Ensuring a secure, reliable, safe and cost-effective supply of water is critical to support economic prosperity, liveability and health of our communities and the health of our natural environments.
The growing challenges in providing water services across Asia-Pacific are well known. Population growth, ageing infrastructure, increased risk of severe weather events (including flood) and climate change (impacting supply and demand) places heightened pressure on existing systems to deliver essential services such as water and wastewater services. The reliance on climate dependent systems to supply water to the community is particularly evident in the context of New Zealand, where many regions are facing water shortages with social, economic and environmental consequences.
Addressing these issues requires critical decisions about how we choose to use or preserve natural resources, including land and water, and how we value potential investments to balance water supply and demand in a variable climate, including evaluating measures such as water conservation.
Why water conservation?
Water conservation programs include measures to enhance water efficiency through behaviour and/or technology, manage leakage and promote small scale supply and reuse (such as recycling and stormwater harvesting). All these measures ultimately reduce the draw on the community’s potable water supplies – reducing the risk of supply shortfalls and impacts on the environment.
Water conservation can promote a range of economic, social and environmental benefits not captured by traditional ‘build’ solutions, including:
- avoided cost of water supply infrastructure,
- improved water security, reducing the risk of water restrictions and/or a supply shortfall,
- improved amenity and recreation outcomes,
- reduced wastewater and stormwater volumes to defer system constraints,
- reduced energy use with benefits in terms of avoid energy infrastructure and greenhouse emissions and
- improved environmental outcomes.
For example, investment in water conservation measures can reduce water demand and slow the rate at which storage levels deplete, deferring or avoiding the need to augment the system to increase supply yield. By avoiding or deferring a supply system augmentation, water conservation can deliver a cost-saving benefit to society in the form of deferred or avoided investment (a financial cost saving) and avoided infrastructure footprint (a social benefit – see below). In water scarce communities with constrained or high value land, deferring infrastructure investment can be particularly significant for enhancing urban liveability and improving quality of life outcomes.
Figure 1 - ‘Logic map’ linking water conservation and avoided infrastructure footprint
Importantly, the value of water conservation changes over time:
- It is highest during periods of low water availability (water scarcity) where the material benefit relates to managing drought.
- It is lowest in periods of high water availability (for example, outside of drought), where the material benefit relates to the avoided cost of meeting growth in water demand.
This means that valuing water solely at the usage price of water, as a proxy for the value of water conservation is likely to significantly understate the value of water conservation.
Figure 2 - The value of water conservation varies over time
The benefits of water conservation are not always well integrated into decision-making
Historically, the benefits of water conservation have not been well established, quantified, and ultimately well-integrated into decision-making. Many utilities often estimate the benefits of water conservation initiatives, based on the avoided marginal cost of water supply to the utility i.e. the cost incurred (or avoided) in the production (or savings) of one extra unit of water.[1] On a levelised benefit basis, the unit value of these savings is often in the range of $2 – 4/kL.[2].
In our experience, this is because, compared to more traditional investments, it can be more difficult to:
- identify the full range of benefits associated with water conservation - which can involve economic, social and environmental changes − the magnitude of which vary significantly over time and by project and location, and so require robust place-based analysis
- measure and value the full range of benefits when they typically have no observable market price (such as reduced risk of water restrictions or a supply shortfall) requiring specialist economic valuation techniques, and
- engage with beneficiaries and securing co-funding. For example, beneficiaries can go beyond those water customers and include the broader community, governments and energy utilities. The dispersed nature of beneficiaries means that it can often be difficult to secure co-funding from those who benefit from these investments.
These barriers risk under valuing water saved, and therefore, the benefits of water conservation, ultimately reducing water security.
Economic evaluation provides us with a tool to capture the economic, social & environmental benefits of water conservation
The question then is, how do we embed active consideration of these benefits into our water decision-making process?
While government policy could mandate investment in water conservation, prescribing a one-size-fits-all approach does not guarantee smart investments that maximise the value of our resources. In some circumstances, the costs of water conservation will be more than outweighed by its benefits.
Economic evaluation, such as cost-benefit analysis (CBA) supported by more sophisticated risk management tools like real-options analysis (ROA) enables decision-makers to identify, quantify and value the economic, social and environmental costs and benefits of water conservation at different points in time, ensuring these broader impacts are captured in investment decisions.
Figure 3 – Cost benefit analysis involves six key steps
While these steps are not always easy and can require collaboration across sectors and disciplines, they provide a robust and defensible framework for identifying where and when water conservation can cost-effectively support delivery of our key water services.
The economic, social and environmental benefits of water conservation can be significant
To support the sector in better understanding and demonstrating the value of water conservation we worked with the NSW Government to develop a set of bespoke cost benefit analysis guidance for water conservation measures. We also applied these guidelines ex-post to evaluate the success of leakage reduction and water conservation programs in regional communities, and identify the levelized benefit (or unitised measure) of the value of water.
Our analysis of these water conservation programs found that water conservation could deliver up to $56.9m in net benefits to the community over the 30-year modelling period ($FY24, discounted) in the form of:
- Improved security of supply by reducing reliance on water supply sources (including reduced risk of a supply shortfall).
- Deferred investment in the water supply network required to align long term supply with demand (including reduced draw on existing water supply).
- Reduced wastewater infrastructure needs and enhanced ecological outcomes from reduced treated wastewater discharge into surrounding waterways
- Reduced energy use and greenhouse gas emissions.
- Enhanced outdoor recreation opportunities and liveability outcomes.
Critically, these benefits go beyond avoided financial cost savings from deferring investment in new water sources to balance long-term supply and demand and demonstrates that even if the marginal improvement in water security (e.g. reduction in likelihood of a supply shortfall) as a result of water conservation may appear small, the avoided cost can be significant.
Figure 4 – the levelised benefits of water conservation can be significant – an example from regional NSW, Australia
Converting the value of the water savings from the programs considered to ‘levelised benefits’ results in a value of water conservation up to $9.69/kL (under central climate change) and up to $26.21/kL in the dry climate change scenario.
This demonstrates that utilising estimates of the marginal cost of water supply to the utility, or the usage price of water, as a proxy for the value of water conservation is likely to significantly understate the value of water conservation measures. This risks under-provision of efficient investment in water conservation and highlights the need to better understand the value of water.
Where to from here?
In the face of growing water security challenges, increased investment in water conservation has the potential to generate significant benefit to the community. However, the benefits of water conservation have historically not been well established, quantified, and ultimately well-integrated into decision-making. The potential for poor decisions that are not environmentally, socially or economically optimal is significant.
Utilising more credible estimates of the value of water conservation – that account for the broader economic, social and environmental benefits that accrue to the utility and the community from water conservation – may result in the economic level of water conservation being significantly higher than currently assessed.
This will require collaboration between economists, scientists, planners across the public and private sector to better identify, quantify, value and incorporate these benefits into decision-making.
This article was originally written for, and published in, the NZ Water Journal (pg 58-60). Thank you to Water New Zealand, for the opportunity.
[1] This is often informed by an estimate of the Long Run Marginal Cost (LRMC) of water supply, or where this estimate is not available, the usage price of water.
[2] As stated in the National Water Initiative’s Pricing Principles and referenced in Department of Planning and Environment’s Guidance on strategic planning outcome – Implement sound pricing and prudent financial management (2022) utilities should base water usage charges on the LRMC of water supply.
