externalities include both direct impacts at the storage site and, also, effects that storage has on the performance of river and groundwater systems. These externalities are generated, in part, by competing demands for water. The more water diverted into the urban supply system, the less available to support agriculture and to maintain valuable environmental functions. All water has an opportunity cost and, in the absence of a competitive market for it, sometimes allocation to the urban sector may not be its highest and best use (CSIRO, 2000).

Environmental Costs

The Environmental externalities are those associated public health and ecosystem health. (Rogers at al. 1998). The environmental cost represents the costs of damage that water users impose on the environment and ecosystems and those who use the environment (e.g. a reduction in the ecological quality of aquatic ecosystems or the salinization and degradation of productive soils). Additionally, the environmental costs refer to those associated with the depletion of water ecosystem quality, which in turn leads to a decrease in the capacity of water-related resources to provide goods and services that are beneficial for human well-being (Koundouriat al. 2016.) On the other hand, water treatment industry can be responsible for global environmental impacts, the most common amongst which are the depletion of natural resources and indirect release of pollutants into the water, land and air through chemicals and energy consumption. From this point various environmental, impacts may arise from the various aspects of urban water service provision, including catchment management, the water supply system, water delivery, drinking water treatment, and wastewater treatment. These impacts can be either direct or indirect. To estimate the environmental damage, it is necessary to apply appropriate valuation techniques that allow the estimation of the total economic value of water resources across the various economic sectors, and willingness to pay for the conservation of water resources of all affected individuals (Koundouriet al., 2016). The identification of the potential ways, Life Cycle Assessment (LCA) use in evaluating the systems in an environmental impacts – based an in a holistic way that enables the identification of critical processes and the potential improvements for existing structures. The LCA methodology helps to calculate of environmental impacts in a systematic and scientific way by regarding all the inputs and outputs of a system. Hence, it allows for comparison on environmental grounds. LCA has been used widely in the field of urban water management whether for a whole urban water system or for a part of the system

Full Economic Cost

The full economic cost of water is the sum of Full Supply Cost and also consisted of Opportunity Cost and Economic Externalities. For economic equilibrium the value of water the value of water, should just equal the full of cost water. At this point, the classical economic model indicates that social welfare is maximized. In practical case, however, the value on use is typically expected to be higher than the estimated full cost. This often because of difficulties in estimating the economic and environmental externalities (Rogers et al., 1998). In this context, cost-benefit analysis (CBA) is a technique for assessing monetary social costs and benefits of a capital investment project along a given period. In these analyses, the external cost and benefits considered alongside the internal cost and benefits. Thus, the total social cost and are benefits are measured. CBA uses in the water sector to justify investment needs and improvements of water quality and other serviceability parameters. It provides a structured comparison of all the costs and benefits when deciding on the optimum level of water quality improvement schemes.