Economic Evaluation

The use of water generates benefits, the supplying of that water incurs costs.

For both costs and benefits, the assessment is performed, in parallel for:

1. direct monetary costs and benefits: these include capital and operating costs, and direct use benefits.
2. combined direct and indirect costs and benefits: these also include penalties and estimated flood damages as well as the optional compliance benefits.

Benefits

• Direct Monetary Benefits: Benefits are generated by every cubic meter of water demand met. For each demand node, there is one parameter to estimate the added value generated by the input of one unit (cubic meter) of water. For any economic sector or activity, the estimate could be based on the value of goods or services produced, divided by the amount of water used, and possibly corrected by the relative importantce, role, or percentage that water contributes to the value added.

  A complex example is the value of urban water supply. A minimum estimate would be the cost of water (corrected for any public subsidies); a maximum estimate would be the gross economic product of the city: obviously, only some fraction can be attributed as the value of water supplied. The marginal benefit of water would be the economic product generated for one additional unit of water supplied. This standard economic model already clearly shows the limits of its applicability to some natural resources. However, it is important to realize:

  1. there is no single correct method of estimation;
  2. what is important is that the same method and logic is consistently used for the estimation of all sectoral benefits, and that the estimation strategy used is well documented.

  See, for example:

  Young, R.A (2005) Determining the Economic Value of Water: Concepts and Methods.
  RFF Press, Resources for the Future, February 2005/340 pages ISBN 1-891853-97-X
  Heinz, I. (2005) The economic value of water and the EU Water Framework Directive: how managed in practice?
  IWA International Conference on Water Economics, Statistics, and Finance Rethymno, Greece, 8-10 July 2005.

• Compliance Benefits: A second source of potential benefits are control nodes: at every node, we can specify an (optional) monetary benefit for every day the expressed target is met. This can represent direct monetary benefits (sufficient flow to operate a ferry), or environmental benefits (sufficient water for wetlands). This Compliance Benefit is, however, expressed in monetary units per day.

Costs: direct and indirect costs

• fixed annual costs (annualised) representing investment or capital costs for structures,
• regular (monthly, independent of flow) operatin costs like personnel for a treatment plant or reservoir;
• variable, i.e., volume dependent(linear) operating costs for services related to supply.

• START NODES includes investment, regular and variable operating costs. If a category does not apply, the corresponding number is simply set to 0.0;
  • subtype: pumped wells:   for pumped well, the flow dependent costs could also be made a function of the aquifer level, the lower the more expensive;
  • subtype: interbasin transfer
  • subtype: desalination.
• DIVERSION NODES, representing the costs of the structure or pumping, with capital and operating costs;
• RESERVOIR NODES (annualised capital costs and flow independent, regular operating costs only)
  Reservoir nodes can, if they produce hydropower, have a flow dependent benefit from hydropower generation; Will only be implemented once we have changed to reservoirs with multiple outlest including hydropower.
• DEMAND NODES are assumed to have (optional) water related technologies applied, from irrigation technologies to urban waterworks, so all three three direct cost categories apply.

Indirect Costs: penalties

• Demand Nodes: exponential cost function for every cubic meter of shortfall below a threshold (demand - supply - threshold), in analogy to the estimation of flood damages, see below;

  Shortfall costs are calculated as follows:

  shortfall = demand - supply
  minsupply = demand * threshold% / 100
  
  IF shortfall > minsupply
     SHORTFALLCOST = MULT * (shortfall-minsupply) ** EXP
  

  so for example, a threshold of 50% and an exponent of 2.0 would account for all shortfalls below 50% of demand squared.

• Control nodes: unit costs for every day the target is not met, which also can be used to represent environmental damages.

  For damages caused by exceeding maximum flow constraints (flooding conditions) the penalty can (optionally) be made proportional (exponential) to the amount of exceedance, by specifying a multiplier and an exponent that is applied to the flow ABOVE the constraint:

  FLOOD DAMAGE = A * (FLOW-THRESHOLD) ** B

  Summary Report

  Costs and benefits are summarised and reported by category (use benefit, compliance benefit, annual costs, operating cost, shortfall penalty, flood damage) and node type, similar to the supply-demand table annual summary for a scenario.

  Summary parameters derived that are also shown on the main scenario results page include:

  Total Cost (combined)	(sum of all costs, direct economic, indirect (penalties), flood damage)
  Total Cost (direct)	(sum of all capital and operating costs)
  Total Benefits (combined)	sum of all direct and indirect (compliance) benefits
  Total Benefits (direct)	direct monetary benefits from satisfied demand only
  Net Benefit (combined)	(total benefits (combined) minus total costs)
  Net Benefit (direct)	(direct benefits minus direct costs)
  Benefit/cost ratio (combined)	(total benefits divided by total costs)
  Benefit/cost ratio (direct)	(direct benefits divided by direct costs)
  Cost/benefit ratio (combined)	(total costs divided by total benefits)
  Cost/benefit ratio (direct)	(direct costs divided by direct benefits)
  Economic efficiency (direct)	($$/cubic meter, net direct benefit divided by total supply to demand nodes)
  Economic efficiency (combined)	($$/cubic meter, net benefit divided by total water input (inflow plus effective rain)
  Water costs (combined)	($$/cubic meter, total costs divided by total water input)
  Water costs (direct)	($$/cubic meter, total direct costs divided by total supply to demand nodes)

  In addition, the pages provides a TABULAR SUMMARY of all cost and benefit categories as COLUMNS (direct benefits, indirect benefits; captial costs, fixed and variable OMR, penalties, flood damage); versus all applicable node types (including DEMAND NODE SUBTYPES) as ROWS.