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

Project Duration: 1 March 2017 – 1 March 2019

Project Budget: $ 267,200

Water availability, supply and distribution are already presenting challenges to businesses and society in New Zealand (NZ).  Climate change, as well as population and economic growth will exacerbate these pressures.  Water storage is an adaptation that may enable greater security of supply, but is however a significant investment.  Furthermore, climate change is inherently uncertain, meaning there is considerable scope for over- or under-investment.  At present, few large investment decisions in NZ consider the uncertainty of climate change. This project will apply Real Options Analysis (ROA) to decisions around water storage, which is an approach that incorporates flexibility in design and operating decisions so that it is robust against a range of plausible climate futures. We will apply ROA to a site in Canterbury as an example but the primary aim of the project is to develop a way to apply the method in NZ, using NZ climate data, that will be replicable across sites and regions.

Developing this analysis will be of direct relevance to decision-makers considering any large, irreversible investment that may be affected by a changing climate.  The results will directly assist the decision-makers in the specific case-study area, allowing a careful and informed analysis to be conducted.

Principal Investigators:

Primary Contact: Dr Anita Wreford, Scion (NZ), anita.wreford@scionresearch.com (03) 3642949 ext 7478/ 021 1656580

Dr Daniel Collins, NIWA (NZ)

Dr Ruth Dittrich, University of Portland (USA)

 

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