Will Water Scarcity Be The Death Of Fossil Fuels?
By Christian Bonawandt
Recalculating the relationship between water and energy to ensure the security of both.
Water stress, whether caused by drought, access limitation, or contamination, has been increasingly detrimental for an ever-growing range of industries. Recently, a report by CDP, in collaboration with Planet Tracker, shed light on the significant impact of water insecurity on the financial performance of more than 4,000 companies. Of particular note are those companies in energy or energy-adjacent sectors.
As the world grapples with the impending threat of a 40% global shortfall in water supply by 2030, addressing water risks becomes imperative, not only for the sustainability of businesses but also for the success of initiatives aimed at combating climate change, including transitioning from fossil fuels to cleaner energy.
Asset Stranding
According to the report, nearly 20% of fossil fuel companies report their businesses are being impacted by water restrictions. In many cases, companies are experiencing asset stranding — in other words, the assets and resources are experiencing depreciation and devaluation, ultimately becoming a financial drain. The implications of such stranding events are significant, particularly at the project level, where disruptions in operations and production capacity can have cascading effects on the overall performance of companies within these sectors.
In light of this, the report makes clear that a business-as-usual approach in water management and business planning could jeopardize the expansion and sustainability goals of these sectors. As water-related challenges are anticipated to escalate, the stability of a secure water supply emerges as a linchpin for future growth.
A Boon For Clean Energy?
Such challenges in the fossil fuel industry have the potential to threaten production levels and increase prices. This combination, along with the rising need to conserve water in general, has the potential to drive investors and consumers toward cleaner energy sources.
Many renewable energy sources consume far less water. According to McKinsey & Company, a 50-percentage point increase in renewable energy usage results in a 60% decrease in water impact for certain industries.
But not all is rosy. The International Energy Agency (IEA) notes that while technologies such as photovoltaic cells and wind turbines require very little water, others such as concentrated solar power and biofuels are more water-intensive.
Even more significant, the CDP report highlights that water scarcity poses a particularly significant challenge to the metals and mining sector. The magnitude of impact varies, but the overarching concern is the potential stranding of assets due to increased water stress. Unfortunately, many clean energy technologies are heavily reliant on a variety of specific metals, and any vulnerability in this sector is bound to flow upstream in the form of supply chain limitations and price increases.
In fact, mining companies accounted for 40% of survey respondents reporting exposure to water-stranding risk factors. They face disruptions that could close operations, reduce production capacity, and constrain growth.
The Role Of The Financial Sector
The CDP report is ultimately aimed at investors, and notes that the concentration of capital towards activities exposed to the water crisis raises concerns about financial stability. The report highlights that 69% of listed equities acknowledge exposure to water-related risks that could lead to substantive changes in their business, with a potential value at risk reaching up to $225 billion. Unfortunately, 33% of listed financial institutions are not assessing their exposure to water risks. As a result, the report notes that the financial sector's vulnerability may actually be underestimated.
The consequences for companies and investors are serious. Production slowdowns or halts, disputes over water leading to reputational damage, and assets becoming stranded are some of the potential outcomes. A projected 40% global shortfall in water supply by 2030 further underscores the urgency for companies to transition to more water-resilient business models, including less water-intensive energy sources.
Moreover, it means that the overall vulnerability of fossil fuels to water-related challenges poses a financial risk that many investors are not taking seriously enough. While many clean energy sources still have exposure to water-scarcity-related risks, the transition toward renewable energy and sustainable practices provides an avenue for investors to mitigate such risks. In contrast, fossil fuel industries, particularly coal as well as oil and gas, face heightened susceptibility to water stress.
The report emphasizes the need for investors to recognize the interconnectedness of water scarcity, regulatory dynamics, and the financial health of industries heavily reliant on fossil fuels. However, the broader takeaway is that, in light of increasing water stress, investors (and businesses at large) need to consider broadening their energy exposure.
Christian Bonawandt is an industrial content writer for Water Online. He has been writing about B2B technology and industrial processes for 23 years.