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Developing Portfolios of Water Transfers
(This project is the subject of Brian Kirsch's doctoral research, click
here to see an abstract of a
paper recently published in Water
Resources Research)
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. This work combines a
hydrologic-water market simulation with an optimization approach to
identify portfolios of permanent rights, options and leases that
minimize 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. The simulation is linked with an
algorithm that uses an implicit filtering search method designed for
solution surfaces that exhibit high frequency, low amplitude
noise. This simulation-optimization approach is applied to a
region that currently supports an active water market, with results
suggesting that the use of temporary transfers can reduce expected
water supply costs substantially, while still maintaining high
reliability levels. Also evaluated are tradeoffs between expected
costs and cost variability that occur with variation in a portfolio’s
distribution of rights, options and leases. While this work
represents firm supply capacity as permanent water rights, a similar
approach could be used to develop portfolios integrating options and/or
leases with hard supply infrastructure.
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