Policy Insights for Urban Water Pricing in Australia

Presented at CERF

byProfessor R. Quentin Graftonquentin.grafton@anu.edu.au

9 February 2010

2

Australian Residential Water Use

3

Urban Water Sector

Source: Allen Consulting (2008)

4

Water Charges, Use & BurdenCountry Water Bill

(Euros/yr)Median Water Price (€/kL)

Median Consumption(kL/year)

Water Bill/Income (%)

Australia 226 0.66 190 0.62Canada 332 0.88 194 0.74Czech. Rep. 229 1.44 105 1.91France 373 2.88 100 1.01Italy 270 0.93 200 0.90Korea 116 0.36 220 0.50Mexico 104 0.31 265 1.42Netherlands 230 1.93 103 0.75Norway 318 1.72 140 0.50Sweden 394 2.35 130 0.98

5

Comparative Water Prices $/kL (1)

$1.0248$1.2025$1.7766

$0.8564$1.0049$1.4846

$0.8205$0.9628$1.4223

$0.782$0.918$1.355

0-440L/day: $0.75441-880L/day:$0.88>880L/day:$1.30

Melbourne(City West Water)

$1.0192$1.1957$1.7666

$0.8517$0.9992$1.4763

$0.8184$0.9601$1.4185

$0.782$0.918$1.356

0-440L/day: $0.75441-880L/day:$0.88>880L/day:$1.30

Melbourne(Yarra Valley Water)

$1.0052$1.2206$1.9745

$0.84$1.02$1.65

$0.81$0.96$1.55

$0.78$0.92$1.44

0-440L/day: $0.75441-880L/day:$0.88>880L/day:$1.30

Melbourne(Southeast Water)

0-200kL: $1.85>200kL:$3.70

$0.775$1.67$2.57

$0.66$1.29$1.74

$0.58$1.135$1.53

0-100kL: $0.515100-300kL:$1.00>300kL:$1.35

Canberra

$1.61$1.81

$1.339$1.829

$1.26$1.63

0-100kL: $1.20>100kL: $1.48

$1.013Sydney

2008/092007/082006/072005/062004/05City

Increasing Block Tariff

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Urban Water Storages

7.734 521265 000Darwin3.756 823207 400Canberra0.338 15011 000Hobart1.0163 577168 979Adelaide2.8244 158688 000Perth6.52981321 930 350Brisbane & SE Qld4.0444 3651 173 000Melbourne4.9528 2602 584 300Sydney

Yearsmegalitresmegalitres

Supply when full (based on 2005-06 rate of consumption)

Annual consumption 2005-06

Dam storage capacityCity

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Climate Variability & Water Supply

Future M e lb ou rn e S u p p lie s

Bass S tra it

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‘Drought Proofing’ Australia

Current1.21546Gold Coast

20110.951950Perth (2)

Current0.41755Perth (1)

End 20101.8350100Adelaide

End 20113.535150Melbourne

Current2.41791Sydney

Expected date of

completion

Capital cost

($billion)

Proportion of current total water supply

(%)

Capacity (GL)

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Direct Costs of Water Supply Options

$0.25

$1.30 $1.45 $1.50 $1.58

$2.61$3.00 $3.00

$4.00

$5.00

$5.60$6.00

$9.30

$1.68$1.15 $1.30

$0.63

$0.22

$0.30$0.06

$3.00

$0.00 $0.10 $0.20 $0.15 $0.08$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

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Source: Marsden Jacob Analysis based on water supply plans for Sydney, Adelaide, Perth, Newcastle.

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Costs of Water Restrictions• Water restrictions prevent water being allocated

efficiently between indoor and outdoor use within households and across households.

• Costs of Water Restrictions:- Direct measurement of value of time spent hand-watering using household production approach ($347-870/household in Perth)– Stated preference surveys ($239/household in

Canberra)– Demand studies ($150/household in Sydney)– ~ $900 million/year in Australia (Productivity

Commission)

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Problems with Urban Water Pricing• Households water prices typically set years in

advance with no direct connection to water storage levels. NSW & Queensland use ‘average incremental cost’ (AIC) approach to set price which divides the expected cost of augmentation by the expected increase in supply.

• Expensive infrastructure with AIC pricing means that consumers end up paying much higher water prices in the very near future (already started in Canberra and Sydney).

• If water prices had been allowed to go higher as dams levels fell (scarcity/flexible pricing) then many of these investments could have been postponed or even made redundant.

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Equity Issues• A common objection to scarcity pricing is that

water is a need, and it is inequitable to the poor to raise prices in times of drought.

• Because demand is inelastic, higher prices generate substantial revenues. These revenues could be redistributed in a lump-sum fashion by reducing fixed water charges. Those who use little water anyway (such as the poor in apartments) can actually benefit.

• Infrastructure improvements are paid for by permanent increases in price. Most of the benefit accrues to households who would water outside because restrictions can be reduced or even removed.

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Too Much, Too Soon• Decision when to invest in extra water supply is

contingent on the water price as the price affects demand which, in turn, determines whether extra supply is required or not.

• Balancing supply and demand with appropriate pricing allows postponement of decision to invest until it is economically justified (at very low water storages).

• Postponing investment allows it to rain — 35% of total inflows comes from only 5% of months so waiting has a big payoff (water storage in Sydney catchment jumped from 37% to 57% in the month before the desalination contract was signed in July 2007).

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Better Water Pricing• Allow water prices to vary up and down according

to dam water storages ─ single most effective instrument to manage residential water demand This can be done immediately if governments were to impose ‘water abstraction charges’ (as in the ACT).

• Evaluate planned infrastructure investments from an economic (scarcity) perspective.

• Supplement flexible water pricing with cost effective water demand saving measures. Higher prices water prices increase likelihood water saving behaviours and use of water saving devices.