Feb. 8 (Bloomberg) — After a decade of struggles to
assuage environmentalists, raise almost $1 billion and win
permits, Poseidon Resources Group will finally answer a critical
question: Is converting seawater to drinking water a profitable
venture in the U.S. when there are cheaper options?
The developer of water infrastructure projects began site
work last month on the Carlsbad desalination plant, the largest
of its kind in the Western Hemisphere. When completed in 2016,
the facility 33 miles (53 kilometers) north of San Diego each
day will create 54 million gallons of drinking water after
drawing it from the salty Pacific Ocean.
Bankrolled by a $922 million JPMorgan Chase & Co.-led
public-private bond offering — the biggest U.S. project
financing deal of 2012 — Carlsbad’s chances of success are
aided by a 30-year agreement with San Diego’s water authority to
buy water from the plant. If successful, the project could
become a model for how to ease a growing water crunch.
“Its success is going to prevent desal from slowing
down,” said Tom Pankratz, a Houston-based editor of the Water
Desalination Report. “It’s going to eliminate one of the
hurdles to projects that are being considered.”
Desalination provides about 50 percent of municipal water
in such places as Saudi Arabia, and reverse-osmosis plants
including Poseidon’s filter out salt from Spain to China. Yet
until the current U.S. drought, the country has been slower to
develop large-scale desalination plants producing at least 20
million gallons of purified ocean water a day.
‘Last Resort’
That’s because in the Middle East, desalinated water is
often the “core” or at least half of the domestic supply,
while in such places as the U.S., Spain and Australia, it’s
“marginal, or the supply of last resort,” less than 10 percent
in most instances, said Maxime Serrano Bardisa, a water analyst
at Bloomberg New Energy Finance in London.
As the Carlsbad plant starts to emerge from near Agua
Hedionda lagoon by NRG Energy Inc.’s Encina power station,
Poseidon is pushing for a similar-sized desalination facility of
about 50 million gallons an hour’s drive north in Huntington
Beach, California.
If both are built, each will surpass in size the Tampa Bay
reverse-osmosis desalination facility in Florida to become the
largest seawater-purifying plant in the U.S., said Alasdair Wilson, a BNEF analyst.
San Diego Must Buy
Under terms of Poseidon’s partnership, San Diego County’s
water authority will buy at least 40,000 acre-feet of drinking
water stripped of sea salt and sediment, enough for 80,000
single-family homes, over the next three decades.
That supply, sufficient for about 7 percent of the 3.2
million residents in the region, gives the San Diego area a
buffer from water shortages, its mayor said. It also shelters
Stamford, Connecticut-based Poseidon and its backers from risks
including demand shortfalls and uncompleted construction.
“You have to give Poseidon credit for getting this
permitted,” said Jeff Moser, executive director of the National
Water Research Institute in Fountain Valley, California.
The company faced concerns about how the deal would be
financed, disagreements over terms and costs of the water supply
agreement and criticism from environmentalists about the output
of salt in the energy-intensive filtering process damaging
marine life offshore. Most of the plant’s discharge will be
diluted so the salinity doesn’t impact sea-life.
Upfront Funding
Poseidon’s partnership with the water authority may also
help the company succeed after a similar deal failed a decade
ago, leaving a partially-built plant in Tampa. This time,
Poseidon has upfront funding from an infrastructure firm and a
contractor experienced in building similar plants.
Poseidon was unable to secure financing for the Tampa Bay
desalination facility in 2002 after early construction began.
The city’s water authority ultimately bought Poseidon’s interest
in the project.
“Parallels between what happened in Tampa and our project
now are tenuous at best,” Poseidon Chief Financial Officer Andy
Kingman said. The failure to finance and build the smaller
facility in Tampa Bay isn’t relevant beyond providing lessons
learned and history, the CFO said.
Israeli Experience
A contractor with the seawater desalination background that
Israel’s IDE Technologies Ltd. brings to the project wasn’t
available a decade ago, Kingman said. “Having someone right in
the middle of it who has experience not only designing them but
also running them was important.”
IDE, co-owned by Israel Chemicals and Delek Group Ltd., has
a $500 million contract to provide maintenance with Poseidon for
30 years. Its project works include the Ashkelon and Hadera
desalination plants in Israel.
The upfront financing from the bond offering, combined with
the water supply agreement, may provide a model across
California, which has 12 desalination plants under
consideration, according to Sandy Kerl, Deputy General Manager
of the San Diego County Water Authority.
“Everyone’s been interested in looking at what our water
purchase agreement looked like, and how this went,” Kerl said.
Under terms of the 200-page agreement, with 300 pages of
technical appendices, residents will pay about $5 to $7 a month
more for the county to add desalinated water to its supply and
build a pipeline to help deliver it, Kerl said.
‘Well-Structured Deal’
“It is a well-structured deal with appropriate risk-
sharing between the public sector and the private sector,” said
Trent Vichie, a senior managing director at Stonepeak
Infrastructure Partners in New York, which made the private
equity investment. “We look for assets that have essential uses
and this fits the bill.”
The 6-acre Carlsbad site abuts the power station owned by
NRG, the second-largest independent power-producer in the U.S.
after Calpine Corp., whose 400-foot smokestack looms over
beaches frequented by surfers. Once built, the water
purification facility will depend on power from Encina.
Desalinated water is similar in cost to other new water
sources in the San Diego Area such as brackish or recycled
water, Kerl said. The county’s water authority did a study and
found that in the San Diego area the cost of desalinated water
was comparable to other new local options.
In Huntington Beach, where Poseidon’s proposed desalination
plant has attracted interest from Orange County water agencies,
residents and environmental groups have been watching the
Carlsbad process.
Potential Risks
Coastkeeper, which primarily monitors environmental issues,
reviewed both the controls to protect marine life and the
financial structure of the deal, said Ray Heimstra, associate
director at Orange County Coastkeeper.
Because the state is considering new regulations for
desalination plants, the Carlsbad plant may face retrofitting
costs, he said. His Coastkeeper branch, which oversees the
Huntington Beach area, said it’s concerned about avoiding that
potential risk in a water-purchase agreement.
Backers of the Carlsbad plant say the agreement and risk-
sharing should shield the county and investors from retrofitting
costs for a project that’s creating about 2,300 jobs.
Their water price can go up no more than 30 percent during
the contract, and is capped at 10 percent in any one year,
Poseidon’s Kingman said. While potential changes to the system
required by regulation may cost as much as $200 million in
capital, he said, the shared risk will protect consumer rates.
‘Negotiated Balance’
“It was a fair, negotiated balance of the risk that they
have and the risk that we have,” he said.
All new water supplies — recycled water, brackish water
and desalinated water — will be about twice the cost for
current supplies, Kerl said.
The cost increase will buy the area access to a water
source that’s not sensitive to regulatory changes in Washington
or Sacramento, where political leanings could shift dam
operations and local water supplies, she said.
The company’s decade-long permitting efforts resulted in a
partnership that could serve as a model for Florida, Texas and
California, Poseidon said. “It’s always been a needed
project,” Kingman said.
The plant will show whether making salt water potable is
viable in the U.S. given that cheaper alternatives exist, said
Heather Cooley, co-director of the Pacific Institute water
program in Oakland, California.
For now, across four-lane Carlsbad Boulevard from Carlsbad
State Beach by a road lined by vehicles, many with surfboards
mounted to roofs, the beach teems with surfers drawn to the
warm-water jetties — heated discharges from Encina’s power
plant.
To contact the reporter on this story:
Jessica Resnick-Ault in New York at
jresnickault@bloomberg.net
To contact the editor responsible for this story:
Randall Hackley at
rhackley@bloomberg.net
