7
Implementation Issues

Water providers throughout the world are concerned about meeting potable water supply needs. Increasing water demands as a result of greater environmental awareness and localized population growth has placed a strain on traditional freshwater sources in some areas. Consequently, many providers are considering alternative water supply sources, including the desalination of seawater, brackish water, or both. In addition, they are pursuing advanced treatment technologies to deliver drinking water to meet more stringent drinking water quality standards.

This chapter provides a summary of implementation issues, including institutional matters, that need to be addressed by water providers when developing desalination projects. The issues covered in this chapter include environmental regulatory requirements, capital and operating costs, public perception, siting considerations, planning and design issues that consider the uncertainty of new technology, product water quality changes within conveyance systems, alternative project delivery and procurement methods, and project financing. Environmental issues, including environmentally protective design, predictive modeling, monitoring, and energy issues, are also important utility considerations, but these are not included here because they are addressed in Chapters 4 and 5.

ENVIRONMENTAL REGULATORY ISSUES

Environmental issues relating to source water and concentrate management are significant considerations for desalination projects. Environmental issues are described in detail in Chapter 5, and the regulatory aspects of desalination project implementation are discussed in this section.

The types and complexity of permits required for a desalination plant vary depending on the project location and other site-specific factors,



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7 Implementation Issues Water providers throughout the world are concerned about meeting potable water supply needs. Increasing water demands as a result of greater environmental awareness and localized population growth has placed a strain on traditional freshwater sources in some areas. Conse- quently, many providers are considering alternative water supply sources, including the desalination of seawater, brackish water, or both. In addition, they are pursuing advanced treatment technologies to deliver drinking water to meet more stringent drinking water quality standards. This chapter provides a summary of implementation issues, includ- ing institutional matters, that need to be addressed by water providers when developing desalination projects. The issues covered in this chapter include environmental regulatory requirements, capital and operating costs, public perception, siting considerations, planning and design issues that consider the uncertainty of new technology, product water quality changes within conveyance systems, alternative project delivery and pro- curement methods, and project financing. Environmental issues, including environmentally protective design, predictive modeling, moni- toring, and energy issues, are also important utility considerations, but these are not included here because they are addressed in Chapters 4 and 5. ENVIRONMENTAL REGULATORY ISSUES Environmental issues relating to source water and concentrate man- agement are significant considerations for desalination projects. Environmental issues are described in detail in Chapter 5, and the regula- tory aspects of desalination project implementation are discussed in this section. The types and complexity of permits required for a desalination plant vary depending on the project location and other site-specific factors, 182

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Implementation Issues 183 such as the type of desalination technology and the method of concen- trate management employed. The implementation of a desalination project typically requires multiple permits from federal, state, and local agencies. In general, the regulatory programs and associated permitting processes revolve, and can be broadly classified, around the three streams involved in the process (Stratus Consulting, 2006): 1. Source water (or feedwater stream) permits address the location and means of obtaining the source water used by the desalination facility. 2. Potable water (or finished water stream) permits address the use of the finished water produced by the desalination facility. 3. Waste (concentrate and other associated waste stream) permits address the treatment or discharge of the waste streams, including con- centrate, chemical wastes from cleaning processes, and any other waste associated with the operation of the facility. Other required permits (e.g., building, site work, roadway crossings) are similar to those required for construction of other types of water treat- ment facilities and are not addressed here. Some state and local authorities may require other permits in addition to those discussed in this section (see Cooley et al. [2006] for examples of California permit requirements). Of the three categories just defined, the regulatory issues related to the permitting of the concentrate and other waste streams are typically the most involved. The key federal permit requirements are related to the Clean Water Act. To obtain the permits, extensive environmental impact analyses may be required, depending on the specific discharge method proposed. Most of the permits provide for extensive review and comment from resource agencies and the public. Source Water Permits Source water permit requirements depend on the location of the de- salination facility. For an inland groundwater facility, no significant regulatory approval is required for the groundwater wells, unless water rights or pumping permits are required. For a stand-alone coastal desali- nation facility, the following permits will be required for a new intake pipe: • a Clean Water Act (Sections 316b and 404) permit, issued by the U.S. Army Corps of Engineers, which regulates intakes and the dis- charge of dredged materials into navigable waters (see also Box 5-1);

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184 Desalination: A National Perspective • a Rivers and Harbors Act (Sections 9 and 10) permit, issued by the U.S. Army Corps of Engineers, which regulates the construction of any structure or work within navigable waters; and • in some states, a permit from the state coastal agency. For a coastal desalination facility co-located with a power plant, a permit for constructing a new intake (or discharge) pipe is not required because the existing intake (and discharge) of the power plant is used. Although this is an advantage of co-location of desalination and power plants, there are also disadvantages of co-location, which are addressed later. In some cases, plants have also been required to obtain separate permits to use existing intake or discharge structures. Potable Water Permit The potable water permit, as required by the Safe Drinking Water Act, is typical of permits required for any drinking water treatment plant. This permit is not required if the desalted water is used for nonpotable (e.g., irrigation) purposes. The potable water permit requires periodic compliance monitoring. One unique aspect of this permit for desalination is the need to identify the monitoring points in the treatment process for filtration efficiency and turbidity compliance. In most states, state agen- cies have primacy to regulate the Safe Drinking Water Act. Concentrate Management Permits The effective management of the desalination concentrate stream is a significant issue in the implementation of a desalination facility. Concen- trate management (especially for inland or brackish water applications) is often the decisive factor that determines the viability of a desalination project because of both environmental and economic concerns. Specific concentrate management approaches and associated environmental issues are discussed in Chapters 4 and 5. Although several concentrate man- agement methods are currently available, as shown in Table 4-4, there are permitting challenges, high costs, and other limitations associated with all methods (Sethi et al., 2006a). Here, the key implementation chal- lenges and regulatory issues related to concentrate management are discussed. Currently there are multiple levels associated with the regulation of concentrate management, including federal, state, and often local agen- cies with specific requirements. At present, concentrate from the

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Implementation Issues 185 desalination process is regulated through a default classification as an industrial waste under the Clean Water Act because the Act does not specifically address by-products from drinking water treatment plants. However, in the State of Florida, concentrate has been given some regu- latory distinction, as it is now called a “potable water byproduct” if produced by plants of size 189 m3/day (50,000 gal/day) or smaller. Pend- ing state legislation may extend this to plants of larger size (Mickley, 2006). Nationally, separate classification of drinking water treatment plant by-products would require an amendment of the Clean Water Act. The federal laws associated with the management of concentrate and associated wastes from desalting plants include the following: • Clean Water Act. A National Pollution Discharge Elimination System (NPDES) permit is required for surface water discharges. Dis- charge to sewers (i.e., indirect discharge to a municipal wastewater treatment plant) does not require an NPDES permit, but compliance with Environmental Protection Agency Pretreatment Control Program stan- dards and state pretreatment programs may be required. Engineering studies may be required by states for reuse-based concentrate manage- ment methods (e.g., land application, spray irrigation). • Safe Drinking Water Act. Compliance with the Underground In- jection Control program and with Wellhead Protection Program regulations is required for deep-well injection. • Resource Conservation and Recovery Act (RCRA). Although the by-products of desalination plants are typically not considered hazard- ous, it is the utility’s responsibility to confirm if the concentrate produced meets the RCRA definition of a hazardous waste. • Solid Waste Disposal Act. This law applies to nonhazardous solid waste disposal and would apply to desalination plants using a solid waste disposal method. • Comprehensive Environmental Response, Compensation, and Liability Act. This law is applicable only if the desalination plant has stored, treated, or disposed of a hazardous waste as defined by RCRA. This law might apply to desalination concentrate from groundwater that contains high levels of toxic elements exceeding drinking water stan- dards. • Hazardous Materials Transportation Act. This law applies if any hazardous residuals (e.g., cleaning waste) are transported offsite. • Toxic Substances Control Act (TSCA). This law, which controls the sale of toxic chemical substances, applies if concentrate is defined by the TSCA chemical inventory as toxic and sold for reuse (e.g., blended with treated wastewater for reuse).

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186 Desalination: A National Perspective • If the waste contains technologically enhanced naturally occur- ring radioactive materials (TENORMs) exceeding certain levels, disposal or storage may require additional permits. Numerous state and federal regulations govern the disposal of waste that contains radionuclides, al- though there are currently no federal regulations that specifically address TENORMs (EPA, 2005). The compliance process for all of the aforementioned permits is complex and necessitates a detailed review in the planning phase. Over- all, the costs and time involved in the permitting process are significant and, regardless of the capacity of the facility, the regulatory requirements involved in the process are approximately similar. Depending on the concentrate management alternatives available, small inland facilities could be especially challenged by the implementation and permitting of concentrate management processes. PUBLIC PERCEPTION Successful implementation of a desalination plant requires more than a successful resolution of technical issues. Affected persons in the area are often able to slow or block implementation if public perception is negative, whether or not a concern is justified in the particular project. Public concerns about desalination vary and include worries about the cleanliness of the source and product water, technical feasibility of de- salination, environmental effects of process operation and concentrate management, privatization issues, and future affordability of the re- source. The perceptions and concerns about desalination may be influenced by the need or urgency for an additional source of freshwater or for a reliable source of water. Failure to gain public acceptance can derail the most essential and feasible desalination project. Local citizens and nongovernmental or- ganizations may influence a regulatory body or local government officials, and these regulators or officials can in turn place impediments in the permitting process. Broad-based public participation in the proc- ess—that is, greater than that necessitated by permitting requirements— may help minimize adverse relationships and help the project progress more readily toward successful implementation (Burroughs, 1999; Rob- erts, 2004; Robinson, 2007). The following section describes a number of concerns that have been voiced by citizens in response to proposed desalination facilities. Some of these issues may not be valid on a technical level; for others, there may be ways to mitigate the concerns. Nevertheless, the public percep-

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Implementation Issues 187 tion of a concern will need to be addressed to ensure successful imple- mentation of the desalination project. Source Water Issues Desalination utilizes source water not previously considered suitable as a source for drinking water. For example, seawater contains much higher concentrations of many chemical species, such as boron, than are found in conventional drinking water supply sources or finished waters. Estuarine waters are often the receiving water for known point and non- point discharges. Inland brackish waters can be perceived as being less pristine than other groundwater. Therefore, concerns may arise among the public over the ability of the desalination process to fully treat these source waters. Because reverse osmosis (RO) and nanofiltration tech- nologies may allow passage to the product water of some constituents in the source water (see Chapter 5), the public may perceive water produced by membrane-based desalination as not sufficiently protective of public health. Water providers can address this concern by educating the public on the technical advances of water treatment processes and the effective constituent removal efficiencies of these processes. Environmental Issues As discussed in Chapter 5, there are varied environmental concerns related to desalination, and these concerns can affect public perception of a desalination project. For seawater desalination, as with any process involving the intake of large volumes of surface water, there can be con- cerns with impingement of larger organisms and entrainment of smaller ones in the intake system. Citizens may also be concerned about adverse effects of desalination concentrate discharge. The energy requirements of seawater desalination can lead to public concerns over increased green- house gas emissions that can be a part of increasing energy usage (unless non-greenhouse-gas-emitting energy sources are used to support the plant or unless carbon credits are established). Public concern over global climate change can have a localized influence in limiting new sources of emissions. Water providers can address concentrate discharge concerns by educating the public about the advanced environmental models used to predict environmental changes due to concentrate dis- charge as well as the environmental monitoring plans that will be in place to detect any unacceptable environmental changes in the very early stages should they occur.

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188 Desalination: A National Perspective Necessity of Supply Proposals for a new desalination plant can lead the public to question the need for additional water supply. If the plant supplements current water supplies, the perception can be created that the provision of addi- tional water supply may lead to additional population growth, creating the impression that desalination would work against existing or potential growth management efforts. If current water supplies are sufficient to meet human demands for water, the desalination facility could be seen as unnecessary even if it could replace another unsustainable water source in current use or if it would allow for currently unmet environmental wa- ter needs to be fulfilled. Water providers can address the replacement scenario by educating the public on the need to replace unsustainable sources or sources that are causing unacceptable environmental impact. An explanation of the anticipated net environmental benefit can be help- ful to address the public concern regarding the perceived environmental impacts of desalination projects. Reliability of Supply Consumers expect consistent availability of a sufficient quantity of high-quality water on demand. Although seawater desalination offers the promise of a drought-resistant water supply, the limited experience in the United States with large desalination plants can affect stakeholders’ con- fidence in the reliability of desalination technology even though similarly sized plants are common in other countries (Robinson, 2007). Seawater desalination can encompass more unit subprocesses (e.g., filtration, chemical treatment) than can traditional water treatment, opening the probability for more processes to go wrong unless appropriate parallel steps, redundancy, and process isolation techniques are in place to miti- gate potential problems. With mitigation steps in place, desalination plants can be as or more reliable than traditional water treatment plants. Nevertheless, the public may be more comfortable with the reliability of familiar treatment processes using traditional sources. Water providers can address this concern by educating the public on the number of successful international seawater desalination projects and U.S. brackish water desalination projects that are in operation. In the United States, brackish water membrane desalination is becoming a common water treatment technology to meet water supply needs.

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Implementation Issues 189 Energy and Cost Concerns The water sector is a large consumer of electrical power, and desali- nation processes require more energy to operate than traditional water treatment processes (Table 5-1) . Thus, public concern over the reliability and availability of energy can spill over into concern for these higher- energy processes. In some parts of the country, the current energy grid capacity is already strained, and the perception can be created within the public that the system may not sustain increased demand from desalina- tion facilities, thus increasing the potential for power outages or other failures affecting more than just the water supply. Energy costs are a portion of the question in consumers’ minds re- garding the long-term cost of water produced by desalination. If energy prices rise, the operating cost for desalination will necessarily increase unless long-term power purchase agreements are in place. Thus, the pub- lic may have concerns about the future costs of the water supply. Water providers can address this concern by educating the public on the incre- mental cost of desalination as compared to other water supply alternatives. The public can also be informed that total project cost (in- cluding operating cost) will also be considered as part of the criteria for project selection. Siting Concerns Public perception can be focused on highly localized issues associ- ated with the siting of a desalination plant. Localized environmental degradation, co-location with power plants, barriers to beach access, and increased population growth and regional development are examples of concerns voiced by citizens about desalination plants. Although some of these issues would arise with any development in these areas, there are certainly unique siting concerns for a new desalination plant. It was found in Tampa Bay, Florida, that consumer interest, positive or nega- tive, was not strong regarding the desalination project until specific potential sites were chosen. In Tampa, some of the negative public reac- tions derived from the plan to co-locate the plant with an existing coal- burning power plant, reflecting citizens’ displeasure with the possibility of prolonging the operational life of the power plant. The public also ex- pressed concerns about environmental impacts on Tampa Bay (Robinson, 2007). Water providers can address these concerns by involv- ing the public early in the siting process, clearly identifying site-selection criteria with public input, and inviting alternative site suggestions from the public.

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190 Desalination: A National Perspective Public and Private Water Management Public versus private management of water supply systems has spurred public interest for a number of reasons. The key distinction be- tween the two options is that private entities have a profit interest in the operation of the facility whereas public ownership and operation does not. Hence, the question can be raised whether a private entity will prop- erly prioritize the quality of operation over profit. In balance, there also is a perception that private entities are more cost conscience and may be able to produce comparable water quantity and quality at a lower cost than a public water provider. Consequently, there is no hard-and-fast conclusion that the public prefers either approach (NRC, 2002c). SITING CONSIDERATIONS OF CO-LOCATION When planning for desalination, decisions must be made about where to site the plant, and water suppliers should consider the advan- tages and disadvantages of co-location. The co-location concept, which involves direct connection of the desalination plant intake and/or dis- charge facilities of an adjacently located coastal power plant, can bring economic and environmental benefits (Voutchkov, 2004, 2005). In the case of an inland location, the desalination plant can be co-located with a wastewater treatment plant. The following section focuses on issues that water suppliers should consider with respect to co-location. In the case of an inland co-location of a desalination plant with a wastewater treatment plant, the concentrate can be discharged directly to the wastewater plant or blended with the treated wastewater effluent prior to surface water discharge. The former strategy requires that the impacts on the wastewater treatment processes, if any, be within accept- able limits. Another possible benefit includes using the waste gas produced during wastewater treatment as a source of energy for the de- salination process. Co-location with a power station was used for the Tampa Bay Sea- water Desalination Plant and has been considered for numerous plants in the United States and worldwide, such as the proposed seawater desali- nation plant in Carlsbad, California. At the Tampa Bay Seawater Desalination Plant, the intake and discharge are connected directly to the cooling water discharge outfalls of the Tampa Electric Big Bend Power Station (Figure 7-1). The cooling water discharged from the condensers is 3 to 8oC (5 to 15oF) warmer than the ambient source ocean water. This is a significant benefit because the RO process requires approximately 5 to 8 percent lower feed pressure when the influent seawater is an average of 6oC (10oF) warmer. Therefore, co-located plants use proportionally

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Implementation Issues 191 FIGURE 7-1. Schematic of a co-located seawater desalination facility. lower energy costs for seawater desalination. However, increased tem- peratures in the feedwater can result in an adverse increase in salt passage and potentially accelerated biofouling of the membrane. The source water for a desalination plant co-located with a power plant is the cooling water discharge, which has already passed through screens similar to those used on surface water intakes for desalination plants. Therefore, a co-located desalination plant generally does not re- quire the construction of a separate intake structure, intake pipeline, or screening facilities (i.e., bar-racks and coarse screens), and co-location can also alleviate the need to construct separate ocean outfalls. As indi- cated earlier, a permit for a new intake pipe (or discharge pipe) is generally not required for a coastal desalination facility co-located with a power plant. The cost of intakes and outfalls for a desalination plant is about 7 percent of the total capital costs (GWI, 2006a); thus, power plant co-location yields significant permitting and construction cost savings. As a result of co-location, the grid transmission portion of the power fees can also be minimized or avoided, although state and federal regulations may sometimes prohibit preferential pricing for co-located facilities (Cooley et al., 2006).

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192 Desalination: A National Perspective For co-location to be cost-effective and feasible, it is necessary that the power plant discharge flow be larger than the desalination plant ca- pacity. In cases when the concentrate is blended with cooling water, both the power plant capacity and the required “concentrate blending factor” (assessed for each particular co-location scenario) determine the maxi- mum size of the desalination plant. Consistent with intake and outfall considerations at stand-alone plants, the power plant outfall design needs to avoid recirculation of concentrate to the desalination plant intake. As discussed in Chapter 5, co-location can yield environmental bene- fits for seawater plants. Co-location can reduce impacts on marine benthic and seashore habitats relative to a stand-alone desalination plant by avoiding construction of new intakes. As long as the power plant is operating and using seawater to cool the plant boilers, the desalination facility does not cause increased impacts from impingement and en- trainment. By mixing the concentrate discharge with power plant cooling water, the combined outfall will dilute the concentrate and can accelerate the dissipation of thermal and saline discharges to the ocean (Voutchkov, 2004). These benefits, however, presume the continued operation of power plants with once-through cooling systems. Therefore, the perspec- tive and requirements of regulatory agencies are important factors for water suppliers exploring the co-location of a desalination facility. For example, the California Coastal Commission has considered phasing out power plants with once-through cooling due to the impingement and en- trainment associated with screening and processing large quantities of seawater. In the absence of co-location with power plants using once- through cooling, seawater desalination facilities will have to develop other approaches to concentrate discharge, such as implementation of offshore diffuser technology. Should the power plant discontinue operat- ing on an interim or permanent basis, water withdrawals would have to continue to provide source water and, in some cases, dilution of the concentrate. Thus, there is concern that co-location of desalination facili- ties might encourage the extended use of older power plants that are based on once-through cooling. Due in part to such factors and concerns, the California Coastal Commission requires that any proposed co-located desalination plant should present an analysis for the co-located scenario and for a co-located facility operating independently of the power plant (i.e., during temporary or permanent cooling system shutdowns) (Sea- water Desalination and the California Coastal Act, 2004). In environmentally sensitive areas, alternate intake structures that minimize the effects of impingement and entrainment may need to be considered (see Chapters 4 and 5), especially for proposed co-located desalination plants where there are plans for phasing out the use of once-through cooling systems.

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Implementation Issues 201 form as required, and that the equipment will be maintained, repaired, and replaced according to reasonable and measurable standards. Thus, like the DB model, the DBO model approach transfers certain risks from the public water provider to the private contractors. DBO approaches are often used where project performance and the value of the service to TABLE 7-1a. Summary of Common Project Delivery Methods. Project Delivery Model Structure Description • Owner selects engineer who Design-Bid- Build (DBB) helps define project, develop bid documents, evaluate bids • Construction awarded to lowest responsive bidder • Construction monitored by engineer or construction manager • Operations by owner or contract operator • Owner hires design-build team Design-Build (DB) • Operation by owner or contract operator • Involves a single umbrella Design-Build- Operate contractor for overall design, con- (DBO) struction, and long-term operation • Owner has wide discretion in how prescriptive or performance- based the process is, but must define existing conditions, inputs (i.e., raw water quality and flows), and expected outcomes • Similar to DBO except private Design-Build- Own-Operate- financing and ownership Transfer • Ownership may be transferred to (DBOOT) public agency at end of contract term. Contract sets method for valu- ing facility at that time SOURCE:: Adapted from Beck (2002).

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202 Desalination: A National Perspective TABLE 7-1b. Advantages and Disadvantages of Common Project Delivery Methods Advantages Disadvantages Works best when… • Operation of facility • Well understood by • Segments design, Design- Bid-Build is minimal or well un- all involved parties construction, and operation (DBB) • Potential for high derstood by owner and reduces collaboration • Project requires a • Linear process increases degree of control and high degree of public involvement by owner schedule duration • Independent • Prone to disputes and oversight • Owner wants to be oversight of construction creates opportunities for risk extensively involved in contractor avoidance by the designer the design and construction contractor • Schedule is not a • Low-bid contactor priority selection reduces creativity and increases risks of per- formance problems • Risks are mostly borne by the owner • May not allow for economies of scale in opera- tions • For new technologies, operability may not be the primary design concern • Time is critical BUT • Owner may not be as • Collaboration be- Design- Build (DB) existing conditions and familiar with DB process or tween designer and desired outcomes are contract terms contractor • Reduces owner control • Parallel processes well defined • Project uses conven- and oversight. Owner’s reduce duration • Reduces design tional, well-understood rejection of the design, if not technology based clearly on rights in the costs • Owner willing to contract, can entail large • Reduces potential change orders and delay relinquish control over for disputes between claims design details designer and construc- • Design and “as-built” • Operational or aes- tion contractor drawings not as detailed • Single point of thetic issues are easily • Eliminates “independent defined accountability • Early contractor oversight” role of the de- • Can promote design signer input will likely save innovation • Does not inherently time or money • Provides more cer- include incentives for oper- tainty about costs at an ability and construction earlier stage quality as does a DBO or • Allows owner to BOOT approach assign certain risks to • Higher cost to compete DB team • Owner’s staff does • Allows designer, • Reduces owner Design- Build- not have experience construction contractor, involvement Operate • Owner may not be operating the type of and operator to work (DBO) facility together collaboratively familiar with DBO contracting • Input conditions to • Parallel processes • High cost to compete the facility can be well reduce duration may limit competition • Operator input on defined and the number • Depending on contract of external influences new technologies and terms, may give operator affecting plant opera- design saves money incentives to overcharge for tions are limited • DBO contractor has ongoing renewals and re- • Owner is comfort- placements or to neglect a built-in incentive to able with less direct maintenance near the end of assure quality since they control during design, the contract term will be the long-term construction, and op- • Operations contract may operator eration • Single point of limit long-term flexibility • Requires multiphase accountability continued

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Implementation Issues 203 Advantages Disadvantages Works best when… • Allows owner to Design- contact Build- assign certain risks to Operate DBO contractor (DBO) • Economies of scale (continued) for operations • Collaboration, long- term contract, and ap- propriate risk allocation can substantially cut costs • Defines long-term expenses for rate setting • Public financing • Same as DBO and: • Same as DBO Design- Build-Own- • Can be used where • BUT lack of public cannot be obtained Operate- • Transfer of technol- project expenditures financing increases the cost Transfer would exceed public of money ogy risk is important (DBOOT) borrowing capacity • Beneficial when preserving public credit for other projects is important (i.e. no debt on balance sheet) • Can isolate owner from project risk SOURCE: Adapted from Beck (2002). be provided is more important than the details of what happens with the various procurement steps along the way. DBOs are particularly popular with fast-track projects and complex projects that include relatively new technology or specialized operations and maintenance (O&M) expertise (see Box 7-2). With a vested interest in controlling operating expenses, DBO contractors have a greater ten- dency to accept the risk of employing new and innovative solutions to lower production costs and improve operability. These projects often are driven by the magnitude of total project costs because a single entity is responsible for design, construction, and O&M. Financing of capital cost using this delivery model is the same as that for the DBB model and is discussed further in the section on public and municipal financing. Design-Build-Own-Operate-Transfer DBOOT projects are an expansion of the DBO concept in which the contractor also finances the project and initially owns the facility (see Table 7-1a). The public water provider commits to purchase some quan- tity of water from the desalination facility at an agreed-upon price over some period of time. This water purchase agreement serves as collateral

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204 Desalination: A National Perspective BOX 7-2 Summary of Project Delivery Method History of the Tampa Bay Seawater Desalination Project The Tampa Bay Seawater Desalination Project began as a privately owned DBOOT procured project. This delivery method was selected in 1998 by Tampa Bay Water when it was determined that the regulatory and technological risk could be best managed by the private sector. A seawater desalination plant of this size (25 million gallons per day) had never been permitted in the United States, and the technology of surface water desalination had not been success- fully implemented in the United States. Tampa Bay Water’s initial plan was to structure the deal with the developer that would facilitate an election to purchase the developer’s interest in the project at any time, with the intent to purchase the facility after the first replacement cycle of RO membranes had occurred (ap- proximately 5 to 7 years into operation). By that time, the true cost of operating and maintaining the plant would be known, and the plant’s performance proven. Tampa Bay Water was under contractual requirements to build and bring online new alternative drought-resistant supplies in 4 years. Because the initial NPDES permit was taking much longer to issue than originally anticipated, partial interim construction financing was secured. The initial long lead equipment was ordered and the beginning stages of construction were started in order to allow for the facility to be built within the designated schedule. A year later, the devel- oper team failed to secure the appropriate performance bonds necessary to secure the permanent financing. After a 3-month effort to reconfigure the financ- ing, a developer team member (corporate owner) filed for bankruptcy, further complicating the ability of the project team to secure permanent financing and raising the potential cost of private financing. Consequently, Tampa Bay Water took ownership of the facility by buying out the developer’s interest in the project earlier than expected with the project near 50 percent completion. Through the buyout provision of the DBOOT contract, Tampa Bay Water assumed the original developer’s DBO contracts and contractors for construction completion and plant operation and maintenance. This process transitioned a DBOOT into a DBO ar- rangement which shifted project ownership and performance risk from the original developer to Tampa Bay Water. In 2003, the DBO contractor subse- quently failed the acceptance test by not meeting contractual performance requirements, entered bankruptcy, and did not complete the project. Tampa Bay Water was ultimately able to settle with the contractor in federal bankruptcy court, which allowed pursuit of a replacement contractor for the needed remediation work. Tampa Bay Water began replacement contractor selection in late 2003 to complete the construction and correct the specific known problems at the desali- nation plant. In November 2004, Tampa Bay Water retained a new construction completion and operations and maintenance contractor (American Water— Pridesa) using the DBO project delivery method to complete $30 million of re- pairs and modifications to the facility that would ultimately deliver a reliable desalination water source for the region. Lessons learned from this experience include the following: ▪ Contract documents should be created at the beginning of the procurement continued

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Implementation Issues 205 process so the developer teams and contractors are submitting proposals for similar contract requirements. Any suggested contract changes should be re- quired to be submitted with the proposals. • If a DBOOT method is selected, anticipate ownership transfer at any stage of the project. • Careful consideration should be taken prior to making a decision to transition project ownership in a DBOOT. The assuming owner should understand that they are stepping into the role of the original developer and, therefore, assuming liability for the original developer’s decisions. • A structured and transparent pilot testing program of proposed technologies that supports the design should be conducted prior to selecting a proposal. The pilot program should include pretreatment (including security filters) and RO processes. • Specific desalination project experience should be a qualification require- ment before a proposal is accepted. • Right of way and property acquisition should be controlled by the public util- ity because private developers do not have eminent domain authority. for the contractor to secure private financing for the project. DBOOT contracts contain provisions to transfer ownership of the facility to the public water provider at a mutually agreeable date. The primary benefit of a DBOOT project delivery is that a private enterprise assumes the technical risk and commercial risk, including the risk of development, permitting, and financing. The public water pro- vider and their ratepayers are relieved of the financial burden of the project and are well insulated from its liabilities and risks; they pay only for water they have contracted to purchase as it is required. The public water provider will be financially protected by performance bonds, pro- fessional liability insurances, and liquidated damages provided by the contractor. Although these measures may realize some level of financial protection, certain consequences of plant failure will remain with the public water provider, which is obligated to meet customer demand. Proper prequalification of contractors and prudent review of their capa- bilities (both technical and financial) and of the proposed plans go far to mitigating these risks. The Tampa Bay Seawater Desalination Project is an example of a public water provider using alternative delivery methods to implement a desalination project. This project delivery started as a DBOOT and is now being implemented through a DBO arrangement. The history of the delivery method changes and circumstances surrounding those decisions are included in Box 7-2. A variant of the DBOOT approach is the design-build-own-operate (DBOO) model, where there is no asset transfer at the end of the contract term. Many small DBOO projects have been established to provide de-

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206 Desalination: A National Perspective salinated water for hotels and resorts, industries, and small public water providers. One drawback of both the DBOO and the DBOOT approaches is that lower-interest-rate and tax-exempt public financing is not typically available to private-sector developers in the United States. This may pre- vent private developers from offering a competitive financing advantage, unless the promise of future public ownership through a DBOOT model can be used to obtain government financing rates. Nevertheless, private financing of desalination projects is on the rise. Prior to 2000, fewer than 5 percent of desalination projects involved private-sector financing. Today, of more than 150 desalination facilities over 5,000 m3/day that are being planned worldwide (and which identified a source of finance), approximately 51 percent involve private financing (GWI, 2006a). Pri- vate financing approaches are discussed further in the next section. Smaller utilities may provide greater opportunity for use of the DBOO or DBOOT process since limited financial resources may preclude cost- effective project financing. PROJECT FINANCING The capital cost of desalination projects, similar to other water sup- ply projects, is generally considered to include “up-front” costs such as administrative, design, permitting, property acquisition, and construction costs. These are the costs required to complete or ready a facility for transition into long-term operations. Since these costs are significant, water providers are often required to finance or borrow the funds to im- plement the project. It is common for the capital cost to be amortized, similar to a home loan, over periods of 20 to 30 years through municipal bonds or other common financing instruments. The water rates estab- lished by the water provider will include the amortized capital cost plus operating and maintenance costs and profit for private development pro- jects. Following is a discussion of the public and private ownership financing considerations for desalination projects. Public and Municipal Financing The ability for public water providers to obtain financing through bond issues is largely controlled by credit ratings established by three major Wall Street rating agencies (Fitch Ratings, Moody’s Investors Ser- vice, and Standard & Poor’s). Large municipal public water provider and public sewer utilities in the United States have traditionally held high credit ratings. Large public water providers are considered a very stable

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Implementation Issues 207 industry because there have been almost no instances where a utility failed to pay off its debt. Public water providers are advantaged by main- taining a controlled customer base with no competition for service. This customer base provides ample assurance to rating agencies that the cus- tomer base will be sustained to repay the debt. For these reasons, public water providers usually receive a general average investment rating in the “A” category ranging from a single “A” to “AAA,” a good invest- ment grade rating. Investment grade ratings are a public water provider’s indicator of its ability to borrow funds to finance its capital infrastructure needs and bor- row those funds at advantageous interest rates. One factor in a public water provider’s rating is the strength of its management practices. These practices include the ability to meet projected agency goals, the flexibil- ity to change with currently changing needs of the public water provider, the continuity of the management team, and the sophistication of its planning process to prepare for meeting future needs (FitchRatings, 2007). A public water provider will typically issue tax-exempt municipal revenue bonds to build a treatment facility and necessary infrastructure. The benefit of issuing tax-exempt debt is that the bond issuer pays a lower interest rate to the bond buyer than a comparable taxable invest- ment because the bond buyer keeps more of the interest earnings. The revenues from the sale of water from the new treatment facility will typi- cally be pledged to repay the debt. Large public water providers may have the opportunity to issue system debt, which can be repaid from revenues of the entire system, not just the new facility being built. If the borrowing is backed by the system, there is a better opportunity for suc- cessful repayment and usually a better credit rating than debt financed solely on the revenues generated by the facility (more typical of small water providers and private water providers). Although there are risks that will be evaluated outside of the project itself, such as extreme water events, most of the credit strength will be reviewed based on the strength of the project itself. Project-level risks such as the contractual founda- tion; technology, construction, and operations; competitive market exposure; legal structure; counterparty exposure; and financial strength will be evaluated (Box 7-3; Standard & Poor, 2006). Public water providers can also provide additional assurances that the water provider will assist in resolving any issues encountered. In summary, financing desalination projects should not present a significant implementation challenge for large public water providers. Small public water providers, however, may find it more difficult to finance desalination projects given the limited financial resources in rural areas, the limited access to capital markets, the limited managerial re-

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208 Desalination: A National Perspective BOX 7-3 Variables Considered in Evaluating Risk for Project Financing In an evaluation of project risk, the following variables are considered in rela- tion to potential impacts on the operation of the facility and subsequent ability to repay the debt service (Standard & Poor, 2006): 1. Contractual foundation is an analysis of the protections provided within the project delivery agreements and an evaluation of how the agreements address the operating risks. The agreements are typically reviewed considering the ade- quacy and strength of the technology, counterparty credit risk, market risks, and other project characteristics. 2. Technology, construction, and operations involve an assessment of the dependability of the design. If the project fails to reach completion or operate as it was contracted then there may be a problem with the ability to meet the debt service requirements. A technical evaluation of the project design by an inde- pendent engineer is usually required. 3. Competitive market exposure is a comparison of the proposed product price with competing market products. If the market has a natural monopoly, it still must be economically viable with the expected regional costs for the con- sumer. 4. Legal structure involves a review of the entities created to develop this pro- ject and an evaluation of the potential impacts to the project should an insolvency of any of the critical players take place. 5. Counterparty exposure: a large portion of the project’s strength is fre- quently dependent on other parties such as providers of raw materials, purchases of the project’s product, and EPC contractors. The counterparties for the agreements will be evaluated to ascertain the potential risk to the project should the counterparties experience a failure. 6. Financial strength: there are many factors that can impact the financial strength of a project such as interest rates, inflation, liquidity and funding. It is also important how the debt is structured and amortized. For example, large bal- loon payments have proven to be problematic in many corporate and public financing plans. sources, and the potentially costly concentrate discharge systems. Typi- cal funding alternatives for small systems include state and federal grant and loan programs, conventional commercial loans, and long-term debt- financing mechanisms such as municipal, general obligation, rate reve- nue, or assessment bonds (NRC, 1997). The Drinking Water State Revolving Fund provides states with the means to establish a revolving fund to provide low-cost loans to public water systems. Desalination plants are eligible for funding through the state revolving funds. Allot- ments to states for 2006 through 2009 are based on a 2003 needs survey. Each state receives no less than 1 percent of the funding in any fiscal year. In 2007 this resulted in a minimum state allotment of just over $8 million per state (EPA, 2007c). Other options for smaller water facilities

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Implementation Issues 209 include capital facility charges paid by new users as they connect to a system and developer extension policies in which a developer pays the utility to finance a new system or directly bears the cost of the new infra- structure (NRC, 1997). Private Financing Desalination projects may utilize traditional equipment financing schemes with 5- to 7-year repayment and prevailing load interest rates, with loan guarantees provided by the project developer. If the project is large enough, development financing with longer repayment periods may be possible, with deferred repayment during construction. A key feature that DBOO and DBOOT projects have in common is the use of project financing. The lenders’ source of repayment is cash flow generated by the project itself; there is little or no recourse for the lender to attempt to recover funds from the public agency. However, the public agency may be expected to make certain guarantees, such as an agreement to purchase the product water assuming contractual commitments are met. Nonrecourse3 project financing has been used for the world’s largest desalination DBOOT project—a 274,000 m3/day fa- cility at Ashkelon, Israel—as well as for many smaller plants. DBOOT contract durations of up to 30 years are in operation. However, the pro- jects are funded by mixes of equity, bonds, and loans, the mix of which vary for each project. Equity participation is usually a requirement for the main plant designers, the operators, and the developer. Loan terms do not usually match the full term of the DBOOT contract, but terms of up to 18 years have been achieved. Financing has been successfully achieved in both developing nations (such as Trinidad, which has a 30- year design-build-operate-transfer delivery model for the largest sea- water RO facility in the Western Hemisphere) and well-established economies (such as Singapore, which as the largest seawater RO DBOOT in Asia). Typical debt-to-equity ratios for a nonrecourse fi- nanced desalination project is around 3:1. By ensuring financial risk is contained within the project company, the public agency is unburdened of the risks of developing a new water supply source. Several different types of bonds may also be available to support pri- vate financing. The type of bond depends on the type of entities engaged in the project and their relationships. Corporate bonds, with no tax bene- fit to investors, are required for entirely private-sector contracts. Bonds exempt from federal and perhaps state and local taxes are possible in 3 A loan where the lending bank is only entitled to repayment from the profits of the pro- ject being funded by the loan, not from other assets of the borrower.

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210 Desalination: A National Perspective DBOO and DBOOT models if the entity purchasing the water is a local government. If the public agency purchasing the water has an equity stake in the project development, presumably municipal bonds could be utilized. If the public agency does not have an equity stake in the project development and more than 10 percent of the funds raised by the bond are utilized for a privately funded project, then municipal private activity bonds presumably would be used. A number of infrastructure funds, including some based in the United States, have recently increased investment in water assets as a complement to their traditional investments in such privatized infrastruc- tures as toll roads, airports, and railways. To date the infrastructure funds have focused on privatized utilities and a few technology firms but could also be a source of finance for PPP projects. CONCLUSIONS AND RECOMMENDATIONS Implementation of desalination projects can be achieved with proper planning and resource availability. Key resources include capital funds and financing capability, funds for electricity or the availability of other sources of energy, access to acceptable source waters, and cost-effective and environmentally sustainable concentrate management options. The implementation process includes the following main components: public involvement programs, regulatory requirements, procurement and project delivery establishment, financing, technology selection, and finished wa- ter quality management. Specific recommendations and conclusions follow that pertain to desalination implementation for water providers. To build trust and educate the public on the key project issues, water providers considering desalination should engage the public as early as possible. Key issues should include environmental impacts, site selection, cost, product water quality, and reliability of the technology. The water supplier can improve public relations by establishing a process to make information readily available to the public including public meetings, newsletters, and websites. Water providers should meet with regulatory agencies as soon as possible in the planning and development process to begin under- standing applicable regulatory requirements. The permitting process involved in the planning, design, or construction of a desalination facility requires significant time and cost. This process can be very cumbersome and can pose implementation challenges to small public water providers. Although the types and complexity of permits vary with project location, concentrate management method, and other specific factors, typically

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Implementation Issues 211 multiple permits are required from federal, state, and local agencies. Thus, it is recommended that the permitting process for a planned desali- nation facility should begin at the earliest planning stage. Water providers should consider all project delivery models available and select the most appropriate model. The project delivery method selected can affect the amount of risk carried by the water pro- vider, the access to innovative technology, and the time to project completion. Once a delivery method is selected, contracts should be de- veloped during the early stages of the procurement process so risk allocation is clearly defined prior to the submittal of cost proposals. Con- tract documents for DB and DBB focus on equipment specifications whereas those for DBO and DBOOT focus on performance (i.e., quality and quantity). A development contractor should be selected based on a balance of financial and technical criteria, as required for the selected project delivery model, including related project experience. Local and state regulations may force water suppliers to consider only certain pro- ject delivery models (e.g., DBB). To evaluate and optimize the process design early in the process, water providers should conduct pilot testing. The pilot process should include all of the key project processes from pretreatment through de- salination to evaluate individual component performance as part of the overall system. Pilot processes should be designed to simulate full-scale operations including key parameters such as chemical feed rates, chemi- cal contact times, and filter load rates. To prevent unanticipated water quality changes, the effects of blending the desalinated product water with other existing sources should be considered during project design. Proven post-treatment technology is available to mitigate potential problems that could other- wise be experienced in the product water distribution systems and downstream wastewater systems. Desalination water providers should consider potential decom- missioning of once-through cooling power plants and wastewater plants when evaluating co-location benefits. Power plant cooling water and wastewater plant effluent can serve as a means of diluting concen- trate prior to discharge to the environment and can significantly reduce capital costs associated with intake and outfall construction. However, should these plants be decommissioned, alternative methods of concen- trate management will have to be developed. Potential concentrate management options might include offshore multiple diffuser discharges and deep-well injection, among others.