Center on Financial Risk in Environmental Systems: Rio Grande Valley
Rio Grande Valley
Managing portfolios of water market transfers
Most cities rely on firm water supply capacity to meet demand, but increasing scarcity and supply costs are encouraging greater use of temporary transfers (e.g., spot leases, options). This raises questions regarding how best to coordinate the use of these transfers in meeting cost and reliability objectives.
A hydrologic–water market simulation with an optimization approach to identify portfolios of permanent rights, options, and leases that minimize the expected costs of meeting a city’s annual demand with a specified reliability. Spot market prices are linked to hydrologic conditions and described by monthly lease price distributions which are used to price options via a risk- neutral approach. Monthly choices regarding when and how much water to acquire through temporary transfers are made on the basis of anticipatory decision rules related to the ratio of expected supply to expected demand. A simulation-optimization approach is applied to a region that currently supports an active water market, with results suggesting that temporary transfers can reduce expected water supply costs substantially, while still maintaining high reliability. Also evaluated are trade-offs between expected costs and cost variability that occur with variation in a portfolio’s distribution of rights, options, and leases. Multi-objective analysis reveals more information about the sources and impacts of uncertainty, and allows for the design of more robust portfolios.
Kasprzyk, J. R., Reed, P. M., Characklis, G. W. and B. R. KirschD
(2012). “Many-Objective de Novo Water Supply Portfolio Planning Under Deep Uncertainty,” Environmental Modelling and Software, 34, pp. 87-104
Kasprzyk, J. R., Reed, P. M., Kirsch, B. R., and G. W. Characklis (2009). “Managing Population and Drought Risk Using Many-objective Water Portfolio Planning Under Uncertainty,” Water Resources Research, 45, W12401.