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Dr Julien Harou, University College London, UK What’s the national economic value of water trading? ----- PARALLEL SESSIONS 3 --- Economic innovations to manage risk through water trading. Examines economic innovations to manage water security risks associated with intensified competition for scarce and variable water supplies. Contributions investigate institutional reforms, economic incentives and behavioural change in water allocation with examples from Australia, Canada, UK and USA.
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Water trading in England? – policies and tools to enhance water
security and efficiency
Julien Harou
University College London
April 18, 2012, Oxford Water Security Conference
2012 Drought risk across England and Wales
Rising water demands and a changing climate mean increased scarcity is likely
Resource Availability
Annual Rainfall
Challenges • Scarcity: resources over-licensed, over-
abstracted in many basins • Uncertainty: Climate, population, shocks,
institutional changes • Public demands: ecological health, low
water prices, fairness Challenges motivate formulation of new
policies and increased sophistication in planning methods
Some proposed policy solutions
• Encouraging innovative demand management schemes e.g. seasonal or block tariffs, smart meters, efficiency, etc.
• Reform abstraction licensing system • Better planning under uncertainty (reliability,
robustness, resilience, etc., not just least cost)
• Water trading – regional and local
This talk • Water sector reform • Potential regional, local benefits from water trading • Institutional uncertainty • Tools for identifying benefits, helping to design policy • Case studies (ongoing):
1. Regional trading Tool: Portfolio investment optimisation (‘supply-demand’ models)
2. Local catchment trading Simulating water rights markets
Possible water company reforms
• Investment incentives – decrease bias towards capital schemes – Remove dis-incentives for some operating cost
intensive measures (e.g. transfers) • 5-year review period • Supply-demand planning
– Not risk based, deterministic or quasi-stochastic – Fixed levels of service – can’t explore cost-
reliability trade-off
Possible licensing reforms
• Rights that respond to water availability – Proportions of available flow are licensed,
rather than volumes – Consumptiveness is considered (linked
abstraction licences and discharge consents) – Daily low-transaction cost spot market
• Water charging – Replace licenses with a near real-time pricing
system (price is function of water availability)
National water development costs
Regional trading (between companies)
• Long-term – Marginal cost of new supplies vary by region – Long-term transfers between companies will
reduce costs in some areas • Shorter term
– In many cases, short-term activation of interconnections will be more beneficial
– Allows deferring costly investments – Interconnected networks offer flexibility which
translates to higher reliabilities, smaller and shorter failures
Local catchment license trading
• Whichever abstraction licence reform option is chosen, there is no ‘new’ water available in many sub-basins
• The ability of licence holders to make short- and long-term exchanges is vital to reduce economic costs of water scarcity
• Largest gains would be from a low-transaction cost short-term spot market that would manifest in dry years
Would a spot-market work? • Relatively little irrigated agriculture England-wide
(and other ‘low-value uses’) • Water use technologies combine short-term
practices but also long-term investments (ability to adapt in short-term is limited in many sectors)
• Will water managers develop confidence in the market as a reliable water source?
• Many users are risk-averse, put premium on reliability (e.g. water companies) – it’s not clear to what extent they will rely on a market that rarely manifests
• Market power of some abstractors -> equity and other social acceptability considerations
Institutional uncertainty • Ideal infrastructure investments will be very
different depending on: – Local markets? Short and/or long-term? – Regional markets? Spot and/or long-term?
• Given likely adaptive long-term water company and licensing reforms, is institutional uncertainty as significant to planning as climate uncertainty?
• Tools we plan with should be able to represent different institutional (regulatory, management structures, …) futures to ensure investments are robust (‘low regret’) across these
Tools (in progress) for institutional design and planning under uncertainty
1. Regional trading Question: how does interconnection reduce costs, increase reliability? Tool: Least economic cost supply-demand investment planning and regional trading, new stochastic simulation-based approaches
2. Local catchment trading How could different reforms affect trading? Tool: Simulating water rights markets
1. Modelling supply-demand investment and inter-regional water trading
• Regional supply demand optimisation modelling selects annual investments in new supplies (including transfers) and demand management measures
• Objective: minimise costs (capital, fixed & variable operating, social, & environmental) over 30-yr time horizon
• For each measure you must provide: annual cost and annual yield (‘deployable output’)
• Reliability (level of service is fixed)
Supply-demand modelling
Temporal Results
0
50
100
150
200
2007 2012 2017 2022 2027 2032
Leak
age
optio
ns [M
l/d]
YearscdLRP cdLCN sdL143sdL142 sdL141 sdL140sdL139 sdL138 ldAL1ldAL2 ldMR ldAL3sdAL1 sdAL2
0
50
100
150
200
2007 2012 2017 2022 2027 2032Supp
ly o
ptio
ns [M
l/d]
YearscrCGW crBUGR ldELRDldNNR lrARK ldECRlrSW ldSLA ldESDldLRD ldD25 ldHBldASR ldST ldSEAldDV2 ldDV1 srGG1RA75
0
50
100
150
200
2007 2012 2017 2022 2027 2032
Wat
er e
ffici
ency
op
tions
[Ml/d
]
YearsccTWE ccHGT ccNCDccCFE ldEWE scEWE
0
50
100
150
200
2007 2012 2017 2022 2027 2032
Met
er o
ptio
ns [M
l/d]
YearsldTCM csCOM
Spatial Results
HKi
RZ4
RZ5
jSTLM (Welsh 36)
CENT
SUT ES
SWA
KEV
SOUTH
GFD
LDN
NORTH
jARo
sjRA75
sjRAP1
sjRAP2
sjRA3Z sjRA150 jwRA3Z
jlRAP2jlRA3Z
jlRA150jlRAP1jlRA75
j44
HEN
j45
jSOB
jNETC (Nothumbrian)
SWOX
ESSEX
jun2
jun3
LONDON
SWOX
SLARS
SWT
Southern
Central
existing nodes supply node leakage control
water efficiency improvements metering export to external WRZs DYCP supply options source junction
future link between WRZs
intra-company existing link
inter-company existing link
UTR150
UTR100
LONDON
SWOX
SWT
VTVW_Abs
Southern
Central
VTVW_T_BS
VTVW+ESW_BS
Supply node Leakage control
Water efficiency improvements Metering Seasonal tariffs
Mains replacement
UTR75
HKi
RZ4
RZ5
CENT
SUT ES
SWA
KEV
SOUTH
GFD
LDN
NORTH
HENjSOB
SWOX ESSEX
P089 P090 P091
cdLCN
P088
P104
P099
ldELRD
ldNNR
ldECR
ldLRD
ldAL1 ldTCM
ldEWE
sdAL1 rkSOB
scEWE
cpBB
cpDW cpTC cpHLR
cpLG
P105
srCGW
P087
P086
crGERR
ldARK
ldSLA
ldD25
lrSW
ldHB ldASR
ldST
ldSEA
ldADL3
ldAL2
jARo jlRA75
sjRA75 jun2
P092
P093 P094 P095
P096 P097 P098
P106 P107 P108
P111 P110
P109
ldSEA ldDV2 ldAST ldESD
ldDV1
ldBSS
ldBSN
cpFS
cpWL
cpTT
P101
P100
P083 P084 P085
P102
P103
ldADL4
VTVW_Abs
VTVW_T_BS
VTVW+ESW_BS
Options Results
Early draft schematic of UCL’s Ofwat-funded national supply demand model
New approaches? • Use water resource simulation models directly to
choose between alternatives • Allows considering multiple measures of
performance (rather than abstract yield concepts), e.g. reliability, vulnerability, resilience, ecology, cost-effectiveness
• Use planning under uncertainty frameworks (e.g. RDM, Info-gap, Real Options, multi-criteria search, etc.)
• Ideal solution: not 1 solution, but trade-offs between performance measures (e.g. reliability - cost)
Water resource simulation models: track system performance each time-step
HKi
RZ4
RZ5
jSTLM (Welsh 36)
CENT
SUT ES
SWA
KEV
SOUTH
GFD
LDN
NORTH
jARo
sjRA75
sjRAP1
sjRAP2
sjRA3Z sjRA150 jwRA3Z
jlRAP2jlRA3Z
jlRA150jlRAP1jlRA75
j44
HEN
j45
jSOB
jNETC (Nothumbrian)
SWOX
ESSEX
jun2
jun3
LONDON
SWOX
SLARS
SWT
Southern
Central
existing nodes supply node leakage control
water efficiency improvements metering export to external WRZs DYCP supply options source junction
future link between WRZs
intra-company existing link
inter-company existing link
UTR150
UTR100
LONDON
SWOX
SWT
VTVW_Abs
Southern
Central
VTVW_T_BS
VTVW+ESW_BS
Supply node Leakage control
Water efficiency improvements Metering Seasonal tariffs
Mains replacement
UTR75
HKi
RZ4
RZ5
CENT
SUT ES
SWA
KEV
SOUTH
GFD
LDN
NORTH
HENjSOB
SWOX ESSEX
P089 P090 P091
cdLCN
P088
P104
P099
ldELRD
ldNNR
ldECR
ldLRD
ldAL1 ldTCM
ldEWE
sdAL1 rkSOB
scEWE
cpBB
cpDW cpTC cpHLR
cpLG
P105
srCGW
P087
P086
crGERR
ldARK
ldSLA
ldD25
lrSW
ldHB ldASR
ldST
ldSEA
ldADL3
ldAL2
jARo jlRA75
sjRA75 jun2
P092
P093 P094 P095
P096 P097 P098
P106 P107 P108
P111 P110
P109
ldSEA ldDV2 ldAST ldESD
ldDV1
ldBSS
ldBSN
cpFS
cpWL
cpTT
P101
P100
P083 P084 P085
P102
P103
ldADL4
VTVW_Abs
VTVW_T_BS
VTVW+ESW_BS
Options Results
Annual supply-demand
RDM
More performance detail means less schemes portfolios (‘packages of measures’) are considered
2. Catchment scale trade simulation
Goal: Use a predictive model to assess how different water licensing reform policies affect water abstraction, consumption and trade between license holders
Catchment simulator
Inflows
• Hydro-economic model simulates trading between pairs of water rights holders each time-step to maximise regional economic benefits
• Requires: – Seasonal economic
benefit functions of each sector/user
– Transaction costs between buyers & sellers
• Shadow values quantify opportunity costs of regulations
Transaction costs used in the study
Trade, storage, and river flow distribution over the modelled time horizon
Weekly regional net economic benefits from abstractions
Results for one abstractor
Carsington Reservoir
Tittesworth Reservoir
Results: E4 water use during 2006
Benefits & limitations • Tracks individual trades and links them to
catchment environmental conditions (flows & storage over time)
• Could be extended to a multi-agent model with sub-models representing each user type (adding autonomous rule-based decisions)
• Uses a regional objective rather than one of each agent individually (no gaming, rent seeking)
• Benefit functions need to be correct to evaluate trades properly
• Transaction costs required; hard to establish
Conclusions • Reform is coming: company regulation, licensing
of abstraction/discharge • Planners should consider institutional uncertainty • Tools that accurately represent policy drivers of
water management would be helpful in the adaptive process of designing good policies – Effort 1: Planning under uncertainty, investment
optimisation, economic value of regional trading are inter-related
– Effort 2: Initial catchment simulation of markets shows valuation, transaction costs are key