Stochastic Economic Approach to Headworks Augmentation Timing
This report was produced for the Urban Water Research Association of Australia, a now discontinued research program.
Report no. UWRAA 72
The problem of deciding when a headworks augmentation should commence and of optimizing restriction rules is considered using an economic-based approach. The approach uses information about consumers’ willingness-to-pay for water to evaluate the economic impact of restrictions on water consumption. Multi-replicate simulation, which accounts for uncertainty in future stream flows as well as future demand, is used to estimate future expected economic losses due to restrictions for a given drought management plan and operating policy. Computer software for implementing this methodology was developed around the WATHNET generalized headworks simulation model and can be run on IBM-compatible and Macintosh computers and on Unix workstation supporting X Windows.
A case study based on the Newcastle headworks demonstrates the methodology. It is shown that economic losses can be very sensitive to the shape of the demand-price curve in the subsistence region, where prices, well beyond those currently set by water authorities, force the consumer to drastically reduce consumption. However, presently there is insufficient information to reliably define the shape of the domestic demand-price curve in this region. The need for a comprehensive drought management plan is argued. Finally it is shown how the estimation of economic losses can assist in the optimization of restriction rules and in the selection of the augmentation date which maximizes net expected economic benefits.
The viability of the economic loss methodology depends critically on having reliable demand-price information. Given such information the tools developed in this study are capable of giving planners an economic perspective on system performance, which, together with current risk-based measures, should assist in the search for good solutions to managing headworks systems.
The main research priority lies in better definition of the demand-price relationship in the subsistence region, not only for the outdoor domestic sector but for all other sectors. Willingness-to-pay surveys and cross-sectional studies may better define this subsistence region. A sufficient outcome of such work would be an objective description of the uncertainty about the demand-price curve in the subsistence region.