Diversification of urban water supply: An assessment of social costs and water production costs
Water Policy (2022) 24 (6): 980–997.
The incorporation of new water sources into a supply system requires an assessment of their economic feasibility, which, in turn, demands knowledge of their associated costs. This study calculates water production cost and evaluates social cost by applying the residual value method and calculating the shadow price for several water sources. The results indicate that desalination and industrial reuse incur similar costs, with the former being more competitive in terms of investment (US dollar (USD) 0.28/m3) and the latter in operation and maintenance (USD 0.57/m3). Cisterns and greywater reuse incur higher investment costs (USD 2.20/m3 and USD 2.60/m3, respectively), while well water has the lowest total cost (USD 0.08/m3). Desalination showed the lowest degree of distortion between shadow price and water cost and between shadow price and the average tariff; meanwhile, there was moderate distortion for industrial reuse and groundwater sources. The conclusions suggest that desalination and industrial reuse offer good flow at feasible costs and are, therefore, strategically sound sources. However, for these sources and for wells, tariff policy does not reflect a significant part of the social cost they incur.
Diversification of water supply is essential to increase water security of urban areas.
Industrial reuse has the highest shadow price and desalination, the highest water cost among alternative water sources.
Industrial reuse and wells have a higher distortion between shadow price and average water tariff than desalination.
Water scarcity restricts development (). The challenge of water policy and management is to provide various stakeholders with the water supply to meet the needs of social life (). Hence, it is important to balance investments in technology and infrastructure with issues related to governance, so that concrete – infrastructure – is not privileged at the expense of management – governance ().
Certain contexts promote scarcity and affect water security, thus amplifying the intrinsic challenges of water provision (i.e. unlimited demand and finite supply); they are climate change, population growth, and increased economic activity (). Regarding these scarcity promoters, point out that urban and industrial pressure increases water-pollutant levels, thus exacerbating supply problems.
Scarcity inevitably stems from a continuous (and increasingly intense) growth in domestic and productive demand for a good for which there is a finite supply; in the case of water, demand is enhanced by climate change, which can intensify extreme events, such as droughts and floods. report the impacts of climate change on urban water supply, such as the intrusion of saline water into aquifers, caused by rising sea levels, and the reduction of water availability in reservoirs, caused by increased evaporation. point to a greater variability of rainfall due to climate change, causing longer and more intense drought periods, especially in Northeast Brazil, which affects water availability.
Furthermore, although climate change is a key discussion topic among policy and supply decision-makers, it remains unclear whether it guides adaptive planning to any great extent (). The use of alternative supply sources has played a positive role in reducing scarcity and increasing water security.
Water transposition among basins is often presented as a supply-problem solution that helps guarantee urban water security; however, it also generates conflicts () vis-à-vis donor-basin shortages () and impacts supply costs (). Therefore, it is important to ascertain alternative water sources within a given region itself and seek out a supply–demand balance.
Thus, the diversification of the supply matrices of urban centres is a strategy to ensure water security. Diversification means not only increasing the water supply, but also providing a number of opportunities to develop new productive supply chains linked to the water-resource sector and democratizing water access. Diversification has been carried out using desalination plants, water reuse, groundwater, and water transfers, among other sources. These alternative supply sources are a reality in several parts of the world, and they are enacted to reduce scarcity and ensure water security (; ). In the US state of Florida, seawater desalination and wastewater reuse complement the groundwater supply system (). In Costa del Sol, Spain, reservoir water stocks are complemented by other sources, including desalination plants, transfers, wells, and water recycling, especially in periods of drought ().
Incorporating new water sources into a supply system requires knowledge of the associated costs, to assess their economic feasibility. In this context, this study calculates the cost of water production and evaluates its social cost. We used data provided by water management institutions and undertook budget calculations to obtain water production costs. We also employed the residual value method () to obtain the shadow price of water, which reflects its social cost. Here, we calculate the shadow price to evaluate the benefits and costs of the water supply company when making water available from the following sources: desalination, industrial reuse, and wells (the water company does not take into account costs and benefits from cisterns and greywater reuse, hence these were excluded from the shadow price calculation). If the shadow price estimate exceeds the cost of producing water from a given source, decisions will tend to favour using that source. Therefore, our study answers questions related to (i) the identification of supply costs and shadow prices and (ii) the degree to which the supply costs and shadow prices of various supply sources diverge.
According to , for water uses involving government decision-making, estimations of the social price (also called the shadow price) are often needed to support decisions regarding the efficient system allocations and investments. From a social perspective – which differs from a private perspective – benefits and costs are evaluated through social prices, which can be understood as the social willingness to pay for or receive goods and services; economic transactions scarcely reflect these prices. The shadow price of water indicates the social opportunity cost of water for society, in the case of both final use (domestic) and intermediate use (productive sector). When the social price of water diverges from the prevailing price (tariff), then social and private valuations also diverge. Researchers have developed shadow price estimates for water in different sectors and under different methods and have found that these prices diverge from the practiced tariffs (; ; ). There is a lack of empirical research that obtains shadow price estimates by using the residual; despite the simplicity and robustness of this method, it is infrequently observed in the literature (; ).
Moreover, most studies that address shadow price under the lens of the residual value method do so with respect to irrigated agriculture. There is a relative dearth of research that addresses the urban supply sector, especially when it involves various alternative supply sources. On the contrary, ) estimate the shadow price of water in the Chinese industry by using the directional distance function method; this method has also been used to estimate shadow prices related to the quality of supply in Chile () and England and Wales ().
To date, no study has applied the residual value method to evaluate the shadow price of urban water supplies. We attempt to fill this research gap and discuss the shadow price of water using the residual value method; we do so by undertaking empirical research into urban water supplies that comprise several alternative supply sources. In addition, we provide water production cost estimates for Brazil, a Latin American country whose socioeconomic context is quite different from that of other nations most frequently mentioned in the literature (i.e. Asian, European, and North American countries).
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