Making robust decisions about New Zealand's water

Light shines over Benmore hydro-dam in Otago, Photo by Chris Sisarich

Robust adaptation decision making under uncertainty: an application of real options analysis to decision making in the water sector

We all need water, but climate change is putting the availability, supply and distribution of water under increasing pressure. Through drought, erratic rainfall, an expanding population and a growing economy, our access to water is at risk and we need to adapt.

One possible solution to the problem is water storage. If water could be collected and stored in times of plenty, we’d have reliable access to the water we need in times of need. But it’s an expensive solution – water storage facilities are a significant investment, and it’s difficult to justify the immediate costs when the benefits may not be seen for several years. Given the inherent uncertainty in predicting climate change impacts, there’s significant scope for over- or underinvestment. Too little, and we may run into significant water shortages. Too much, and we waste valuable resources that could be invested elsewhere.

At present, few large investment decisions in New Zealand consider the uncertainty of climate change in their decision-making process. This project will introduce a tool – Real Options Analysis (ROA) – to decisions being made about water storage in New Zealand. ROA incorporates ongoing learning into a cost-benefit analysis, placing explicit value on flexibility – making investment as efficient as possible and adaptable to a range of climate futures.

We’ll test the effectiveness of this decision-making process at a site in Canterbury, which is already experiencing extreme pressure on its water resources. The primary aim of this project, however, is to apply ROA in a way that can be replicated all over the country. In this way, our research is of direct relevance to local authorities, farmers, investors and any decision makers considering large, irreversible investment that may be affected by a changing climate. It will allow us to make informed decisions, and to adapt – in cost-effective ways – to an uncertain future.

Project contact: Anita Wreford, Scion (NZ)
Project budget: $267,200
Project duration: March 2017 – March 2019

Research and findings:
Robust adaptation decision-making under uncertainty: An application of real options analysis to decision-making in the water sector, Daniel Collins (for Anita Wreford), Deep South Symposium

 

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