California Desalination: Orange County Negotiating another Poseidon Project

The Municipal Water District of Orange County (“MWDOC”) released last month a draft Water Reliability Agreement Term Sheet outlining the terms under which it may buy 56,000 AF per year of drinking water from Poseidon Resources’ Huntington Beach Seawater Desalination Project.  As with San Diego’s desalination plant in Carlsbad, another wholesale water agency in Southern California is seeking fully reliable water supplies. 

The document and related draft Letter of Intent offer a framework for continuing negotiations between Poseidon and MWDOC and twenty retail water service providers.

The three milestones in the term sheet show that project decisions will move promptly:

  • Contract execution no later than January 1, 2014
  • Full construction financing no later than June 30, 2014
  • Commercial operations begin the earlier of December 31, 2017 or 40 months after the close of construction financing.

Poseidon will be responsible for construction and operation.  Buyers will pay for produced water.  According to current estimates, the annual cost at a defined delivery point at the plant is $1,424/AF (January 2013$).  The estimate is based on many assumptions including:

  • $250/AF annual incentive from the Metropolitan Water District of Southern California
  • 82% debt and 18% equity financing of the total capital budget, with transparent and reasonable returns paid to equity.
  • 5.15% interest rate on plant bonds
  • current SoCal Edison electricity prices

There would be two regional water delivery systems. The estimated cost for a Northern Delivery System is $138/AF per year, assuming a 4.90% debt interest rate and $101.2 million engineering, procurement and construction (“EPC”) cost.  The estimated cost for a Southern Delivery System is $94/AF per year, assuming a 4.90% debt interest rate and $69.9 million EPC cost.  Electricity, operations and maintenance costs of the delivery systems are not included in the estimates.

If a contract is ultimately executed, this project would mean that two member agencies of the Metropolitan Water District of Southern California have included seawater desalination in their water supply portfolios.  With 112,000 AF per year of desalinated seawater eventually produced in San Diego and Huntington Beach, Poseidon’s projects are becoming a significant factor in Southern California’s water supply portfolio.

The progress, or lack thereof, addressing Bay Delta issues this Legislative session will probably have a significant impact on the future pace of desalination.  With decades of stalemate on the Delta, water providers must look to new solutions and projects to meet their water needs.  Indefinite delay is not an option for entities with an obligation to provide reliable water service.  The willingness of municipal water providers to buy desalinated seawater is first-hand evidence of the high value of supply reliability and the ability to control their water future. 

Where will California’s next desalination plant be located?  Monterey?

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About Rodney T. Smith

Rodney T. Smith, Ph.D., President of Stratecon Inc.—an economics and strategic planning consulting firm—advises public and private sector water users on the acquisition, sale and leasing of water rights and water supplies in the western U.S. He is routinely involved in economic valuation of water rights, water investments, and negotiation of water acquisition and transportation agreements and has served as an expert witness in the economic valuation of groundwater resources, disputes over the economic interpretation of water contracts, economics of water conservation and water use practices, and the socio-economic impacts of land fallowing. For more information, see