Stanford researchers develop financing framework to fund critical freshwater projects

Using lessons from the energy sector, Stanford researchers outline strategies to bring the nation's water infrastructure into the 21st century.

Milan highrises using gray water

Residential towers in Milan, Italy, use filtered gray water from the building itself to irrigate trees, an example of innovative water use. Stanford’s Water in the West program has developed financing frameworks that could be used to encourage such uses. (Image credit: Mishkabear/Flickr)

A new report by a team of researchers at Stanford University offers a framework to fund water projects based on lessons learned from the energy sector.

“Our sophisticated water system is slowly reaching the end of its lifetime and is in need of renewed investment due to population growth, urbanization, climate change impacts, environmental degradation, aging infrastructure, and ever-increasing operation and maintenance costs,” said report co-author Newsha Ajami, the director of urban water policy at Stanford’s Water in the West program. “Tackling these modern challenges calls for new thinking and innovative, multipurpose infrastructure solutions.”

The new report also calls for significant investment, which is harder than ever to come by when traditional federal and state government funds are limited. Local utilities and municipalities are often too cash-strapped to meet existing operations and maintenance obligations, let alone finance new projects.

The need for innovation to the nation’s water infrastructure was underscored this week by the Obama administration’s unprecedented inclusion of $267 million dedicated to water innovation in the proposed federal budget.

In their report, Ajami and her co-authors identify financing tools and techniques from the electricity sector with potential to bridge the financing gap to next-generation water systems.

Among the report’s recommended solutions is the use of innovative, multipurpose water projects called “distributed solutions.” Designed to be implemented at a local level, such projects include “green infrastructure” built to manage storm water, or homes and offices designed to flush toilets with gray water rather than potable water. The researchers write that providing incentives for such small- to medium-scale projects at the local level can be more efficient and economical than relying on more traditional funding models.

The report recommends four central elements that are essential to upgrade the nation’s water infrastructure:

Catalyzing change through external forces. Regulations such as direct enforcement, economic incentives and innovative pricing structures that have proved successful in the electricity sector can similarly be used to promote adoption of innovative water projects.

Establishing public and private funding. In the electricity sector, distributed clean energy projects – such as customer-, community- or utility-scale solar and wind energy systems ­– often rely on a diverse set of public and private funding sources. Similarly, the water sector should take advantage of funding sources such as bonds, end-user fees and venture capital.

Using resource pathways to facilitate flow of funding. Once funding for a project has been acquired, stakeholders should be able to access these funds through resource pathways. Pathways used in the electricity sector include loans and grants, rebates, tax credits and on-bill initiatives. They could be used in the water sector to promote cost-sharing opportunities among customers or to eliminate upfront costs.

Creating innovative governance structures to enable project implementation. Given the many diverse stakeholders and complex transactions involved, distributed solutions can be difficult to manage under a traditional project management scheme. Novel governance tools such as net metering, end-to-end service companies and project or financial aggregation have been useful in the energy sector and hold promise for use in the water sector.

These financing mechanisms can help incorporate distributed water projects into the nation’s existing water infrastructure, offering increased flexibility in responding to a changing climate and meeting future water quality and quantity needs.

“The water sector must secure adequate funding if it is to move into a more sustainable and resilient future,” Ajami said. “This framework could be used not only for distributed solutions, but by the water sector as a whole to secure the capital needed to upgrade our nation’s urban water systems for the 21st century.”