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