Hydro-economic models: coupling of two different domains in water management

Ingo Heinz

Institute of Environmental Research

University of Dortmund

Germany

Harmoni-CA Forum & ConferenceOsnabrueck, 5-7 April 2006, Germany

What is ‘economics’ in water management?

• Explain the socio-economic and political processes in watersheds

• Find out the economic values of different water uses (trade-offs between e.g. discharge and ecology)• Find out the economic net-benefits of water for different water users (trade-offs between e.g. agriculture and hydro-power)

• Determine the most efficient water management strategies and water policies (e.g. water pricing)

Economics in the EU Water Framework Directive (WFD)

1. Economic analysis of water use Art. 5:

* Forecasts of water supply and demand

* Costs and prices of water services

* Investments and extent of cost recovery

2. Incentive water pricing (incl. the ppp) Art. 9

3. Most cost-effective measures in water use Art. 4 + 11

4. Cost recovery of water services Art. 9

5. Cost-benefit analysis of measures (derogation from the Directive’s objectives) Art. 4

How can hydro-economic models help?

• Simulation of the processes in watersheds:

* Water availability and water demand

* Water quality

* Water ecology

* Extreme events (shortage, flooding)

* Costs / benefits of water management measures

* Cost recovery

* Water prices and contribution to cost recovery

How can hydro-economic models help?

• Optimisation of the processes in watersheds:

* Water allocation among different water uses (abstraction, discharge, storage, shipping, natural habitats, recreation)

* Water allocation among different water users (households, agriculture, industry, power plants)

* Economically efficient measures in water management (water supply, water quality, aquatic ecosystems, flood control)

* Cost recovery and water pricing

* Water policies (regulations, water markets, subsidies)

Ringler, Berger, Cai, Rosegrant, Obeng-Asiedu et al.

Integrated Hydro-Economic Model:

Maipo (Chile), GLOWA Volta (Africa), etc.

Andreu Alvares et al. Aquatool DSS:

PRB Jucar river basin (Spain), etc.

Assimacopoulos et al. WaterStrategyMan WSM:

Island of Paros (Greece), etc.

Models: three examples

Integrated Hydro-Economic Model Ringler, Berger, Rosegrant, Cai, Obeng-Asiedu et al.

(Germany, USA, Africa)

Purpose Optimal allocation of water resources among competing water users

Objective Maximisation of total economic net-benefits from water use

Outcomes • Optimal price for water abstraction• Water price resulting from water trading

Aquatool DSS Andreu Alvares et al. (Spain)

Purpose • Optimal allocation of water resources among competing water users• Most cost-efficient measures in water use

Objective • Simulation of economic processes in watersheds• Maximisation of total economic net-benefits from water use

Outcomes • Marginal resource costs at optimal allocation• Marginal environmental costs at constraints• Water price resulting from water trading

WaterStrategyMan Assimacopoulos et al. (Greece)

Purpose • Optimal allocation of water resources among competing water users• Most cost-efficient measures in water use

Objective • Simulation of economic processes in watersheds• Maximisation of total economic net-benefits from water use

Outcomes • Optimal prices for abstraction, water use and pollution• Financial, environmental and resource costs

Forecast water supply and demand Art. 5 ✔ ✔ ✔

Maximise total economic net-benefits across all water users

✔ ✔ ✔

Find out the most cost-effective measures in water management at given constraints Art. 5 + 11

✔ ✔ ✔

Calculate financial, environmental and resource costs Art. 5

✔ ✔

Determine charges on using infrastructure, and on environmental and resource costs Art. 9

✔

Cost-benefit analysis trade-offs between dif- ferent water uses versus stakeholder values Art. 4

✔

What do hydro-economic models provide currently?

Some basic essentials in

hydro-economic models

Optimal allocation of scarce water resources

V = i (NBi) max

V: Total economic value from water

NBi: Economic net benefits from water for user i

NBi = NBWSi - Pi

NBWSi: Economic nets benefit for i without water shortage

Pi: Economic losses due to water shortage for i (= „penalty“)

Marginal net benefits for user i: MNBi

Water delivery

MNBi*

W*

Economic losses dueto water shortage„penalty“: Pi

WS

Net economic benefits for user i: NBi

Condition for optimal water allocation

.... and in dependence on constraints r, such as total availability of water resources and environmental limits (e.g. minimum streamflow in rivers) :

wp*i,r: „shadow prices“

MNB*1 = MNB*2 = ... = MNB*i = MNB*n =

= wp*i: unit water costs for each water user i

wp*i can vary between different river basins and periods

The concept of water scarcity rent

Marginal net benefits for user i: MNBi

Water delivery W*

Limited wateravailability

Uniteconomicwater value

Marginalcost ofinfrastructure

Water scarcity rent= resource cost

WS

No watershortage

Condition for optimal water allocation

MNB*1 = MNB*2 = ... = MNB*i = MNB*n =

= wp*i: unit water value for each water user i

Model Penalty functions

Water scarcity rent

Ringler, Berger, Cai, Rosegrant, Obeng-Asiedu et al.

Unit economic value of water:

wp*i

Andreu Alvares et al.

Shadow prices of constraints:

wp*i,r

Assimacopoulos et al.

Unit financial, environmental and resources costs:

wp*i

Coupling water models with

economic models

Model Holistic Modular

Ringler, Berger, Cai, Rosegrant, Obeng-Asiedu et al.

✔ ✔ ✔

Andreu Alvares et al. ✔ ✔ ✔

Assimacopoulos et al. ✔ ✔ ✔

AgriCom Mozart DSS – AMDSS

(Dirksen, Blind, Nagandla, Bomhof, Heinz et al., The Netherlands, Germany)

A modular approach using the Open Modeling Interface and Environment – OpenMI

Created in the HarmonIT project (2002 – 2005)

Mozart model = Hydrological model

Mozart represents relationships between environmental pressures (inundation, water logging, salinity and water shortage) and yield damage fractions.

AgriCom model = Economic model

AgriCom calculates yield losses, costs and benefits in agriculture on the basis of Mozart’s calculations results for different environmental conditions (such as for dry and heavy rain conditions).

DSS component

DSS calculates the economic net benefits for each of the selected strategies, i.e. installing more irrigation equipments, improving drainage systems.

AgriCom

CropPrice, CropValue, ActualPhYield, LabourCosts, EnergyCosts, WaterLevyCosts, FixedCapitalCosts

OutputExchangeItems

AM-DSSScenarios and

Investment

InputExchangeItems

InputExchangeItems

Economic net benefit

MozartEnvironmental pressures

Area, CropCode, Droughtdamage, Saltdamage, WaterlogDam, InundDam, AvgGroundwaterlevel, SprinkType, SprinkDemandSW, SprinkDemandGW

OutputExchangeItems

As one typically exchanges a Quantity on an ElementSet, this combination is grouped into an ExchangeItem. A model can have exchangeItems as input (InputExchangeItem) or can provide them as output (OutputExchangeItem).

Rainfall-Runoff model

River model

+Quantity = "LateralFlow"+ElementSet = "LateralInlets"

OutputExchangeItem

+Quantity = "WaterLevel"+ElementSet = "River"+DataOperationDescriptor =

"None""Interpolate (spatial)"

+Quantity = "Rainfall"+ElementSet = "Sub-catchments"

+Quantity = "Outflow"+ElementSet = "Outlets"+DataOperationDescription = "None"

"TimeAverage (temporal)""MaxValue (temporal)"

Rain module

+Quantity = "Precipitation"+ElementSet = "MyRainGrid"+DataOperationDescriptor = "None"

"Average (temporal)""Accumulate (temporal)""Average (spatial)"

InputExchangeItem

OutputExchangeItem

InputExchangeItem

OutputExchangeItem

AM-DSS

+Quantity = "ActualPhYield"+ElementSet = "Default"

OutputExchangeItem

+Quantity = "EconomicNetBenefit„+ElementSet = "Default„+DataOperationDescriptor="None"

InputExchangeItem

Mozart model

+Quantity = "Sprinkling Type„+ElementSet = "PlotByDw85„+DataOperationDescriptor = "None"

OutputExchangeItem

Agricom model

+Quantity = "Sprinkling Type„+ElementSet = "District water code:85"

+Quantity = "ActualPhYield"+ElementSet = "District water code:85"+DataOperationDescription = "None"

OutputExchangeItem

InputExchangeItem

GetValues() call

GetValues() call

Benefits from coupling techniques (such as OpenMI)

• Allow separated models to be updated• Link models with different spatial representation • Link models with different temporal resolutions• Link models with different terminologies & units• Link models based on different concepts• Allow two-way interactions at every time step• Allow optimisation feedback loops• Allow coupling further models• Make integrated water resource management easier.

Future challenges

Identify the needs for considering socio-economic and water policy aspects in IWRM

Develop economic models tailored to watersheds

Improve the properties of coupling techniques to link water models with economic models

Apply and improve hydro-economic models in watersheds together with the stakeholders.