Simulating water markets with transaction costs

Abstract

This paper presents an optimization model to simulate short-term pair-wise spot-market trading of surface water abstraction licenses (water rights). The approach uses a node-arc multicommodity formulation that tracks individual supplier-receiver transactions in a water resource network. This enables accounting for transaction costs between individual buyer-seller pairs and abstractor-specific rules and behaviors using constraints. Trades are driven by economic demand curves that represent each abstractor's time-varying water demand. The purpose of the proposed model is to assess potential hydrologic and economic outcomes of water markets and aid policy makers in designing water market regulations. The model is applied to the Great Ouse River basin in Eastern England. The model assesses the potential weekly water trades and abstractions that could occur in a normal and a dry year. Four sectors (public water supply, energy, agriculture, and industrial) are included in the 94 active licensed water diversions. Each license's unique environmental restrictions are represented and weekly economic water demand curves are estimated. Rules encoded as constraints represent current water management realities and plausible stakeholder-informed water market behaviors. Results show buyers favor sellers who can supply large volumes to minimize transactions. The energy plant cooling and agricultural licenses, often restricted from obtaining water at times when it generates benefits, benefit most from trades. Assumptions and model limitations are discussed.Key PointsTransaction tracking hydro-economic optimization models simulate water marketsProposed model formulation incorporates transaction costs and trading behaviorWater markets benefit users with the most restricted water access

Protecting environmental flows through enhanced water licensing and water markets

“…The model presented in this paper is an extension of the hydroeconomic model of Erfani et al (2014) which uses economic optimisation to simulate and track pair-wise water market transactions between individual water users. This paper introduces dynamic environmental flows and scalable "share" licenses into the pair-wise transaction tracking hydroeconomic water market simulator to evaluate how they perform in a water trading context.…”

“…Cheng et al (2009) developed a flow-path model formulation that allows tracking transactions between users. Erfani et al (2013) presented an efficient variant used by Erfani et al (2014) to model a surface water spot market. This paper extends the generic water market simulation model proposed by Erfani et al (2014) to assess possible outcomes of water trading under a share-based licensing system where allocations (water rights) are updated according to current flow conditions and dynamically updated environmental flows (Environment Agency, 2013;Young and McColl, 2005).…”

Agent Based Modelling for Water Resource Allocation in the Transboundary Nile River

“…The gross economic benefits of water abstraction is calculated by integrating the demand curve [4]. While any complex economic model could be exploited, without loss of generality, in the modelling presented in this paper, the economic objective function is a quadratic function shown by a i x i − b i x 2 i and calculated by integrating the linear water demand functions for each agent [15] (for details, the reader is referred to [2,3,31]). This function can be modified to closely represent the case study specific assumptions, for example, to consider that the marginal utility in arid countries is not likely to reach zero.…”

“…In order to set a reasonable value for the parameters a i and b i in an objective function, the water demand curves should be estimated primarily according to the water demand and price, and then total benefit functions are calculated by integrating the demand functions. Following [2], the point expansion method is used to estimate the linear demand curve for various sectors. The original point expansion is based on the total water consumption and the water price.…”

“…So far, the centralised system by a central planner (CP) has been a standard water management approach, by which the whole water basin is modelled as a centralised system and then water is distributed for maximising the total benefit of users. Centralised system techniques assume that all agents will allocate the water among each other such that their aggregate welfare is maximised [2][3][4]. In this mechanism, the water is allocated to achieve the equal marginal return for all the users.…”