Environmental flows from Warragamba Dam

October is nearly here, but we just had the driest September for Sydney on record!
And this is on back of a very dry August. It has basically not rained at all for a while!
This has meant that the volume of water stored in Sydney’s main drinking water supply source – Warragamba Dam, has been falling rapidly over the last couple of months. The Dam is currently some 88.5 % full, which is still good, but this percentage is dropping rapidly, at some 0.5% per week. If dry conditions continue, we are going to see the percentages dropping to 70% and 60%, and that’s when the Sydney desalination plant starts to kick in. Current operating rules for the plant stipulate that it will start operating when the level of the water stored in the dam falls below 60% and continue until the level climbs back over 70% again. These numbers used to be 70% and 80% respectively, but were changed recently with the 2017 Metropolitan Water Plan. A good change!
On the other hand, the same 2017 Metropolitan Water Plan puts in place new rules for environmental flow releases downstream from the Warragamba dam into the Hawkesbury river. While having more environmental flows is clearly beneficial and will provide significant improvement of river health, the full cost of providing those flows seem not to have been considered in the plan. In particular, there are ‘shadow’ costs of environmental flows in terms of speeding up the lowering of the water volume in the dam, and thereby speeding up the breaching of the threshold that will trigger the operation of the desalination plant. Now, the cost of the water supplied from the desalination plant is substantially (2-3 times) higher than the cost of supplying water from the dam. So, the sooner the desal is activated, and the longer it operates over a given time horizon, the higher the costs to municipal water users. Environmental flow releases contribute to these higher costs. Some simulations that we ran show that the extra costs from activating the desalination plant and having it operate for longer as a result of environmental flow releases are quite high.
In addition, we ran some optimization scenarios, where we used dynamic optimization methods that allow us to account for the ‘shadow’ costs of environmental flows, and to determine economically optimal quantity of environmental flows. The results show that combined net benefits of environmental flows and net benefits to municipal water users are significantly higher (about $15.3 million higher on average per annum) under optimized environmental flows that take into account the shadow cost, compared to the current environmental flow rules.
Environmental flows sent downstream from the dam are good. However, some of the costs at which they come are ‘hidden’, or not immediately apparent. These costs ought to be considered if benefits to whole society are to be maximized!

Author: Tiho Ancev

Tiho Ancev is a Professor of Agricultural and Resource Economics in the School of Economics, University of Sydney. His main research areas are agricultural, environmental, natural resource and energy economics. Tiho’s main contributions have been in water economics and policy, economics of energy, economics of air pollution and climate change policies, and economics of precision agriculture and agricultural input use. He has published widely on these topics in top international peer reviewed journals. Tiho has led and contributed to national and international research projects in these research areas. He is currently the Managing Editor-in-Chief of the Australian Journal of Agricultural and Resource Economics.