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Optimal Portfolio Management of Urban Water

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  • Leroux, Anke D
  • Martin, Vance

Abstract

Cities have been investing heavily in recent years to augment their water supply, focusing on either stormwater harvesting or desalination. A more optimal strategy is to consider all sources of water jointly, thereby allowing for hedging of supply risks. A portfolio model of urban water supply is derived, consisting of reservoirs, stormwater harvesting and de- salination, which takes into account the uncertainties of water flows and rainfall as well as the relative costs of associated with the three types of water sources. Calibrating the model to Melbourne's existing water supply system, a significant result is that optimal contributions are dependent on current water stocks, thereby providing insights into the appropiate- ness of historical water augmentation decisions. It is found that, with the exception of reservoirs, observed contributions deviate from optimal contributions for stormwater harvesting and desalination with the results suggesting a need for future investments to target stormwater harvesting ahead of desalination technology. Moreover, the optimal portfolio is found to vary throughout the year with desalination being the preferred supplementary supply source to reservoirs during summer months, while harvested stormwater is the preferred choice during winter. This result has implications for augmentation investments to mitigate seasonal water supply shortages.

Suggested Citation

  • Leroux, Anke D & Martin, Vance, 2014. "Optimal Portfolio Management of Urban Water," 2014 Conference (58th), February 4-7, 2014, Port Macquarie, Australia 165857, Australian Agricultural and Resource Economics Society.
  • Handle: RePEc:ags:aare14:165857
    DOI: 10.22004/ag.econ.165857
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    References listed on IDEAS

    as
    1. Anastasios Michailidis & Konstadinos Mattas, 2007. "Using Real Options Theory to Irrigation Dam Investment Analysis: An Application of Binomial Option Pricing Model," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 21(10), pages 1717-1733, October.
    2. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
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    Keywords

    Environmental Economics and Policy; Risk and Uncertainty;

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