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Optimisation of water procurement decisions in an irrigation district: the role of option contracts

Optimisation of water procurement decisions in an irrigation district: the role of option contracts Water supply instability is one of the main risks faced by irrigation districts and farmers. Water procurement decision optimisation is essential in order to increase supply reliability and reduce costs. Water markets, such as spot purchases or water supply option contracts, can make this decision process more flexible. We analyse the potential interest in an option contract for an irrigation district that has access to several water sources. We apply a stochastic recursive mathematical programming model to simulate the water procurement decisions of an irrigation district's board operating in a context of water supply uncertainty in south‐eastern Spain. We analyse what role different option contracts could play in securing its water supply. Results suggest that the irrigation district would be willing to accept the proposed option contract in most cases subject to realistic values of the option contract financial terms. Of nine different water sources, desalination and the option contract are the main substitutes, where the use of either depends on the contract parameters. The contract premium and optioned volume are the variables that have a greater impact on the irrigation district's decisions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Australian Journal of Agricultural Resource Economics Wiley

Optimisation of water procurement decisions in an irrigation district: the role of option contracts

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References (50)

Publisher
Wiley
Copyright
Copyright © 2016 Australian Agricultural and Resource Economics Society Inc.
ISSN
1364-985X
eISSN
1467-8489
DOI
10.1111/1467-8489.12110
Publisher site
See Article on Publisher Site

Abstract

Water supply instability is one of the main risks faced by irrigation districts and farmers. Water procurement decision optimisation is essential in order to increase supply reliability and reduce costs. Water markets, such as spot purchases or water supply option contracts, can make this decision process more flexible. We analyse the potential interest in an option contract for an irrigation district that has access to several water sources. We apply a stochastic recursive mathematical programming model to simulate the water procurement decisions of an irrigation district's board operating in a context of water supply uncertainty in south‐eastern Spain. We analyse what role different option contracts could play in securing its water supply. Results suggest that the irrigation district would be willing to accept the proposed option contract in most cases subject to realistic values of the option contract financial terms. Of nine different water sources, desalination and the option contract are the main substitutes, where the use of either depends on the contract parameters. The contract premium and optioned volume are the variables that have a greater impact on the irrigation district's decisions.

Journal

The Australian Journal of Agricultural Resource EconomicsWiley

Published: Jan 1, 2016

Keywords: ; ; ; ;

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