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

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  • Rey, Dolores
  • Calatrava, Javier
  • Garrido, Alberto

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.

Suggested Citation

  • Rey, Dolores & Calatrava, Javier & Garrido, Alberto, 2016. "Optimisation of water procurement decisions in an irrigation district: the role of option contracts," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 60(1), January.
    • Handle: RePEc:ags:aareaj:283235
    DOI: 10.22004/ag.econ.283235
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    Cited by:

    1. Guerrero-Baena, M. Dolores & Villanueva, Anastasio J. & Gómez-Limón, José A. & Glenk, Klaus, 2019. "Willingness to pay for improved irrigation water supply reliability: An approach based on probability density functions," Agricultural Water Management, Elsevier, vol. 217(C), pages 11-22.
    2. Sandra Ricart & Rubén A. Villar-Navascués & Maria Hernández-Hernández & Antonio M. Rico-Amorós & Jorge Olcina-Cantos & Enrique Moltó-Mantero, 2021. "Extending Natural Limits to Address Water Scarcity? The Role of Non-Conventional Water Fluxes in Climate Change Adaptation Capacity: A Review," Sustainability, MDPI, vol. 13(5), pages 1-31, February.

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    Keywords

    Resource /Energy Economics and Policy;

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