How To Fix The Water Crisis | CNBC Marathon

How To Fix The Water Crisis | CNBC Marathon

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There's just not enough water to go around. If you live somewhere where it rains, you need flood insurance. It is the largest natural catastrophe that we have.

It's happening all the time. Wow. You can't make a mistake when you're irrigating or else you could quickly run out your water.

It's hard, really, to find a business that's not being affected. These aren't just issues in developing countries, something you hear about elsewhere. These are things that are happening in our communities all the time. 71% of our planet's surface is covered in water. 332.5 million mi³ of it. 366 billion billion gallons.

That's over 48 billion gallons of water for every person on earth. But today, one out of three people don't have access to safe drinking water. Some projections will show by 2050, more than half our population will be living in water stressed areas. That's over 4 billion people.

These aren't just issues in developing countries, something you hear about elsewhere. These are things that are happening in our communities all the time. Worried and angry about lead contamination.

The military in remote parts of Puerto Rico. And that's the result of many things. But one of them is that 96.5% of that water is found in our oceans. It's saturated with salt and undrinkable, and most of the earth's freshwater is locked away in glaciers or deep underground. Less than 1% of it is available to us.

When you dig a little bit and look under the surface, even here in the United States, we have large numbers of people that don't have access to safe, clean drinking water. So why can't we just take all that seawater, filter out the salt and have a nearly unlimited supply of clean, drinkable water? Desalination broadly is the process of removing salts from water. It's been practiced for years. In fact, it's a natural process. It occurs when the sun heats the ocean and fresh water evaporates off and it falls again as rainfall.

If you mix salt into water, it dissolves. And if you could watch microscopically while you did that, you'd see that the water is actually breaking apart the salt into charged particles that chemically interact with the water. So salt water is a chemically new solution. It's not just water with some salt grains floating around in it. And that's why desalination is a

fundamentally tricky process. The two main types of desalination are thermal desalination and reverse osmosis. Thermal desalination is the oldest form of desalination. It's essentially boiling water and then capturing the steam and turning that into fresh water.

But in the 60s, we were able to develop reverse osmosis processes at UCLA, and these have now started to dominate the market. So one of the chief differences between the two is reverse osmosis doesn't use heat, it doesn't boil anything. You're really just pressurizing the water to a tremendous amount and you're forcing it through a membrane where it doesn't want to go. It wants to stay with the salt. But with this high pressure, it is forced to separate from the salt. Broadly speaking, what you want to look at for desalination is where's my fresh water coming from and do I have enough of it? And if I don't have enough of it, do I need to augment supply? Desalination then starts to become a very attractive or interesting option.

Which is why the vast majority of desalination efforts right now are happening in places like the Middle East and North Africa, rich with fossil fuels, but also experiencing extreme water scarcity. Just two countries, Saudi Arabia and UAE, they produce one fourth of the desalination water that is produced currently on this planet. Concerns about desalination fall broadly into three categories: the amount of energy required, how much it costs and its environmental impacts.

There are some that really see it as the key solution. There are others that push back and argue that it's very energy intensive, it's very expensive, it has impacts on the marine environment and that we should pursue alternatives first. It requires a tremendous amount of energy to basically break up that bond between the water and the salt. Ocean water desal can be 25 times as energy intensive as other freshwater approaches. Historically, the impediment for seawater desalination being more abundant or popular in North America has been cost. It has been cost prohibitive historically.

The Claude Louis Carlsbad desalination plant outside of San Diego is the largest of its kind in the Western Hemisphere and has been operating since 2015, producing 50 million gallons of clean water a day. It's in San Diego County because of its dry arid climate. The county has historically imported nearly all of its water from the Colorado River in Northern California. In San Diego and the Carlsbad example, they are spending twice as much for seawater desalination as they do on imported water. Now they were looking at it and saying, well, at some point in the future the cost will be comparable.

And I think some folks pointed to the fact that, well, when that's the case, then that's probably when you should build it. Today, desalinated water in Carlsbad costs approximately twice as much as imported water. But you're comparing apples and oranges because that imported water is coming from systems that were built a half a century ago, where all the capital investment has been paid off.

Standing down for 5 or 10 years, hoping there's some major breakthrough in the technology is not going to materially reduce the cost of building infrastructure. And that's not unique to desal and water. That's true of all public infrastructure. We have a huge deficit. We need to start building not just water, but transportation and housing now, not 5 or 10 years from now.

The Carlsbad plant is operated as a public-private partnership. With the Carlsbad Seawater desalination plant and the proposed Huntington Beach Seawater desalination plant, we're proposing a public-private partnership where the plant is 100% privately financed, and then we enter into a long term fixed price water purchase agreement with the public water agency. And essentially we're recovering our investment over time through the sale of water. There's an infrastructure deficit in the United States. There's certainly an infrastructure deficit in California. And you can't expect local, state and federal government to pay for all of it.

The private sector is going to have to invest private dollars. And I think there's a huge opportunity in water in a way that both protects the ratepayers and also allows for the investment of private capital. Beyond the environmental costs of producing the energy needed to power these plants, another concern arises because they're not just outputting clean desalinated water.

They're also producing huge amounts of hyper salty water called brine as a byproduct. Seawater desalination plants that use reverse osmosis typically operate at a 50% efficiency in that if you take in two gallons of seawater, you're going to produce one gallon of freshwater and one gallon of hypersaline brine. It's a fixed volume of salt that I'm trying to remove. So whether I put it in. Half a gallon of water or a 10th of a gallon of water, it's still going to be there. It's just going. To be much more concentrated.

As desalination efforts grow, it's not clear what should be done with these huge amounts of brine. Globally right now, we're producing over 37 billion gallons a day. Most brine is in one way or another, emptied back into the ocean. But because it has a much higher salt concentration than regular seawater, it has the potential to, among other things, sink to the sea floor and wreak havoc on the plants and animals found there. In addition, because these facilities are taking

in millions of gallons of seawater a day, the intake itself could destroy local marine life. But Poseidon Water, which operates the Carlsbad plant, says the regulations in California provide sufficient environmental protection. Numerous studies have been done in California and around the world that show that level of salinity increase will not harm marine life. And you're also providing drinking water to people in need. But a recent study published in 2018 showed that we're producing even more brine than we thought.

For every liter of desalinated water, we produce 1.5l of brine. In other words, overall, we are producing more brine than we produce desalinated water. And while some places like California have robust regulations regarding brine in place, it's not clear that as a whole the industry is taking its disposal seriously enough. Currently we are disposing of brine in a way which we use to dispose of industrial wastewater about 40, 50 years ago. So if desalination uses a huge amount of energy, is very expensive compared to other options, and in the end we're producing more potentially harmful brine than clean water, why do we continue to pursue it? Desalination has its drawbacks, but one of the benefits is that it's a fairly stable and known process, particularly for dealing with ocean water. You can be confident that it will supply you water when you need it.

Reliability is the key. Water scarcity is a complex, difficult problem. Climate change is affecting everything and introducing growing uncertainty. Weather is variable, but if you have a desalination plant, energy and seawater, you can reliably get clean water. But desalination undeniably uses a large amount of energy, and for some it's just fundamentally difficult to advocate for a technology that would be adding to our ever-growing energy needs. I think when we start to look into these water scarce worlds, we start to think about, well, energy provides us services, it heats our homes, it lights our offices and buildings. And if we think of energy as a service

that can give us water, for some context, you know, the average person in the US uses about 100 gallons of water per day. If I were to produce that 100 gallons per day with ocean water desal, that would be the same amount of electricity consumption that my home would require over an hour. So to kind of put things in context, I think we start to think about our energy resources and where do I invest it? How important is water? It is the most basic element of life.

And people go out and they buy a venti Starbucks every day and spend more on that than they do a month's supply of desalinated water. And they don't realize it. It's clear that desalination alone is not going to fix the world's water problems.

Up In some places where you're just water rich, desalination probably won't make the most sense. Poseidon Water as a company does not believe that seawater desalination is a panacea. We can't just build one or two or ten and really solve our water challenges. Desalination is not the solution to water scarcity.

It's one of the options to narrow the gap between water supply and demand. But for some communities around the world, it's already making an enormous local impact. It's currently a pretty small fraction of the water supply globally and probably will remain so. There are, though, communities for which it is a fairly significant contribution. It can be quite important at the local level.

Desalination is one tool of many, and for it to have maximum impact, it must be implemented alongside other techniques. Israel maybe provides a good example where they have invested quite a bit in seawater desalination, but they also made investments in efficiency such that their water use on a per person basis is far lower than we see here in California or in many, many parts of the United States. So they did those things first so that they aren't wasting that very expensive water that then delayed their need to build a plant.

And when they built it, they could build it a bit smaller than they would have. So there's a real cost savings there to the community. I would almost look at it as like a safe bet, you know, to hedge your risks.

A desalination plant is your low risk option in your portfolio. Kind of expensive maybe, but it's going to deliver. I think we do the cheaper, less environmentally damaging things first. That seawater desalination is an option, in some communities, they don't have other options. Others, though, do have other options. They can use water more efficiently, which can save water, save energy.

You can have less environmental impact. And while most attention is given to seawater desalination, a similar process can be used for treating many other sources of water, like wastewater. The volume of wastewater, if it's all collected and recycled, that is almost equivalent to five times the volume of water that passes through Niagara Falls each year. And if we look at the desalinated water, desalinated water, which we produce globally on an annual basis, is almost equal to half of the volume of the water that passes through Niagara Falls. We don't want to lose sight of other sorts of desal.

Brackish water. You can think of brackish water as it's not as salty as ocean water, but it's saltier than fresh water. It's that whole space between.

And there, the energy requirements are substantially less, simply because there's less salt. So less salt, less stuff to remove, less energy. Desalination is an important tool in the fight against water scarcity. Its reliability is becoming ever more important, but it's not a cure all and other techniques should always be implemented alongside it. Desalination is already vital for many water scarce communities around the world, and as climate change continues to transform our planet, the balance between concerns about energy use and the ability to reliably get clean water is going to evolve. How exactly desalination will fit into the future of clean water is yet to be seen.

The West, now in its third year of an historic drought. According to the US Drought Monitor, 95% of the region facing abnormally dry conditions. The Western United States is entering dangerous territory. Afflicted by a mega drought so severe it is the driest two decades in at least 1200 years.

Reservoir levels have plummeted. We've seen worsening wildfires in states like California, Arizona and Oregon. And with climate change, these extremes are going to continue. And the problem isn't isolated to just the US. Globally, the United Nations predicts a 40% shortfall in freshwater resources by 2030. We're seeing a third of our arable land has been lost in just 40 years.

21 out of our top 30 something aquifers are now at critical levels. No sector has felt the impact more than agriculture, which takes up 70% of the world's freshwater. Irrigation is by far the biggest user of water here in California. Agriculture is notorious for using a large amount of of the state's water. California is the largest agricultural state in the US. It produces foods that we cannot shift to other parts of the country or the world because of the unique Mediterranean climate.

Devin Wright experienced firsthand the challenges of the water crisis when he planted an 80 tree orchard on his property, he quickly depleted his groundwater supply. I was trying to manually irrigate my crop and sometimes just make mistakes and leave my water running. I'd run my well dry and very quickly realized like, wow, you can't make a mistake when you're irrigating or else you could quickly run out your water. And that kind of woke me up to the bigger issue. Well, this is happening everywhere.

But improvements in irrigation efficiency and the integration of technology could help turn the tide in managing an increasingly scarce resource. Growers are preparing themselves for a new type of agriculture. Ag and tech are going to go hand in hand going forward.

The current drought started in 2020 and has quickly escalated to one of the worst in recent history. The American West is currently in a mega drought. Scientists estimate that it's going to become worse over the course of the next few years. Climate change has exasperated drought conditions in places like California, Nevada and Arizona. The current drought has caused a tremendous amount of damage, especially to the Colorado River.

Water levels in the Colorado River have neared their lowest point ever. The Colorado River is a major water resource depended on by the Southwest, supplying 40 million people across seven states and Mexico. The Colorado River has essentially been a lifeline for the Southwest, and it's been critical throughout history for agriculture, for development and for sustaining human life. But reduced snowpack in the Rockies has caused levels to drop, severely impacting reservoirs at Lake Mead and Lake Powell.

Since 2000, we can clearly see the impacts of that in the diminishing storage in Lake Mead and Lake Powell. And those are the two largest reservoirs in the United States. Both of them are now at record lows. As the decline in water supply continues. The shortages and forced cutbacks across states that we saw for the first time last year are only going to increase. The impact of these cuts is not isolated to just the West. Dwindling water supply could have

devastating consequences for the nation's food security. A prolonged drought in the US will not just reduce the income of local farms in Arizona, but it's going to create much tighter supply and increased food prices potentially for consumers across the country. In California, drought is a normal part of its climate, but trends show it is becoming more frequent and for longer stretches of time. The state has started to take some measures to reduce water usage.

In July 2021, Governor Newsom asked residents to voluntarily reduce usage by 15%. And in Southern California, outdoor watering bans have gone into effect. And while these conservation efforts could be helpful, it is unlikely to move the needle in a meaningful way. In normal water years. Agriculture and the environment use roughly equal amounts of water, and urban is a lot less.

Being down in the 10 to 15% range. So when you're told to take a quick shower or not wash your car, honestly, these are rounding errors just to the amount of water that's used in food production. And the absolute worst offenders are kind of old school irrigation techniques of flooding systems. For centuries, farmers have relied predominantly on flood irrigation. This is the most wasteful in terms of water usage.

However, in recent years, farmers have started adopting more efficient methods. Sprinkler irrigation has increased significantly. And what's even more interesting is the growth in micro irrigation, which was almost 0% in the mid 70s, and it's now almost 10%. Micro irrigation systems such as drip and micro sprinklers are some of the most efficient methods available today. With flood irrigation, you can only irrigate maybe once or twice every two weeks.

But with Micro-irrigation you can irrigate every day. You can inject the fertilizers in your irrigation water, you keep the water away from the plants and so you minimize diseases. And so they figured they could produce higher yields on less than 20 or 30% less water than they used to do. In some places, the adoption of these systems has been strong. Tomatoes used to be predominantly flood irrigated. They are now close to 90% subsurface drip irrigation.

But drip irrigation systems are expensive, often costing upwards of $3,000 per acre. Instead, many farmers have opted for more affordable sprinkler systems. The most popular method now in the US, which is over 50% or around 50%, is sprinkler irrigation, specifically center pivot irrigation. And the investment for the farmer is much lower per unit of land. For farmers, water management has always been a challenge. The impact of recent droughts have only made things worse.

I was in Arizona this year and I met with several farmers. I was driving through farming communities outside of Phoenix and was seeing miles of unplanted land and dried up canals and dead cotton fields. It was a very desperate situation and it's been heartbreaking for farmers whose families have farmed this Arizona desert land for generations.

In the last couple of droughts, we've seen about, rough number, half a million acres of land fallowing. And that's in the context of irrigated acreage in California being a little less than 9 million acres. A lot of farmers in Arizona facing water cuts have fallowed their land.

Some farmers have switched to less water intensive crops because farming in Arizona is very water intensive and other farmers are actually trying to pump more groundwater, which is a controversial practice. During previous droughts, many turned to groundwater as a crutch to lean on. When we had these multi-year droughts, what farmers would do, would if they got zero allocation surface water, they would drill a well. Groundwater was sort of an insurance policy that they would go to. But over reliance on slowly replenished underground aquifers have created a whole new set of problems.

Places like Central Valley, the salad bowl of the United States, sunk 28ft because of our overuse of groundwater. Then, of course, you have breakdown in infrastructure. Canals start to collapse, bridges collapse, roads collapse. With little alternatives for more water, the focus has intensified in better managing the resources we do have. Several are working to tackle the water use efficiency issue with more advanced irrigation systems.

Us-based Jain builds and manages smart irrigation systems on farms. An Israeli company, Netafim, which invented modern drip irrigation technology, is developing even more efficient drip systems. And one startup is hoping to make a difference by merging the internet of things with drip irrigation. Lumo is a series of internet connected smart valves, and the system gives growers easy access to irrigation, automation, tracking and reporting so they can quickly and easily access precision irrigation. Most important thing is they can automate those valves. Today, a lot of farmers are out there

turning them on and off manually. That saves them a lot of cost and it also allows them to be very precise about the amount of water that they're distributing. It is powered first and foremost by a battery and solar. It has a computer inside that is connected to a valve as well as some sensors. Think like a flow meter.

They stay connected to the cloud. We can allow our farmers to access them through a mobile app or a web app. We queued up a block, so we just do that here by saying, okay, we want to go, you know, block two, we pick 30 minutes, we queue it, and now it's got a 30 minute run. That's it. Hit the schedule and now it's running. These lines will all fill up. And then we're tracking

that flow through here. Total remote control, which is a real big benefit. We've saved easily 30% of our water that we were using for irrigation simply by removing some of the manmade error. We think that's really valuable to the

farmer, but we also think that's going to become really valuable to other stakeholders like communities, governments, water boards, irrigation districts, because they're all asking how much water are we using? And they don't know. They just have to estimate. It's currently testing its second generation model with a small pilot program. One user, Kurt Beitler of Bohéme Wines, has six valves to water his six acres. We saw an opportunity to try some of this tech on one of my vineyard blocks, and it's really been wonderful.

The biggest improvement with Lumo for my farming operation has been the convenience and precision with how we're irrigating. We've safely reduced excess use of our water by at least 20%. It might be as much as 30 or 40%. Bohéme has its system programed to automatically irrigate at night. We take great effort to irrigate in the nighttime, so we get greater uptake and utilization of the water by the vines.

And for specialty growers such as Beitler's Vineyard, the precision system offers greater control over the growing conditions. With optimal use of water, we're optimizing our finished wine quality. So this is one more very valuable tool in the overall project. Others have sought to completely reimagine how we approach farming altogether by bringing crop cultivation indoors. We felt like we needed a more sustainable alternative, a solution that we call kind of climate adapted. And so what we do is we've developed our own

kind of advanced robotic greenhouses. Iron Ox, a San Francisco startup backed by Bill Gates breakthrough energy venture, is growing leafy greens at facilities outside of Gilroy, California, and Austin, Texas. Gilroy, California. That's been in operation for three years, sold out with different greens, herbs, things like that. And so the idea is that to be able to grow any crop, including we have strawberries, tomatoes, cucumbers in the pipeline.

Our new facility outside of Austin, Texas. That's going to be about 100 x bigger at full scale by in the next year. The company is utilizing robotics, plant science and hydroponics to optimize the growing process. With hydroponics, we're able to apply water and the exact amount of nutrients directly to the roots of the plant. And then for things like water reclamation and other parts in the future, we can actually recycle that water to use less and less water over time, even in drought stricken states. Square Roots is another indoor farming startup that is utilizing vertical farming.

It currently has five commercial scale farms across the Midwest and in New York City. We just had to kind of r eimagine how to grow plants at commercial scale in cities. Inside the farms, we have the perfect climate for growing the plants or go from seed to harvest in 28 days, which might be almost twice as fast as what you can do in an outdoor field. It is also using hydroponics to help minimize water waste. A ton of research studies out there that will show that a well tuned hydroponic system will use about 90% less water than the equivalent outdoor farm. For now, the company is growing salads, herbs and microgreens and selling in the local communities where it's deployed farms.

It is working to expand that to include crops such as turnips, eggplants and more. Researchers are exploring a number of projects that could also help farmers. At the University of California, Davis, Ali Pereza started a lab to research new monitoring and sensing technologies to help growers save water. The focus of this lab is to provide data-driven decision support tools for growers when they want to make some critical decisions about how and when to irrigate or fertilize. One of his projects is focused on analyzing crop yield, helping farmers identify areas that are underperforming.

And then we manage each zone differently. That would help us reduce waste in application of, for example, fertilizer or water or pesticide and also to optimize the crop production. Isaiah Kosaka oversees a group that uses computer simulation models to improve efficiencies on farms.

With these computer models, you can start to ask, What if scenarios? What if I have this amount of water I can simulate or project how much yield I'm going to expect. As I make irrigation decisions through the season, they see what impact those irrigation decisions are going to have on their production goals. But despite the potential impact of these new technologies, adoption is still moving slowly.

Some think it could take government incentives and regulation to push more efficient conservation tools into mass adoption. I think government can play an important role by introducing some incentives for growers that they adapt a smart farming practices and technologies. You need policy and technology together to solve the water challenges in agriculture. Both together, I think we can go a long way. As the industry adapts to the ongoing drought, there will be no one size fits all approach. We're not going to get to this kind of next generation of farming with an incremental solution.

I think it's going to require to declare multiple solutions. I think by the end of this decade it would be a very pretty established practice to use technology, to use some automation, to use the data in a more practical way in agriculture. I think it's exactly this kind of technology that in fact will be the solution to potential water crisis or shortage of water. If farmers have access to technology that will help them better utilize the water, we could have a very significant impact as a whole on net usage in the state.

Water is a crucial resource that all humans need. And right now what we're seeing is there's just not enough water to go around. The current situation is that large swaths of the West, basically all of California, Oregon, Nevada and Utah and a few other states are in a state of drought right now. It's hard really to find a business that's not being affected.

And when the water runs low, the economy feels the effect. Agriculture consumes more than 70% of the available water supply. During drought years. Agriculture will drink up an even larger fraction of water supplies. Tourism, landscaping, homebuilding and farming are just some of the businesses that get hurt because of one of the worst droughts the West Coast has ever experienced.

In 2020, wildfires and drought cost the US a total of $21 billion, according to the National Centers for Environmental Information. And with lower water levels and higher temperatures, the wildfire risk runs hotter. In the West climate region alone, which includes California and Nevada, wildfires caused 12.1

billion in damage in 2020. With fires, political feuds and a changing climate, water wars are becoming more important to the US economy than ever. Right now, the West is experiencing major issues with water shortages and water scarcity. During the drought, we've seen unrelenting high temperatures, dry soil and vegetation that is essentially fueling wildfires earlier in the season and depleting reservoirs. So, for example, like Oroville in Northern California, is a significant source of water for the region. Right now, it's at less than 50%

capacity. Climate change is causing droughts to become more intense. Rising temperatures are leading to less snowpack accumulation in the winter and more wintertime precipitation falling as rain instead of snow, which diminishes the snowpack. Water from melted snow in western mountain ranges, the snowpack we're referring to, has helped sustain the region's rich farmland, turning some areas into agricultural powerhouses.

Farming in California brought in around $49.8 billion in 2018 and another $14.3 billion was produced by farms in Oregon and Washington State. Wildfires can seriously hurt these billion dollar enterprises.

What we have is a number of systems that operate in wild land fire that were created in the mid-20th c entury based on assumptions of that environment and that world no longer exists. Entry level federal forestry technicians on the front lines are paid about $13 per hour, something the Biden administration is working to change. The issue is not only pay, which we need a significant increase in, it's the fact that most of them are seasonals. And so there's no career path for folks. So this year, firefighters are undergoing massive preparations for a wildfire year. They're forecasting could be even worse than last year's. With fire season getting longer and longer, states are now faced with this mounting challenge of adequately preparing and responding to these climate disasters they're seeing more and more of.

So just a couple of months ago, President Joe Biden said that FEMA is going to double funding available to help cities and states prepare for these worsening disasters. As farmers saw the writing on the wall that it was going to be a dry year, some protests about water distribution emerged. So what is a drought? Well, drought is a natural phenomenon. It's when precipitation is less than normal. So this year it also coincides with with unusually high temperatures, which produces its own set of problems, including fires and high energy demand for cooling, fish die offs, tourism losses.

Our water year in California ends on June 30th and we had the least amount of water ever. We got 11.46in and that's just less than half of what a normal year would be. Water scarcity is a problem that affects everyone from the local level to the federal government.

In the background, state and local agencies like the Department of Water Resources and local water agencies work year in and year out, not just during drought periods, on water management, in light of climate change and climate extremes. At the local level, water conservation is nothing new to the residents of California. There are people who are already collecting water from when their showers turned on and putting it in a bucket, the cold water in a bucket, and then using that for landscaping or flushing a toilet. Right now we're in the second consecutive dry year and these consecutive dry years do make droughts more severe. Water markets in California, for example, can help ease drought realities by allowing the transfer of water from one user to another for a set period. Unfortunately, water scarcity usually means that lawsuits both between people living in affected states and between states that share water resources, crop up over who gets what.

Some bodies of water don't end at the state line. Water in the US is at times driven by agreements between states, like the Colorado River Compact, which was designed to help states downriver from facing shortages. So these agreements between states were, my understanding is, were put in place when there was abundant water in the Colorado River.

Unusually so. And so that amount of water declined. And now we have these droughts. Obviously we will have shortages. Sometimes the federal government dictates water access with agencies like the Bureau of Reclamation weighing the needs of farmers and other interested parties with environmental concerns like water needed for sustainable fisheries and to power hydroelectric dams.

You always get the in-fighting between whether, should the fish or some aquatic species get the water? Should the farmers get the water? Should municipalities get water? These aren't new issues for California by any means. The economic effects of climate change are hard to ignore. A large body of evidence suggests that climate change is driving changes in the frequency and duration of droughts, both in the US and globally. And we can see the fingerprints of climate change on this event in several ways. Farmers get hit the hardest when temperatures rise and water runs low.

The impacts of drought really vary by crop within the agricultural sector. Perennial crops like almonds and orchard crops like peaches, those have a really large upfront cost. They don't produce immediately and they frequently have costly and more permanent irrigation systems like drip and micro sprinkler systems.

Because of this, water shortages that result in the need to fallow those crops represent the loss of a long term investment. The government keeps track of the drought levels in the US and the numbers don't look great for parts of the West this year. The most recent ones from last week placed just over 85% of California in a state of extreme or exceptional drought compared with this time last year, less than 3% of the state was in extreme or exceptional drought. So we really are in an unusual situation right now. In California, there's been this gradual transition away from annual crops and towards these perennial orchard crops like almonds, which are higher value.

The perennial crops can be irrigated more efficiently than many of these annual crops because growers can install these permanent and more efficient irrigation systems. But the downside is what I said before. They can lock in the water demand and you can't fallow them in dry years. California had another extreme drought from 2011 to 2016, rivaling this one in its intensity.

And we're also in the midst of what scientists consider to be a mega drought out west. Essentially, a mega drought is a period of severe dryness with not a lot of relief from wet days that lasts for decades and basically triggers wildfires and water shortages and all the issues we're seeing in the West right now. Water indexes could be a free market solution to the unpredictable water availability. And in fact, we have seen more active trading of water futures. There has been a water futures market since 2018 and it has become more active recently. But it's not a futures market in a traditional sense where water is delivered.

It's more like an insurance instrument. Upgrading infrastructure and technical innovation are also two more ways to help mitigate the future drought conditions that result in water scarcity. Contemporary solutions include the use of efficient technologies and practices across all sectors and urban, agricultural and industrial sectors, and even more recently, preserving and increasing storage of water underneath the ground, which is something that is typically called managed aquifer recharge. So think of desalination, which currently is too expensive, but think of Israel. You know, they export water to other regions from desalination. I'm optimistic about ingenuity

of American enterprises. So if shortages and high water prices persist, this will attract bright minds and investment in technology to enable more efficient distribution and maybe new supply sources. The 2020 hurricane season was so bad, the National Hurricane Center ran out of letters in the alphabet.

Hurricane Delta. It's the first time we've ever gotten to the Greek alphabet. This year, 29 named storms.

Hurricanes bring high winds and treacherous rainfall. Two residents we speak to say it still looks like a bomb went off in their town. But often the most damage is caused by flooding. It is the largest natural catastrophe that we have. It's happening all the time. I can take you outside my house right now, it's flooded from the king tides.

We've had three major floods in the house, two of them we've had major claims. Even just a little bit of water can devastate a home. FEMA estimates one inch of floodwater can cause up to $25,000 in damage.

It's mid intensity storms that park for long durations that are being the facilitators of the most catastrophic losses. With sea level on the rise and increased storm severity, all Americans are at risk. If you live somewhere where it rains, you need flood insurance. However, flood insurance is inherently complicated. Arguably, if the insurance costs were higher, perhaps people wouldn't be living in such risky areas. Congress created the Nationalized Flood Insurance Program, or NFIP, in 1968 to help Americans facing flooding.

At the time, there was no other insurance for flood that was available in the United States. The application and underwriting process with the NFIP is very tedious and often the claims paying process is slow. The NFIP is over $20 billion in debt to the US Treasury. This line on the map, the 1% annual chance line on the map, has had unintended consequences. Could the private sector provide a better model for flood insurance? And did governmentally funded flood insurance encourage dangerous practices? 14.6 million properties in the continental US are at a substantial risk of flooding in 2020.

In 2019, 93 people died directly due to flooding in the US. You can check out your risk at, but experts say almost every home is at risk.

We are seeing more severe floods, more severe hurricanes, more severe wildfires. Why? Most of the time it's because more people are living in harm's way. Folks think that they're not at risk and that they don't need flood insurance coverage when clearly 30% of our losses in any particular year happen in the low to moderate risk a rea. Take, for example, Florida, the nation's third most populous state and fifth fastest growing state in the US, with a growth percentage rate of 1.5%. Once the pandemic hit and remote work became the norm, even more people started flocking to the Sunshine State. My name is Kurt Dyer and I live on Miami Beach, Florida. I've lived here for 30 years.

I love Miami Beach. I instantly fell in love with it. It's a beautiful town. Friendly people, great food, beautiful beaches. Florida is one of the top two states facing the biggest substantial flood risk, and that risk will only continue to grow over time. The first flood that we had in 2009, we literally had the little bedroom and bath and guest. They were completely underwater. We have four

steps going up to the kitchen from the guest bedroom. The water was up to the top steps. Washer and dryers, of course, were floating in the garage. We lost our water heater. We lost the central AC that we had just put in. I had fish floating in the pool from the bay.

We had a parts of a boat dock washed up into our front yard. It was quite dramatic. I was devastated. Absolutely devastated. It was just a shock. When you see water in your house,

it's devastating. You know, it's a miserable feeling. You know, you get a check. Luckily, I'm fortunate enough to have

insurance and can afford to pay for it. A lot of people don't. But I wouldn't have considered buying anywhere else. I mean, I love Miami Beach. I wanted a house. We've seen a lot more of not just storm flooding, but a random rainy day flooding, too. Part of it is due to building.

You know, the more we build, the less ground there is to soak up the rainwater. Unfortunately, most people don't think about risks when they're purchasing property. They just look at a beautiful barrier island or a beautiful forest in California and the risk doesn't come into play for them.

I had no clue this house flooded when I bought this house. And the seller nor the realtor disclosed it. But I have no regrets. You know, I just need to take care of the situation, that's all. Cities like Miami and New Orleans will likely experience the most sea level rise flooding, which may in turn cause mass migration away from there. If the residents are concerned about the flooding . However, that is not always top of mind. Most of the time people don't think they need it. Sometimes even people think they already have it.

That's a big misinformation in terms of flood insurance because most people think it's part of their homeowner's policy when it's not. In 2018, only 15% of American homeowners had flood insurance. 60% of Floridian homeowners did not have flood insurance when Hurricane Irma hit. Federal grants, loans and flood insurance payments to Florida following the storm have totaled over $5.8

billion. It's estimated that 80% of the damage to all impacted areas was not covered by flood insurance. Conversely, those who do purchase flood insurance may feel emboldened to live in riskier locations.

A mortgage lender may require flood insurance, but since that can be provided at a relatively low cost, thanks to the NFIP, people don't assume the full risk for living in a dangerous location. We're causing a false incentive on people to live in riskier areas and really the cost then spreads throughout the government and to all Americans and taxpayers. And prior to 2012, flood insurance premiums were kept artificially low because people with homes built before the NFIP was established were not required to purchase flood insurance. It has affected mostly the pre-firm homes. A lot of those homes have been receiving a subsidiary.

Congress then created a group of people, about 20% of the policies, that are discounted. So by law they pay less than their full risk rate. So a lot of people think, you know, I don't have flood insurance. If I have a flood, it's okay. Fema will just, you know, give me money.

That is not how it works. In order to be eligible for the FEMA grants and everything, you have to be a part of the NFIP. In 1968, the NFIP, or a National Flood Insurance Program, was created. It has the fundamental structure so that we, yes, make insurance available. But we do a few other things with the National Flood Insurance Program.

In 22,400 communities, we have approximately 5 million policyholders, right? A trillion.3 insurance coverage in those communities generate roughly $4.5 billion in revenue. So it's a multifaceted government program that has a number of very important objectives. There's different branches of the NFIP.

There's the flood insurance branch, there's floodplain management, as well as coming up with the flood insurance rate maps, which are used in regulation and currently in rating of insurance. NFIP insurance costs about $700 per year or about $2 a day. For residential properties, it covers up to $250,000 of damage to the building and $100,000 for building contents. It also requires a 30 day waiting period so participants must sign up ahead of a storm coming their way. Some stakeholders see the NFIP insurance as flawed. So if you live in a home that's $400,000 and you only bought a $250,000 limit and the home was flooded, it poses the question, what do you do? The second responsibility of the NFIP is tracking flood risk using the floodplain map.

They determine your price for your flood insurance by two main factors. One, what flood zone you're in, and then the height of your home. When I say height, the elevation in comparison to what they determine to be your 100 year flood event. There's three different flood zones. There's a flood zone X where you're not being forced to purchase flood insurance through your mortgage company. And then there's two other flood

zones, flood Zone A, which is a proximity to water and then flood Zone B, which would be on the water where you have the potential for storm surge. The flood insurance rate maps were very good for the time, but currently with the flood rate maps, all risks in the same zone with the same elevation and the same building type are rated the same. The NFIP intends to release a new mapping plan called risk rating 2.0. We know more about flood risk now than we did when the current rating methodology was put in place four decades ago or so. And so now, because of technology, because we understand the risk better, we can create a rating methodology that identifies what the risk is on a property specific basis instead of a zone basis. It's going to be a little bit of a switch up.

Some people will probably see increases as other people will see decreases, but it'll be more balanced o verall. Communities are the third dimension because they have to adopt land use ordinances to manage their floodplain. Communities need to fulfill the requirements and show that they've actually adhered to and are making progress in terms of making themselves more flood resilient. FEMA is very good with working with communities to help them bring their codes and ordinances up to meet the NFIP standards.

Some examples of improvements could be:. Elevate your house if you're in a flood zone, don't put enclosures down below and convert them into living space. You know, allow for water to freely flow on that bottom level. Our insurance went down almost $4,000 a year just by replacing the windows. As of 2020, the NFIP is over $20 Billion in debt to the US Treasury.

But it's debt that one government program owes to another government program and it is wholly attributable to the areas in the program that are not actuarially sound. The program was never designed to necessarily bring in all the money needed to pay for all the programs, whether that's insurance claims, the grant program, the mapping program or the floodplain management program. And so the program's actually functioning and operating as it was designed. It just the design needs to be updated.

In 2012, the Biggert-Waters Act changed the NFIP to create rates based on more information than just the flood maps and attempted to overhaul the NFIP to ask for higher premiums that better match the risk. That law was amended to gradually increase the cost over time instead of doing an adjustment in just one year. This was a big deal.

We were trying to make some progress, trying to write and rate and price the risk accordingly. But politics set in and this NFIP program is often one of the biggest political footballs. We're, I think, definitely taking steps in the right direction to get the program more fiscally sound, but it'll take a number of years, once the sound financial framework is put in place, for us to get to a fully risk-based premium program. Although it is starting to expand, private flood insurance has been around for a while. In 1983, the NFIP started a partnership with private insurance companies through the Write Your Own Program.

As of September 2020, 60 insurance companies participate in that program. The NFIP and FEMA are the insurance company in that situation, but it's not an insurance company from a traditional aspect. It's really more in the case of an application of benefits. The move toward a more laissez faire marketplace has continued to evolve. We've seen a significant increase in market activity in terms of number of carriers offering.

So in 2016 you had about 16 flood insurance carriers. Now you've got about 41. The premiums have grown from 150 million to over 500,000,000 in just four years. So a lot of activity. Good. What I would call silver lining is that we are beginning to see private industry enter into this market. And hopefully we can neutralize some of those

political headwinds that come along with the National Flood Insurance Program. TypTap is an example of that. In Florida alone, there are over 9 million housing units and only 1.7 million NFIP policies. So there's lots of opportunity for private insurance to develop. We were already in the homeowner's insurance business in Florida, and we received many calls from policyholders saying, can you help us? Is there any way you can assist us? Because we're in a situation where we're not able to afford this flood insurance premium. We're ultimately going to have to move from our home.

And with the use of technology, we felt that there was a better, more efficient, profitable way to write flood insurance, specifically in Florida. A lot of private flood insurance underwriters don't rely so much on the flood zone as they do the building's specific characteristics. With the application of that technology, TypTap is hoping to attract some homeowners away from the NFIP and turn a profit.

Through our technology, we're able to identify dislocations in the market, and a majority of the cases offer flood insurance at a more attractive price. Even with the growth of private markets, I really do think Florida is going to lead the way. And I hope we see expand across the country. We're still going to have a set of structures for which the risk is high and the concentration of the number of those in a given area is so high that the private marketplace just is not going to be interested in that.

We've got to understand that we're way underinsured in the number of properties that should have it. There is a huge market out there. In the high risk area, we estimate only a third of the properties have either an NFIP or a private sector flood coverage. There's a market there. So we want to do what we can to encourage the private sector to also take part in managing the flood risk of the nation. Private insurance companies are also able to insure at a higher rate than the NFIP.

That means more protection for homes worth over $250,000. But that could mean more valuable homes built in riskier areas. For example, the average value of a home in Miami is close to $366,000. That's the same Miami that floods during high tide. A report by Risky Business put $15 billion to $23 billion worth of existing property in that area underwater by 2050. I don't think Miami Beach is going to be underwater in my lifetime. That's not saying that we shouldn't address it

now because it's not going to get any better. You know, the king tides are going to get worse. If I can't get insurance and quality of life goes down, I'm not a fool, I'm not going to stay here.

But I hope it doesn't come to that. Clearly, without the National Flood Insurance Program, there would have been far more development in the high risk area and would have been far greater losses without the program. Has the program stopped any unwise development? Of course not. But our floodplain management regulations do save $100 million in losses avoided. The NFIP also encourages communities and individuals who have experienced multiple flooding events to work on resiliency and aids them if they are considering a buyout provided by FEMA.

It's also has to be determined what is still due from a mortgage standpoint and that home, if not fixed, would have a lower probability of being sold. You can't convince me that property values have gone down. And you can't convince me that people don't want to still buy homes and live here because they're buying like crazy. There's no incentivization to move If you're paying rates that aren't actually based on risk, they're based on political judgment. Investing in the resiliency required by the insurers can save lots of money and heartache.

You can get into these communities, you can educate them, you can inform them and help them understand what better building can do. That's really one of the keys. For every dollar spent on being resilient, you save $7 in recovery.

Closing the insurance gap will certainly help protect property owners living in harm's way. But that could just be a Band-Aid for the much larger issue. Both the East and West coasts will be directly impacted by flooding from sea level rise. The second piece, and this is something that no private marketplace would ever do, is to put in place a grant program that acquires at risk structures, particularly those that have had repetitive losses, and says we're going to pay not just the value of the structure, but buy out the entire piece of real estate and dedicate it as open space in perpetuity.

This is predicted to spark a mass migration inland. The question remains if these indirectly impacted communities will be ready to support the new influx of residents or climate migrants.

2023-06-01 16:37

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