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Optimisation of water procurement decisions in an irrigation district: the role of option contracts
Author(s) -
Rey Dolores,
Calatrava Javier,
Garrido Alberto
Publication year - 2016
Publication title -
australian journal of agricultural and resource economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.683
H-Index - 49
eISSN - 1467-8489
pISSN - 1364-985X
DOI - 10.1111/1467-8489.12110
Subject(s) - procurement , water supply , order (exchange) , context (archaeology) , irrigation , business , irrigation district , water resource management , environmental economics , finance , economics , environmental science , environmental engineering , paleontology , ecology , marketing , biology
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.