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
Highlights
Current and future regional water scarcity is stimulating efforts world wide to allow economically efficient reallocation of resources toward higher-value uses
The largest transfers of water allocations by volume are made from the public water supply company to the energy sector, comprising 99% and 94% of the total volume transferred in the normal and dry year, respectively
This paper described a generalized optimization model built to simulate water reallocation in a surface water spot market where downstream trades are preapproved by an environmental regulator
Summary
Current and future regional water scarcity is stimulating efforts world wide to allow economically efficient reallocation of resources toward higher-value uses. Regulated market-assisted allocation of water is gaining support but the regulatory details of each regional market will need to reflect local water management, social and intuitional needs to receive widespread support. This creates a demand for the ability to understand and predict how water markets could perform under a range of hydrologic, institutional, and regulatory environments. Classical optimization-driven hydro-economic models have typically focused on the potential system-wide economic gains from water trading but have not represented individual level transaction detail of water markets and trading behavior. Recent efforts in modeling innovative water market structures include auction-based systems (smart markets), where each user trades with the auction manager [Raffensperger and Cochrane, 2010; Schreinemachers and Berger, 2011]
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