RAND Review
Fount of Knowledge
How Managers of Water Can Plumb Its Deep Uncertainties
By David G. Groves
David Groves is an associate policy researcher at RAND.
Across America and around the world, water managers face increasing difficulties in ensuring water supplies for expanding populations, particularly with the threat of a changing climate. Recent RAND projects examining these issues in the western United States show how some of these challenges can be managed.
One important action for water managers is to invest in water-use efficiency improvements, and better valuations of these programs can help managers make better choices among the investments. For example, if one looks at the efficiency benefits of reducing the costs of water procurement and delivery alone (known as short-run avoided costs), just 7 of the 21 efficiency programs considered by a Colorado water utility appear to be cost-effective. But when long-run avoided costs, such as those from deferred infrastructure projects, and environmental and recreational benefits are factored into the equation, all but 5 of the 21 programs stand out as cost-effective. As shown in one RAND study, accounting for the additional benefits is critical to recognizing the full value of water-efficiency programs.
Another study focused on methods to evaluate the uncertain risk of climate change on water management, using Southern California’s Inland Empire Utilities Agency as a case study. Even though there is significant uncertainty about the effects of climate change on the region’s water supply and demand, the study found that sensible investments can be identified now for the Inland Empire. Specifically, it would be prudent for this utility’s managers today to invest more heavily in local resources, including increased water efficiency and more-aggressive, innovative groundwater management programs.
Water Efficiency Benefits
Choosing how much to invest in water efficiency can be difficult because estimating its benefits can be difficult. Most utilities typically consider only the reduced costs of using current water facilities to meet reduced demand (short-run avoided costs). But there are also deferred or downsized investments in future infrastructure (long-run avoided costs), reduced withdrawals of water from rivers and streams using existing facilities (short-run environmental benefits), and reduced environmental and recreational impacts thanks to the delayed construction of new facilities or the postponed expansion of existing ones (long-run environmental benefits). The environmental and recreational benefits pertain to riparian and wetland habitats, air quality, river fishing, and river rafting.
A more complete estimate of the value of water efficiency is thus the sum of each of these benefits: the short-run and long-run avoided costs and the short-run and long-run environmental benefits. Without adding up all four factors, utility managers are likely to underestimate the benefits and to under invest in efficiency.
The RAND analysis examined, as a case study, the benefits of efficiency in the Denver region. The local utility, Denver Water, serves more than one million people a day, drawing from three water collection systems: the South Platte River, the Roberts Tunnel system, and the Moffat system. Denver Water has projected that the population in its service area will grow by more than 50 percent by 2050, the end of the utility’s long-term planning horizon. At this rate, the average annual water demand will exceed the average annual water supply by 2016. To address the projected shortfall, Denver Water plans to build two new water-supply projects and to expand its water efficiency programs.
The short-run benefits of the efficiency programs likely will be realized immediately and will accrue into the future. The long-run benefits might not appear for many years, perhaps not for a decade or more. To capture all the benefits of sustained water efficiency improvements, we summed up the present value of the benefits from 2007 to 2050.
Water savings concentrated during the summer are worth more than water savings spread throughout the year. |
We also distinguished between two types of efficiency programs: those that save water uniformly throughout the year and those that save water primarily during summer. Water savings concentrated during the summer, when water is scarcer and demand is greatest, are worth more than water savings that are spread throughout the year. This is because many water agencies make capital investments to increase water supplies in response to rising peak demand. Therefore, efficiency programs that save water exclusively during peak times will allow longer deferrals of supply projects than will those programs that save the identical amount annually, but spread out across the year.
Because our calculations depend on several unpredictable factors (such as water needs decades from now and the impact of climate change or severe droughts on water supply), we estimated the benefits across a wide range of assumptions, yielding wide ranges of potential benefits. Although we did not arrive at a single unequivocal estimate of the benefits, the ranges themselves proved to be quite telling.
For programs that save water uniformly throughout the year, the short-run avoided costs alone of saving 1 million gallons of water a year for 43 years in a row were estimated to have a median present value of just $13,400. Adding the long-run avoided costs increased this value to $45,800. Adding all environmental benefits increased this amount further to $63,400, which fell within a range of total estimated benefits stretching from $41,000 to nearly $100,000 (see the centerpiece). Although this range is large, the lower bound ($41,000) is nearly double that of the upper bound of the short-run avoided costs alone ($22,000). Thus, if Denver Water were to consider only the short-run avoided costs, it could possibly undervalue efficiency by 50 percent or more.
For programs that save water primarily during summer, we estimated the median present value of total benefits to be 76 percent higher than those for year-round efficiency programs: $111,600 compared with $63,400 per million gallons saved once a year for 43 years. (As with all analyses of present value, the results are sensitive to the choice of discount rate; in each case cited above, a rate of 6 percent was used.)
We compared our benefit estimates to the costs of many different efficiency programs that had been included in Denver Water’s draft 10-year conservation plan. We assumed that the 10-year program costs would be incurred repeatedly over the 43-year period from 2007 to 2050.
The centerpiece table shows that the discounted 43-year costs of the proposed efficiency programs vary widely, from about $119,000 to replace urinals with low-flow versions to nearly $168 million for irrigation-efficiency incentives (a program that saves water primarily in the summer months). The water savings also vary widely, from just 15 million gallons a year from car-wash certifications to nearly 2.3 billion gallons a year from time-of-sale retrofits of toilets, showerheads, and faucets.
To rank everything fairly by cost, we divided the estimated 43-year discounted cost of each program by its average annual water savings in million gallons. The result gave us the average cost of each program in saving 1 million gallons of water a year for 43 consecutive years. As an example, we divided the 43-year discounted cost of replacing urinals ($119,000) by the average annual water savings (98 million gallons) to obtain an average cost of roughly $1,200 to save a total of 43 million gallons over 43 years.
Changing hydrological conditions could pose a major challenge for water management agencies throughout the West. |
The centerpiece ranks the 12 programs that reduce demand uniformly all year long by cost and then compares these costs to the benefit estimates. If just the short-run avoided costs are valued, then just 4 of the programs appear cost-effective (those that cost less than $13,400 to save a million gallons of water every year). But when considering all avoided costs and environmental benefits, 9 of the programs appear cost-effective, because they cost less than $63,400 to save a million gallons of water every year.
Likewise, the centerpiece ranks the 9 programs that reduce demand primarily in summer. Just 3 appear cost-effective against the short-run avoided costs alone. Counting the long-run avoided costs qualifies 4 more as cost-effective, including irrigation checkups, which cost about $89,000 per million gallons of water saved in each of the 43 years.
California Climate Change
In California, climate change will likely lead to higher temperatures, altered precipitation patterns, and less snow pack to supply state and federal water projects. Climate change might also alter the frequency and severity of extreme events, such as droughts and floods. These changing hydrological conditions could pose a major challenge for many water management agencies, not just in California but also throughout the West.
Figure 1 —Many Dry-Weather Scenarios Could Be Costly Unless the Inland Empire Utilities Agency Augments Its Plans |
SOURCE: Preparing for an Uncertain Future Climate in the Inland Empire, 2008.NOTES: Each dot represents one scenario. Total scenario costs are through 2040. |
RAND researchers have deployed new computational methods that can help water agencies evaluate the risks of climate change and identify the policies that can perform well over a multitude of plausible future conditions. These tools allow managers to assess their plans over many scenarios, identify vulnerabilities, and evaluate the most effective means to mitigate them. We have worked with Southern California’s Inland Empire Utilities Agency (IEUA), based in Chino, California, to test these methods.
To accommodate rapid population growth, IEUA has charted aggressive plans to increase groundwater use by 75 percent through replenishment, desalination, and the distribution of nearly all recycled urban wastewater back to its cities for outdoor use. We identified the risk that climate change could pose to this long-range plan and identified options that could reduce the risk in a cost-effective way. We found that the long-range plan would perform well if the region’s climate were to remain unchanged or to grow wetter; however, there could be significant shortages if drier-climate projections come to pass.
Figure 1 plots the present-value costs of 200 dry-weather scenarios that IEUA could face if it follows its original plan through 2040. Each dot represents one scenario, each with a combination of two costs: the cost of supplying water (the y-axis) and the cost of any water shortages (the x-axis). Scenarios in the green shaded area lead to total discounted costs through 2040 of less than $3.75 billion (or about 20 percent higher than the expected cost if all of the agency’s planning assumptions remain valid). Scenarios in the yellow shaded area would impose costs above this threshold, an amount deemed unacceptably high.
We used statistical methods to identify the conditions that would lead to these high-cost outcomes. We found that three conditions tend to hold simultaneously for the highest costs to be incurred: large (but plausible) precipitation declines over the next several decades, large reductions in water imports as a result of climate change, and a moderate reduction in natural percolation into the local groundwater basin. These conditions stand out as key vulnerabilities facing IEUA.
We considered a variety of options that IEUA could pursue to augment its plan: meeting recycling goals sooner, increasing groundwater replenishment with more recycled water, capturing more storm water to replenish the groundwater, meeting increased water-efficiency goals, and expanding the agency’s dry-year-yield program (using more imported supplies when available in wet years so that more groundwater can be extracted in dry years). We evaluated eight modifications to the IEUA plan to see which might best reduce the climate vulnerabilities identified. Four “static” modifications alter the plan today but make no further adjustments through 2040. Four “adaptive” modifications implement some changes today, monitor water supply reserves, and take future actions if the average five-year supply level drops below a specified threshold.
Figure 2 —Implementing Additional Near-Term Strategies Now and Adapting Later, if Necessary, Will Reduce Vulnerabilities |
SOURCE: Preparing for an Uncertain Future Climate in the Inland Empire, 2008. |
Figure 2 shows the number of scenarios in which each of the alternative plans would impose 35-year costs greater than $3.75 billion. The original plan would impose high costs in 116 of the 200 dry-weather scenarios generated. In contrast, implementing four modifications today — an expanded dry-year-yield program, an accelerated recycling program, increased storm water replenishment, and increased water efficiency — would eliminate almost all the identified vulnerabilities. Even just allowing updates to the plan would shrink the number of vulnerable scenarios down to 32. Any combination of current actions with future updates would reduce the number further. Significantly increasing efficiency now and updating the plan later, if needed, would succeed nearly as well as doing everything now.
IEUA has estimated that it would be cheaper in the future to exploit its local options, such as increased efficiency, than to import water. As a result, the agency is in a fortuitous position: Taking more aggressive near-term actions can reduce not only the agency’s long-term climate vulnerability but also its long-term financial costs. IEUA has begun to use these results both to highlight the benefits of the water-saving actions in its current plan and to argue for implementing even more aggressive actions.
Like those at IEUA, water managers across the United States and beyond face a new, changing, difficult-to-predict environment. Traditional planning assumptions, such as the future climate being similar to that of the past, will likely prove inadequate. Fortunately, a powerful new set of tools can help water managers identify, evaluate, and communicate their vulnerabilities and the best means of reducing them. 
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