5 November 2013

Charging for water a path to conservation

Strategic pricing of water may be the solution to inevitable shortages in the future, a Victoria University of Wellington researcher suggests.

Dr Yiğit Sağlam from Victoria’s School of Economics and Finance says that although New Zealand has one of the highest volumes of available water per capita in the world, we cannot afford to be complacent.

“Although our demand is growing, the supply is not increasing,” he says.

“As the population increases, so too does pressure on household water supply. And with an increased demand for food, this also leads to an increased need for agriculture and industry, which are the largest users of water supply. We need to be thinking carefully about how to manage our supply going forward.”

Dr Sağlam’s research considered water pricing policies as a way of conserving one of our most precious resources.

In the course of his research, which focused on Turkish data but which, he says, are universal principles that can be applied to New Zealand, Dr Sağlam investigated pricing methods, calculating which would lead to an efficient distribution of water.

“I found that an optimal pricing model applied to the Turkish data could ensure water shortages were practically non-existent over the next century,” says Dr Sağlam.

The model involves breaking down water usage into two user groups—households and agriculture—and differentiating the quality of water provided to each.

“This makes sense as agricultural producers don’t generally require top-quality water,” says Dr Sağlam.

Under this model, water suppliers would be able to charge higher prices, if necessary, to control demand and to prevent possible water shortages in the future.

“Although in the short-term this may lead to profits for the water supplier, these would be rebated to households and agriculture in proportion to their water withdrawal, meaning efficiency in water pricing could be achieved while still breaking even.”

Another pricing model he analysed was the ‘average-cost’ pricing policy, where the water supplier sets a price for the average cost of service. However, he says, this wouldn’t promote conservation of water.

“Because this method doesn’t reflect water scarcity, it’s hard for the water supplier to undertake measures that will guard against a potential drought. Another down side is that low prices may lead to excessive use and the subsequent inability to meet demand—which may prove costly to the economy in the long term.

“A blanket rationing system where a certain percentage of water is cut from everyone during a shortage is not ideal either, as it does not encourage efficient usage,” he says.

Dr Sağlam’s calculations of Turkish data estimated that under average-cost pricing, it would take around eight years for the water supplier to run into shortages, but under the optimal pricing rule, water shortages would be practically non-existent for 100 years.

ENDS

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