Long run marginal cost (LRMC) estimates have an important role to play when it comes to wastewater recycling, stormwater harvesting and water conservation. LRMC helps ensure we understand the long-term cost of supplying water or managing wastewater, and the value from integrated water cycle management and water conservation. 
However, while they are central to a range of decisions, deriving estimates of the LRMC of water and wastewater is not without its challenges. 
Our economists Matthew Edgerton and Alexandra Humphrey Cifuentes spoke with the Water Services Association of Australia (WSAA) regarding the importance and challenges of understanding the LRMC of supply and its role in promoting efficient investment and consumption in the water sector. 

“LRMC estimates ... ideally underpin everything from usage prices, to wholesale & access prices, & to decisions about investment in supply or demand-side measures” (IPART - Independent Pricing and Regulatory Tribunal 2019, Review of pricing arrangements for recycled water and related services)

The session covered:

  • the importance of using LRMC as a reference point in setting usage prices to promote efficient consumption,
  • the role of LRMC estimates in assessing avoided costs when evaluating water recycling and/or water conservation measures, and
  • key considerations in developing and applying LRMC estimates, to ensure they are robustly derived and appropriately applied.

For more information on this topic or a copy of the full presentation, please contact Matthew or Alexandra, or anyone from our urban and rural water team. 

Slide showing how Long Run Marginal Cost (LRMC) is applied to the water and wastewater sector


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