Water Policy Vol 10 No 1 pp 95–104 © IWA Publishing 2008 doi:10.2166/wp.2007.032

Calculating constant-reliability water supply unit costs

Gary Wolff

Water planners facing a choice between water “supply” options (including conservation) customarily use the average unit cost of each option as a decision criterion. This approach is misleading and potentially costly when comparing options with very different reliability characteristics. For example, surface water, desalinated seawater or recycled wastewater and some outdoor demand management programs have very different yield patterns. This paper presents a method for calculating constant-reliability unit costs that adapts some concepts and mathematics from financial portfolio theory. Comparison on a constant-reliability basis can significantly change the relative attractiveness of options. In particular, surface water, usually a low cost option, is more expensive after its variability has been accounted for. Further, options that are uncorrelated or inversely correlated with existing supply sources—such as outdoor water conservation—will be more attractive than they initially appear. This insight, which implies options should be evaluated and chosen as packages rather than individually, opens up a new dimension of yield and financial analysis for water planners.

Keywords: Adjusted unit costs; Drought planning; Integrated resource planning; Portfolio theory; Reliability; Uncertainty; Value of reliability; Water conservation; Water supply planning

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