Center on Financial Risk in Environmental Systems: California
California
Project 1 Title:
California’s Food-Energy-Water System: An Open-Source Simulation Model of Adaptive Surface and Groundwater Management in the Central Valley
Summary:
This study introduces the California Food-Energy-Water System (CALFEWS) model, a simulation that integrates consideration of the natural, infrastructural and institutional elements of California’s complex water supply system. The model’s scope spans from Northern California’s reservoirs to the southern end of the Central Valley and is highly resolved both temporally (daily) and spatially (e.g., individual water districts). The CALFEWS model can be used to evaluate the joint water supply/financial risk of individual water users throughout the Central Valley of California.
Description:
The California Food-Energy-Water System (CALFEWS) describes the integrated, multi-sector dynamics that emerge from the coordinated management of surface and groundwater supplies throughout California’s Central Valley. The CALFEWS simulation framework links the operation of state-wide, interbasin transfer projects (i.e., State Water Project, Central Valley Project) with coordinated water management strategies abstracted to the scale of irrigation/water districts. This study contributes a historic baseline (October 1996–September 2016) evaluation of the model’s performance against observations, including reservoir storage, inter-basin transfers, environmental endpoints, and groundwater banking accounts. State-aware, rules-based representations of critical component systems enable CALFEWS to simulate adaptive management responses to alternative climate, infrastructure, and regulatory scenarios. Moreover, CALFEWS has been designed to maintain interoperability with electric power dispatch and agricultural production models. As such, CALFEWS provides a platform to evaluate internally consistent scenarios for the integrated management of water supply, energy generation, and food production, including an assessment of both supply and financial risks.
Related Publication:
[superscripts denoting graduate students (M = masters; D = doctoral) and Post-doctoral Researchers (P) or Researchers (R)) working in CoFiRES]
Zeff, H. B.P, Hamilton, A. L.D, Malek,, K., Herman, J. D., Cohen, J. S., Medellin-Azuara, J., Reed, P. M. and G. W. Characklis (2021). “California’s Food-Energy-Water System: An Open-Source Simulation Model of Adaptive Surface and Groundwater Management in the Central Valley,” Environmental Modelling and Software, 141, 105052 https://doi.org/10.31224/osf.io/sqr7e
Project 2 Title:
Managing Financial Risk Trade‐Offs for Hydropower Generation Using Snowpack‐Based Index Contracts
Summary:
Hydrologic variability poses an important source of financial risk for hydropower‐reliant electric utilities, particularly in snow‐dominated regions. Drought‐related reductions in hydropower production can lead to decreased electricity sales or increased electricity procurement costs for additional supply required to meet firm contractual obligations. This research develops a methodology for characterizing the trade‐offs between cash flows and risk management strategy that combines the use of a reserve fund, line of credit and a novel index-based financial instrument linked to snowpack.
Description:
This analysis focuses on a hydropower producer in the Sierra Nevada mountains (San Francisco Public Utilities Commission). A newly designed index-based financial contract, based on a snow water equivalent depth (SWE) index, provides payouts to hydropower producers in dry years in return for the producers making payments in wet years. This contract, called a capped contract for differences (CFD), is found to significantly reduce cash flow volatility and is considered within a broader risk management portfolio that also includes reserve funds and a line of credit. Our results show that solutions relying primarily on a reserve fund can manage risk at low cost, but may require a utility to take on significant debt during severe droughts. More risk‐averse utilities with less access to debt should combine a reserve fund with the proposed CFD financial instrument in order to better manage the financial losses associated with extreme droughts. Results indicate that the optimal risk management strategies are strongly influenced by the utility’s fixed cost burden and by CFD pricing, while interest rates are found to be less important. These results are broadly transferable to hydropower systems in snow‐dominated regions facing significant revenue volatility.
Related Publication:
[superscripts denoting graduate students (M = masters; D = doctoral) and Post-doctoral Researchers (P) or Researchers (R)) working in CoFiRES]
Hamilton, A. L.D, Characklis, G. W. and P. M. Reed (2020). “Managing financial risk tradeoffs for hydropower generation using snowpack-based index contracts,” Water Resources Research, 2020WR027212, https://doi.org/10.1029/2020WR027212
Project 3 Title:
Resilient California Water Portfolios Require Infrastructure Investment Partnerships That Are Viable for All Partners
Summary:
Water scarcity is a growing problem around the world, and regions such as California are working to identify and invest in diversified, interconnected, flexible, and resilient water supply portfolios. To meet these goals, water utilities, irrigation districts, and other organizations will need to cooperate across scales to finance, build, and operate shared water supply infrastructure. However, planning studies to date have generally focused on partnership-level outcomes (i.e., highly aggregated cost-benefit analyses), while ignoring the heterogeneity of benefits, costs, and risks across the individual partners. These will be important factors in convincing these groups to invest in these multi-million/billion-dollar projects.
Description:
This study contributes an exploratory modeling analysis that tests thousands of alternative infrastructure investment partnerships in the Central Valley of California, using a daily scale simulation model (CALFEWS) to evaluate the effects of new infrastructure on individual partners/water providers. The viability of conveyance and groundwater banking investments are as strongly shaped by partnership design choices (i.e., which water providers are participating, and how the project’s debt is distributed?) as by extreme hydrologic conditions (i.e., floods and droughts). Importantly, most of the analyzed partnerships yield highly unequal distributions of water supply risks and financial risks across the partners, so only 8% of the partnerships explored are capable of providing water to each partner for under $200/ML. Partnership viability is especially rare in the absence of groundwater banking facilities (1%), or under dry hydrologic conditions (1%), even under explicitly optimistic assumptions regarding climate change. Given these results, we outline several major policy implications for institutionally complex regions such as California, which is currently investing heavily in cooperative approaches to resilient water portfolio design.
Related Publication:
[superscripts denoting graduate students (M = masters; D = doctoral) and Post-doctoral Researchers (P) or Researchers (R)) working in CoFiRES]
Hamilton, A. H.D, Zeff, H. B.R, Characklis, G. W. and P. M. Reed (2022). “Resilient California water portfolios require infrastructure investment partnerships that are viable for all partners,” Earth’s Future, e2021EF002573
Project 4 Title:
A composite index-based instrument for managing the financial risk of variable hydrometeorology for electric utilities
Summary:
Extreme hydrometeorological conditions impact electric utilities’ financial stability. Drought and heat waves, which are often correlated, reduce electricity supply (e.g., hydropower) and increase electricity demand, respectively, forcing utilities to resort to more expensive means of generation (e.g., thermal). The combination can lead to significant net revenue losses. A model of U.S. West Coast power systems is combined with a financial model of a large California electric utility to characterize hydrometeorological financial risk and test the performance of a novel form of index insurance for managing it.
Description:
This research involves the development of a financial contract for managing an electric power utility’s hydrometerological financial risk. The contract is based on a composite index of measures related to streamflow, temperature, and electricity prices and its cost-effectiveness is compared against a portfolio of three currently available index contracts each based on a single index: streamflow, cooling degree days (CDD), wholesale market electricity price. The new composite index contract better incorporates consideration of covariance in the three factors and reduces variance in the utility’s net revenues for roughly half the cost of a portfolio of the three existing contracts. The more expensive generation sources dispatched during droughts and heat waves also generate more air pollution. One proposed approach to reducing emissions during these periods is a pollution tax, but this tax would further increase utility financial risk. An alternative regulatory scenario involving a pollution tax is therefore explored, and the composite index contract is shown to significantly reduce risks in this setting as well, thereby reducing disincentives for this public health intervention.
Related Publication:
[superscripts denoting graduate students (M = masters; D = doctoral) and Post-doctoral Researchers (P) or Researchers (R)) working in CoFiRES]
Amonkar, Y.P, Pahel-Short, C.M, Characklis, G.W., Kern, J.D. and A Zeighami, “A composite index-based instrument for managing the financial risk of variable hydrometeorology for electric utilities” (in prep)
Collaborators:
Dr. Pat Reed, Cornell
Dr. Tamlin Pavelsky, Earth, Marine and Environmental Sciences, UNC
Dr. Jon Herman, University of California, Davis
Dr. Josué Medellin-Azuara, University of California, Merced
Other Publications from related projects:
[superscripts denoting graduate students (M = masters; D = doctoral) and Post-doctoral Researchers (P) or Researchers (R)) working in CoFiRES]
Fernandez-Bou, A.S., Rodríguez-Flores, J.M., Guzman, A., Ortiz-Partida, J. P., Classen-Rodriguez, L.P., Sánchez-Pérez, P.A., Valero-Fandiño, J., Pells, C., Flores‑Landeros, H., Sandoval-Solís, S., Characklis, G. W., Harmon, T.C., McCullough, M. and J. Medellín-Azuara (2023). “Water, environment, and socioeconomic justice in California: a multi‑benefit framework,” Science of the Total Environment , 858, 159963, dx.doi.org/10.1016/j.scitotenv.2022.159963
Su, Y.D, Kern, J.D. and G.W. Characklis (2022), “The Effects of Retail Load Defection on a Major Electric Utility’s Exposure to Weather Risk,” Journal of Water Resources Planning and Management, 148(3), https://doi.org/10.1061/(ASCE)WR.1943-5452.0001531
Hamilton, A.L.D, Characklis, G.W. and P.M. Reed (2022). “From Stream Flows to Cash Flows: Leveraging Evolutionary Multi-Objective Direct Policy Search to Manage Hydrologic Financial Risks,” Water Resources Research, 58, e2021WR029747, https://doi.org/10.1029/2021WR029747
Malek, K., Reed, P., Zeff, H.B.R, Hamilton, A.L.D, Wrzesien, M., Holtzman, N. Steinschneider, S. Herman, J. and T. Pavelsky (2021). “Bias correction of hydrologic projections strongly impacts inferred climate vulnerabilities in institutionally complex water systems.” Journal of Water Resources Planning and Management,Volume 148, 1, https://doi.org/10.1061/(ASCE)WR.1943-5452.0001493
Gupta, R.S., Hamilton, A.L.D, Reed, P.M. and G.W. Characklis (2020). “Can Modern Multi-Objective Evolutionary Algorithms Discover High-Dimensional Financial Risk Portfolio Tradeoffs for Snow-Dominated Water-Energy Systems?”, Advances in Water Resources, 145, 103718, https://doi.org/10.1016/j.advwatres.2020.103718
Su, Y. D, Kern, J.D., Reed, P.M. and G.W. Characklis (2020). “Compound Hydrometeorological Extremes Acting Across Multiple Timescales Drive Volatility in California Electricity Market Prices and Emissions,” Applied Energy, 276, https://doi.org/10.1016/j.apenergy.2020.115541
Funding Support:
National Science Foundation, Innovations at the Nexus of Food, Energy, Water Systems (INFEWS) program, award no. EAR-1740082
National Science Foundation, Coupled Natural-Human Systems (CNH2) program, award no. BCS-2009726
UNC Institute for the Environment