California and the Water Market

Given California’s warm climate that often accounts for water reduction measures, its water market has good prospects to become one of the most desirable markets in the wide American west. The market works through short and long-term leases, as well as permanent sales between buyers and sellers. These water rights arrangements have their impact on the economy and life in California, whereby short-term leases are beneficial when water reduction measures are taken during droughts in the sunny land. During such periods, water is shifted to areas that suffer from water shortages which has its economic advantages. Long-term leases and permanent water rights transfers have an impact on the shift in water demand. Water supply in California can turn to a real challenge if we consider the geographical position and climate, which contribute to the lack of water supply, but at the same time, making the water market a gold mine for water market holders.

Water Trading in California

The water market in California is very flexible with the purchase-sale of water rights, but yet, the process of water trading can be very complex and tiresome. Trading water has a tremendous impact on the environment and Californian inhabitants. Despite the valuable potential, trading water in California can be a costly endeavour and time-consuming and the whole process has come down to proving that no damage will be incurred neither on the environment nor the people. The system in place is not efficient on so many levels that it requires a different, much simpler, approach.

What Could Be The Solution To The Water Trading Problem?

The water market of California should be more centralized whereby all trades would be linked to one central system. An automated approach using a computerized system, also known as the smart system, would be a way to streamline and control water trading. This system has been in use in California already for quite some time in other sectors and the question is why it hasn’t still entered the water market. Smart markets are already the foundation for government operations, electricity market and other industrial commodities. They rely on computerized systems and calculations of efficient trades based on constraints.

California’s water supply system is supported through a network of streams and rivers and other water resources such as reservoirs, ground waters ,etc., whereby users draw the water directly from that network. So far, so good, but the problem arises when it comes to the spot market of water shares which is not streamlined properly.

The water market could be remodelled after the Californian electricity market which already uses a smart system, where all electricity market participants are directed to the hotspot so as to trade directly with the ISO (Independent System Operator) and not with each other. Such a system provides for a better control of electricity generation, overviewing the supply-demand balance and enabling market participants to buy only as much as they can afford. This accounts for decent market liquidity enabling electricity generators to meet their financial expenses. The smart market in electricity ensured a stable and efficient market.

An ISO system in the water market would have similar outcomes enabling large stakeholders to trade directly with the system. They could also rent out their current rights to smaller participants on short-time bases, like for 7 days. An ISO water system would calculate the supply-demand ratio, return flows, and “jump in” and buy out the participants (upstream and downstream) who want to give up water, redirecting it to places where it is more valuable. Such a system would automatically be more efficient with its sophisticated way of calculating all the factors that play a role in the market.
Another advantage of the ISO system is the regular and accurate update of prices and the market status which would facilitate trades of drinking and non-drinking water. Costs would be lowered and wealth would be generated across the industry giving more freedom to buyers and sellers in a controlled environment.

Of course, water works different than electricity and the water market would be slower with different levels of quality and their assessment including other complex factors as well, but yet, the smart market sounds promising and would certainly improve the conditions in the water market.

The Prospects of the Smart Water Market

To set up a smart market for water trading would require a lot of work since all market participants would have to be entered into the system and their water rights acknowledged. Water accounting reorganization would be required and stimulated through active trading. Legislation would have to be modified as to set clear rules on water transfer from county to county.

Since it would be a large project that would change the water supply industry from bottom to top, the Californian government could start with a pilot project including only a handful of traders to see where it goes. Also, one of the key roles would and should be assigned to the Californian Water Resources Department which would closely cooperate with the government. The smart system should be introduced gradually by adding new areas as the project progresses in order to prevent any potential chaos in the water market.