Are we risking too much? Estimating the risk-mitigating benefit of urban water supply augmentation options

Increasing population is leading to water shortfalls in urban areas across the world. Shortfalls are intensified in arid and semi-arid regions under climate change through reduced and highly variable rainfall and greater frequency of droughts. Water planners are increasingly considering investments in capital infrastructure to enhance water security. Augmentation involves high capital sunk costs, and a typical challenge that arises is the need to determine whether or not, and at what scale, to invest in augmentation. Water planners face a risk of over- and under-investing in augmentation, but assessments that represent the tradeoffs involved in making augmentation decisions accurately and comprehensively are scarce. The analytical framework presented in this paper, looks retrospectively at what the insurance value of a seawater desalination plant in Adelaide would have been, had the investment been a decade earlier than it was, to illustrate assessing the risk of over- or under-investing in augmentation. The framework draws from three concepts: benefit cost analysis (BCA), probability theory, and conditional value at risk (CVaR). Results show that, at best, had the desalinisation plant been operational during the recent millennium drought, from 1998 to 2010, potential net annual cost of up to a maximum of A$170.6 m in extreme shortfall years, would have been avoided, but this would have involved incurring annual cost of up to A$149.0 m in years of no shortfalls.