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Market opportunities for improved water supply security and economic outcomes LGNSW – Water Management Conference CHRIS OLSZAK 27 August 2014 WATER ENTITLEMENT PORTFOLIO MANAGEMENT
Market opportunities for improved water
supply security and economic outcomes
LGNSW – Water Management Conference
CHRIS OLSZAK
27 August 2014
WATER ENTITLEMENT
PORTFOLIO MANAGEMENT
OVERVIEW
• The importance of water entitlement management for councils
• Overview of water entitlements and markets in NSW
• A strategic and active approach to portfolio management
• A scenario on the benefits of active portfolio management
2
IMPORTANCE OF WATER ENTITLEMENT MANAGEMENT
• Securing urban water supply is a critical public policy objective
• NSW (non-metro) councils are responsible for securing water supply
• Big part of the solution: Water access entitlements and markets
– Help meet the challenges posed by drought, climate change, population growth,
affordability concerns
• Water entitlements should be managed like other valuable assets
3
STRATEGIC APPROACH TO ENTITLEMENT MANAGEMENT
4
Understand the portfolio and
outcomes required
Monitor allocations and usage
Ensure portfolio is appropriate for
achieving outcomes
Optimise the portfolio (e.g. trade
allocations)
THE NSW FRAMEWORK FOR WATER ENTITLEMENTS
5
WALs and entitlement
types
- Local Water Utility (S/G)
- High Security (S)
- General Security (S)
- Supplementary (S)
- Groundwater (G)
- Others
NSW Water Management Act
(2000)
Water sharing plans
(S/G)
Trading rules and
other regulations
OVERVIEW OF LICENCE CONDITIONS & CONSTRAINTS
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Entitlement type Annual %
allocation Entitlement trade Allocation trade Carryover
Local Water Utility × ?? ×
High Security ×
General Security
Supplementary × ×
Groundwater ×
Source: NOW, 2014
TRADE IN WATER ENTITLEMENTS AND ALLOCATIONS
7
Entitlement
(permanent)
trading
Allocation
(temporary)
trading
NSW WATER SYSTEMS
8
Source: NOW, 2014
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THE MACQUARIE RIVER SYSTEM – ALLOCATIONS TO ENTITLEMENTS
Source: NOW, 2014
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14
ML
General Security Local Water Utility
Domestic & Stock High Security
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MACQUARIE SURFACE WATER ALLOCATION TRADING
0
50
100
150
200
250
300
350
400
0
10,000
20,000
30,000
40,000
50,000
60,000
04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14
Avera
ge p
rice ($
/ML
) To
tal
vo
lum
e t
rad
ed
(M
L)
Volume traded
Average price
Source: NOW, 2014
VALUE OF LOCAL WATER UTILITY LICENCES (2013-14)
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System LWU entitlement on issue
(ML)
LWU total asset value
($m)
LWU annual market value
of allocations ($m)
NSW Murray 33,336 38.6 2.2
Murrumbidgee 23,403 37.5 1.6
Macquarie 22,681 45.4 4.3
Namoi 2,421 - 0.4
Gwydir 3,836 16.6 0.6
Border Rivers 620 - 0.1
Total 86,297 138.2 9.2
Source: NOW, 2014
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ILLUSTRATIVE EXAMPLE OF HISTORICAL ANNUAL SUPPLY AND USE
High variability: Urban demand depends on
rainfall
Source: Dubbo City Council, Aither 2014
0
100
200
300
400
500
600
700
800
900
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13
Pre
cip
itatio
n (m
m)
ML
Total water supply (LHS)
Total water demand(LHS)
MONITORING AND ONGOING MANAGEMENT OF ENTITLEMENT
PORTFOLIO
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0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
ML
Median rainfall Rainfall at 75th percentile Rainfall at 25th percentile
CONSTRAINTS ON SALES OF SURPLUS ALLOCATIONS
• Regulation 17(5) of the NSW Access licence dealing principles order
– requires councils to have demand management and drought management plans in place
before allocations can be traded from local water utility entitlements
– the plans must be Ministerially approved
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SECURING LONG TERM WATER NEEDS THROUGH ENTITLEMENTS
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The level of supply security through entitlements will greatly
influence the volume and timing of entitlement purchases
0
5,000
10,000
15,000
20,000
25,000
93-94 98-99 03-04 08-09 13-14 18-19 23-24 28-29 33-34 38-39
ML
Supply
Aither demand projections - median rainfall
Aither demand projections - 5th percentile rainfall
Aither demand projections - 1st percentile rainfall
BENEFITS OF ACTIVE ENTITLEMENT MANAGEMENT
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Scenario – repeat of historical drought; demand exceeds
allocations to entitlements
Council 1 – Limited management Council 2 – Active management
Unsure about total supply and use Actively monitoring allocations and use
No carryover Carryover to GS licences from previous
year
Water restrictions or rush to purchase
allocations or entitlements
Entitlement purchases already undertaken;
allocation purchases made according to
protocols
Community uncertainty and costs to
ratepayers
Community acceptance and funds available
from historical allocation sales
Conflict over licence conditions Licence conditions clear and transparent
Competition with irrigators Benefits for irrigators
High cost for Councils, including staff stress Lower cost for all involved; staff confident
and empowered
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KEY MESSAGES
• Major benefits of active entitlement management
• Benefits accrue now and in the future
• Adopt an asset based approach
• Build capacity over time
Understand your portfolio
Monitor allocations and
usage
Ensure portfolio is appropriate
Optimise the portfolio (e.g.
trade allocations)
