Water: Moving Out of Silos

By Charles Yonts, Debra Tan 13 January, 2014

CLSA's Yonts interviews Tan on water & coal, food, textiles. See why it is time to 'un-silo' water, CLSA's Yonts interviews Tan on water & coal, food, textiles. See why it is time to 'un-silo' water

Policy on coal, pricing, pollution, food are all linked to limited water resources: it's time to move out of silos
Water is a matter of national security: we should see more inter-governmental cooperation on enforcement
With the water-for-coal plan, it looks like China is thinking out of silos: competition for water will be key
Charles Yonts
Author: Charles Yonts
Charles Yonts has been head of Sustainable Research at CLSA, a leading independent stock broker, since May 2011. He held the position of CLSA solar and cleantech analyst before assuming this role. Prior to joining CLSA in 2005, he worked at Insight Pacific and Primasia for three years covering Taiwan’s markets. Charles has a BS in finance from the University of Minnesota, and studied economics and Chinese at Shanghai’s Fudan University.
Read more from Charles Yonts →
Debra Tan
Author: Debra Tan
Debra heads the CWR team and has steered the CWR brand from idea to a leader in the water risk conversation globally. Reports she has written for and with financial institutions analyzing the impact of water risks on the Power, Mining, Agricultural and Textiles industries have been considered groundbreaking and instrumental in understanding not just China’s but future global water challenges. One of these led the fashion industry to nominate CWR as a finalist for the Global Leadership Awards in Sustainable Apparel; another is helping to build consensus toward water risk valuation. Debra is a prolific speaker on water risk delivering keynotes, participating in panel discussions at water prize seminars, numerous investor & industry conferences as well as G2G and academic forums. Before venturing into “water”, she worked in finance, spending over a decade as a chartered accountant and investment banker specializing in M&A and strategic advisory. Debra left banking to pursue her interest in photography and also ran and organized philanthropic and luxury holidays for a small but global private members travel network She has lived and worked in Beijing, HK, KL, London, New York and Singapore and spends her spare time exploring glaciers in Asia.
Read more from Debra Tan →

CLSA Report -Mopping upAs part of CLSA’s latest “ESG in China Report: Mopping Up”, published on 13 December 2013, China Water Risk’s Debra Tan was interviewed by Charles Yonts, the Head of Sustainability Research, on all things water in China – from water & coal to textiles, food & government policies.

The conclusion was that Chinese government policy on pricing, enforcement, food, energy was all linked due to limited water resources – it is time to “move out of silos” when thinking about water.

The “moving out of silos” view was backed since by the Ministry of Water Resources announcement on 17 December saying that regional water availability will dictate coal development plans in China. This Water-for-Coal Plan’  is to set out water allocation for the development of China’s coal bases and forms part of the “Most Stringent Water Management System”  which set provincial water use quotas in order to meet the “Three Red Lines” (the national water use quotas for 2015, 2020 & 2030).

The full interview is below thanks to CLSA, who has kindly allowed us to republish it. Click here to access CLSA’s ESG in China: Mopping Up (professional investors only).


Charles Yonts (CY)What share of China’s available water is used for coal/power? Why is it important that this is addressed?

 

“Chinese policymakers will obviously have to look for water solutions in coal production and power generation if they are to balance food and energy security”

DT: Some 97% of power generation requires water on a daily basis and 53% of China’s ensured coal reserves are located in water-scarce regions. Now put this against the fact that nearly 40% of the country’s agricultural output value is also derived from water-scarce regions and you have a clear waterenergy-food nexus issue. In short, limited water in China will shape her food and energy policies.

With more than 50% of industrial water used in coal and coal-related industries, Chinese policymakers will obviously have to look for water solutions in coal production and power generation if they are to balance food and energy security.

CY: How do you think the contradiction between China’s coal-chem/coal base development plans and water resources will be resolved? Are there any tipping points we could watch for?

DT: Lots of people look at these issues – food, water, energy – in silos (independently) . This is true not only in China, but also the USA and elsewhere. Even globally, these are only starting to be viewed in conjunction with each other: both the UN World Water Day and World Water Week forums will focus on the water-energy nexus in 2014. We should be moving out of silos.

“Lots of people look at these issues – food, water, energy – in silos (independently). This is true not only in China, but also the USA and elsewhere… we should be moving out of silos”

China is moving as quickly as elsewhere; in some sense even earlier – the water energy nexus has been a hot topic this year in the capital partly due to the smog. What’s good for air might not be good for water. For example, hydro power is good for air quality, but not necessarily for water or geopolitical risk (trans-boundary risk). Desal is good for water, but not so for climate change, as it is energy intensive. Coal-to-chem is actually a very small portion of coal use in China – I believe no more than 5% (off the top of my head).

Coal consumed in conversion in 2010

“Coal-to-chem is a strategic sector so it’s here to stay, but the extent of development is in question… it is unlikely that approvals will be made ‘in silos’ in the future.”

Coal-to-chem is a strategic sector so it’s here to stay, but the extent of development is in question. As comprehensive, cohesive policies (across energy, water and food) are developed, coal-chem will be revisited. I hear that there are many provincially approved coal-chem plants that are still awaiting central government approval.

It is unlikely that approvals will be made ‘in silos’ in the future.

China Water Risk - Water For Coal Plan Summary

“Tipping points will stem from pricing and higher penalties”

Tipping points will stem from pricing and higher penalties (which is another form of pricing). Water is a matter of national security and we expect a shift from province back towards central control on matters which impact energy and food security and better enforcement of pollution.

Meanwhile, provincial government incentives are also changing, and could prove a less obvious tipping point. As of last month, there will be more emphasis on achieving environmental targets in deciding the promotion of provincial officials in Ningxia. This could be the catalyst for change to provincial ‘report card’ priorities.

Another less obvious tipping point could be extractive industries moving ahead of policy. Shenhua has set water targets on coal-chem projects, albeit in reaction to Greenpeace [see Calvin Quek’s opinion here]. Perhaps they’ll even go a step further. Coal majors are also setting proper water strategy. These could all be tipping points.

CY: Are there any technological fixes solutions for water consumption in coal mining and power production?

DT: Yes, on average for China you can halve water use in coal production through best-in-class technology and design. You can also reduce water consumption in coal-fired power plants.

For coal production, you would expect to see most of these gains in the TVEs (town village enterprises), which make up 35% of coal mined, because given lack of scale, these would generally be on the high side of water consumption per tonne of coal mined. There will either be pressure to consolidate these TVEs or they could shut down due lack of demand brought on by coal consumption cuts imposed by provinces.

China’s coal reserves are concentrated in the North, where water is most scarce

Ensured coal reserves for 2011

For coal-fired power generation, the choice of the plant type will dictate the water used. As an aside, keep in mind that it is not only coal-fired power that relies on water. For example, concentrated solar power uses as much or in some cases, even more water than coal-fired thermal plants for cooling per unit of energy produced.

Provincial water quota growth reduction - Cagr over 2010-15Regardless, expect to see more environmental spend with tech fixes. Thus, you have to spend wisely and setting a cohesive corporate water strategy will allow you to do that – assess your water risk, set water-usage targets vis-à-vis scarcity for the region and provincial usage quotas and wastewater targets to be compliant with provincial discharge quotas.

Also bear in mind that a truly comprehensive water strategy would include energy-saving strategies (saving power = saving water) and any future expansion plans will also be viewed through a water lens.

CY: We have been seeing signs of better enforcement of environmental regulations, and concomitant tightening of those regulations. Are we being overly optimistic that this time is different (always scary words) and Chinese environmental enforcers will have teeth?

DT: The optimism is not entirely misplaced. I expect standards to be streamlined and standardised (ie, drinking water standards will be standardised across provinces). The proposed amendments to the existing environmental law are currently in their fourth drafting session. The amendments are to give environmental enforcement more teeth. The headline revisions: ‘Environmental protection is basic national policy’ are to be enshrined, along with harsher penalties, including daily fines and no upper limits to fines for repeat offenders.

“expect standards to be streamlined and standardised …  [we] hope that people in power are trying to give the MEP more teeth and litigation will ultimately be opened up to all.”

The third draft was expected to be approved in the third plenum. The impasse is that all litigation should be channelled through the All-China Environment Federation (ACEF). Back in July, we wrote on China Water Risk –Environmental Law: 40 year setback that there was clear signal from the People’s Daily that limiting litigation to just the ACEF would damage China’s attempts to clean-up. Sure enough, the third draft has seen the right to sue expanded to 13 entities.

The fact that the final draft is further delayed gives us hope that people in power are trying to give the MEP more teeth and litigation will ultimately be opened up to all.

“water is a matter of national security …  cooperation between the police and the environmental bureau is just a start to beefing up enforcement.”

In fact the Ministry of Public Security is now joining forces with the MEP to fight environmental crimes, namely – hazardous waste, exceeding discharging quotas and pollution, which adds to the deterioration of ecological environment. As I mentioned before, water is a matter of national security and that this cooperation between the police and the environmental bureau is just a start to beefing up enforcement. Without a stick, it is hard to see how the government can achieve the ambitious Rmb4.5tn target set for the Energy Saving and Environmental Protection Industry.

Regardless, we expect to see more litigation activity. Recently, the ACEF, filed a high profile suit against PetroChina. ACEF is suing PetroChina for allegedly dumping wastewater illegally at drilling operations in Jilin. The amount – roughly US$10m – does not rank high on the league table of environmental fines at oil majors, but it does clearly suggests that SOEs are not exempt. Plus the fact that it aired on CCTV could signal the willingness to use media in engaging the public in the fight against pollution.

CY: What are China’s priorities for dealing with municipal and industrial waste water? What are the key dates and programmes we should be watching to assess progress around tariffs?

DT: Where to start?

“Domestic wastewater has more than doubled from 1998 to 2011 … but many say that industrial wastewater is under-reported”

Domestic wastewater has more than doubled from 1998 to 2011: 19.4b cum pa, to 42.8b cum pa in 2011, easily outpacing urbanisation, which increased from 34% to 51% during the same period. Domestic wastewater discharge has also outpaced industrial wastewater. Industrial wastewater now only officially accounts for 35% of total wastewater discharge leading many to say that industrial wastewater discharge is under-reported. Bear in mind that these numbers do not include non-source-point pollution such as agriculture.

Wastewater pipe buildout has been slower than targeted

Increasing the scope involves building new wastewater plants, upgrading existing plants (to make them more effective) and a big push for pipeline development. This is one of those rare areas where China has fallen well short of targets.

During the 11th five-year plan, China was meant to have built 160,000km of wastewater pipelines, but by the end of 2010, only 70,000km of pipelines had been built. Beijing announced its water plan in August 2013 with wastewater, recycled water and pipeline targets. We expect other cities to follow suit – you can read about it on China Water Risk’s Water: Beijing Leads the Way.

“new drinking-water standards are expected to be in place by 2015 … ultimately, quality standards can only be raised when tariffs are adjusted more comprehensively”

The new drinking-water standards are expected to be in place by 2015 and there is pressure to up investment to treat water to meet this. Ultimately, quality standards can only be raised when tariffs are adjusted more comprehensively. There are signs of change. After the implementation of the residential progressive tariff scheme, even the lowest water users in Guangdong are paying more for water than we do in Hong Kong. As there has not been any uproar in Guangdong, we expect other big cities in China to follow suit with similar hikes next year. Even better news is that just yesterday, the NDRC announced that water-price reform will be completed by 2015 signalling that water intensive industrial users will bear the brunt of this.

CWR Urban Three Tier Water Tariff System Summary

CY: Can you comment on how water ties in to food safety?

“A  Pew Research survey conducted this year clearly shows that fears of water and air pollution fears have increased over the space of a year.”

DT: With over 70% of the groundwater in the North China Plain, (China’s agri belt) being badly polluted, many worry over food safety. Also around the same time this year, MEP admitted the existence of cancer villages in their efforts to tackle hazardous chemicals. Many worry about whether they are eating ‘cadmium rice’ and we have seen lots of chatter on weibo on this as a result. A survey conducted by Pew Research Centre this year clearly shows that people water and air pollution fears have increased over the space of a year (2011-12) – I think over 40% see it as a very big problem while concerns over food safety remains high at 38%.

Air pollution, water pollution and food safety running neck and neck in Pew’s research

Pew Research - Share of respondants in China that view this as a major problem

While there is no shortage of depressing statistics, one site that we’ve found very telling (and often disgusting) on the food safety issue in China is ‘Throw it Out the Window’. This came about because Wu Heng, a student in Shanghai at the time, was simply fed up with the deluge of problems, and started collating food issues into a database that has become very popular in China.

[Note from Charles: This is not a website you want to look at before embarking on a trip around China, particularly if tickets are nonrefundable.] 

CY: We visited a water treatment firm dealing specifically with the textile industry. I’m not sure people fully understand the importance of water to the textiles/fashion industries. Could you talk around some of the key issues there?

DT: Textiles was hit by climate change and water shortages, most notably (recently) by the Chinese drought in 2010-11. Major brands (ie – Gap) had to slash earnings in 2011 as the drought drove down cotton supply, driving up cotton and (consequently) synthetic fibre prices.

At the same time, fashion brands were being hit by Greenpeace’s toxic threads campaign and IPE and Green Choice Alliance investigations into textile supply chains. Combined, this pushed brands to start focusing on their exposure to water risks in their supply chains and banding together to push for Zero Liquid Discharge of toxic chemicals. This year, we finally saw H&M come out with a water stewardship programme. We expect pressure to clean up its supply chain to continue – just today IPE published their Phase III report ranking 48 brands on their supply chain performance. (Note: The full report, out 4 December is still only available in Chinese. But the English press release gives a summary of who has been naughty and who has been nice.)

“India and China, the No.1 and No.2 most water-stressed countries in the world, have around 50% of global cotton production …

… Is this sustainable in the future?”

Most might not recognise that brands/investors are exposed to the same pollution / reputational regardless of whether they are buying in high end or high street fashion. Some high-end and high-street retailers are supplied by the same factories but all fashion is exposed to cotton/synthetics and water that goes into making them. India and China, the No.1 and No.2 most water-stressed countries in the world, have around 50% of global cotton production. Is this sustainable in the future?

As prices of water go up … SMEs could get squeezed, possibly forcing consolidation

Also, since manufacturers are typically small and medium enterprises (SMEs), brands tend to have more power. As prices of water/wastewater go up along with wages, these SMEs get squeezed, possibly forcing consolidation.

If brands want proper water stewardship, they will have to pay for it and/or pass that on to the consumer. Either way, someone has to pay – or the environment takes the hit (again).

“…if the government is no longer working ‘in silos’  … competition for water with other strategic industries will have to be taken into account.”

Eventually, if the government is no longer working ‘in silos’ (as discussed above), in regions which face water scarcity, it has to be determined whether textiles is really a “strategic” industry. Competition for water with other strategic industries will have to be taken into account.

Agriculture, energy and higher value-add industries like tech could be deemed more important than textiles at the provincial or municipal level, thus pushing textiles to the back of the line for limited water resources.

CY: We visited a community centre for migrant children on the outskirts of Beijing. It did not seem like the water (or heating) infrastructure was up to general standards for the city. As urbanisation continues on pace over the coming decades, what should we look for in water infrastructure in China?

DT: If you look at Beijing’s water plans, Beijing City Centre is prioritised and then the focus radiates outwards. More work has been done in the Beijing City Centre than Beijing Metro than the townships. But we are seeing efforts to step up the building up of more plants outside the city centre. If you look at just the water recycling plants, there are 11 new plants planned for the Beijing City Centre, 15 new ones in metro area, and 21 new in neighbouring townships. I guess the kids community centre is yet to be upgraded, but it should be in the plan. As for heating, around 7% of China’s coal is used in heating nationally, so if that was also installed, it would definitely alleviate smog and possibly reduce the need for coal and help water at the same time. It’s all linked.


Further Reading

Government:

  • Pricing Water With the NDRC’s recent announcement of tiered tariff hikes across China’s cities to rein in top end water users, Tan mulls over the proposed tiered water tariffs hikes and whether price points and switchpoints between tiers are properly set
  • More Power to Enforcement  Debra Tan gives a run down of upcoming “institutional innovations” discussed at the 2013 Beijing Forum and why the path-of-more-enforcement is still full of “areas of confusion”
  • Environmental Law Amendment: 40 Year Set Back? Will the proposed amendment set back China’s environmental development by forty years? Or will it be shelved? 
  • Enforcing China’s Planned Green Economy Can China achieve its planned RMB4.5trn energy-saving & environmental protection industry? HSBC’s Wai-Shin Chan on incentives, changes in environmental law, more regulatory muscle and what this means for water
  • Water: Beijing Leads the Way Beijing takes the lead announcing a RMB500 billion Energy Savings & Environmental Protection industry days after the national plan, with more water treatment, recycling, harvesting and pipes plus stricter monitoring of pollution

Coal & Water:

  • Water for Coal: Thirsty Miners? With up to 83% of China’s coal reserves in water stressed & scarce regions, the recent CLSA report asks if there is enough water to grow coal production. If not, what are our options? Debra Tan expands
  • Spend to Quench Coal Thirst Can China manage to balance her limited water resources & coal expansion? Debra Tan argues that the sector can spend to quench coal thirst with consolidation or more investment in aggressive water savings tech
  • Water Grab: Shenhua Responds Shenhua’s reponse to water grab allegations is a good start but Greenpeace’s Quek say questions still remain. Can the environment support a large scale push into the coal-to-chemicals sector? 
  • Syngas: Trade Offs for Water & Air WRI discusses how China’s latest scheme to cut air pollution by replacing coal with synthetic gas will exacerbate water stress in coal-rich provinces. Find out how China’s response to air pollution poses a threat to water

Fashion & Textiles:

  • Fashion Update: Brand Winners and Sinners With the new Phase III Textiles Investigative Report released by 7 China NGOs through IPE, we look at who has managed to stay on top since the first report published in April 2012
  • No Chemicals Please With over 45,0000 synthetic chemicals produced, used and discharged in China’s waterways, Greenpeace’s Ada Kong explains the chemistry of textiles and your exposure to endocrine disrupting chemicals 
  • China Water Woes: The End of Fast Fashion? Lincoln Poon, Global Brand Manager of Pinneco Research worries about water, the fast fashion business & global dependence on made-in-China products: can it last? 
  • Investors Beware: Blackholes & Blacklists Holdings of Fidelity, State Street, Vanguard, BNY Mellon, Capital Group, L&G, T Rowe Price & Govt Pension Fund of Norway in polluting fashion brands reviewed
  • H&M: Water Stewardship in Fashion Claire Hau tells us why water is important to H&M and how it is pioneering water stewardship in fashion from its work with BSR & IPE, partnership with WWF, to its commitment to ban hazardous chemicals by 2020