2. A National Cost-Benefit Analysis
2.1 Introduction and Limitations of Methodology
The purpose of this National Cost Benefit Analysis is to estimate the net benefit contributed to the New Zealand economy of alternative uses of water in the Waitaki River catchment. By identifying the value obtained from various applications of the water resource more can be learned about the proposed developments, the water resource requirements, and the impact upon the catchment as a whole.
The national cost benefit analysis should not be considered definitive as to the overall merits of any consent application. Rather, it should highlight the type of information that is required to accurately assess the economic impact of individual consent applications at the national level, and the impact that variations in this information would have for the overall assessment.
It should also be stated that inclusion of a proposal in the national cost benefit assessment assumes that the proposals are:
- Technically feasible: The proposal would satisfy the supply requirements of the proposal, and would succeed through a consent process without major increases in costs
- Financially viable: the current proposal is viable from the proponent perspective, with reasonable contingencies for revenue generation and capital investment costs.
Rapid Appraisal Method
The method of evaluation closely represents that of a Rapid Appraisal Method (RAM) developed by Read Sturgess (1998) for river management activities. The key concepts of the RAM are:
- Optimal ignorance - knowing what facts are not worth knowing. It is the state of mind which endeavours to avoid information overkill.
- Appropriate Imprecision - knowing that precise data are often unnecessary, and in the case of river management may be impossible to obtain. Orders of magnitude and direction of change are often all that can be used in making decisions. (Read Sturgess, 1998).
During the study, a considerable amount of information has been identified that can support water allocation decisions, however it is generally in support of several different parties. There is certainly enough available information to support the "information overkill" principle, however comparable analysis is limited by inconsistency in the methodology applied by the individuals and organisations developing each specific proposal.
The availability of whole-of-catchment type analysis is limited. Without integrated whole-of-catchment studies undertaken, the remaining analysis tends to be limited to sections of the river and focussed on the incremental impacts that might be associated with individual consent applications.
The primary example of this is the fact that a single hydrologic model that represents available water resources in the Waitaki Catchment, consented water takes, and incorporates consent conditions has not been developed. Without the such information, operational changes to the system by consent holders and the supply security to existing consent holders cannot be compared to scenarios with new consents.
Given these limitations appropriate imprecision is not a choice, but a requirement for the Waitaki catchment at this stage of the process. Even when adopted, this approach does not discharge responsibility from informed professional judgement.
Methods by which the project team has conducted the search for information also reflects the methodology provided in Read Sturgess (1998), and recent catchment evaluation experience gained by the project team. Some of the major principles and examples of the RAM procedure are:
- Derive "standard values" which can be used for the assessment. In the case of irrigation, it was clear that "typical ranges" would need to be used to reflect the investment in on-farm and off-farm infrastructure, which is dependent upon specific location attributes.
- Make use of existing information and, where a sound case can be made, use the results from other studies. This is particularly important for understanding the intrinsic values that might be attributed to existing environment-related attributes located within the catchment.
- Concentrate first on the evaluation of the market benefits. It may yield some interesting results that might permit the more difficult evaluation of non-market benefits to be avoided or curtailed.
- Wherever possible base predictions of river behaviour and resulting damage on actual past events.
- Use informal interviews rather than formal questionnaires and rigorously drawn samples of interviewees…Group discussions may also be useful in attempting to obtain a consensus. Avoid strict sampling procedures and statistical niceties. Usually rough average values can be used.
- Use case studies where possible, and extrapolate from these to all occurrences of the type of damage.
The major objective of the national cost benefit analysis is to identify the "net benefit" which accrues to the national economy as a result of applying the additional volumes of the resource for alternative applications. This must seek to incorporate, where possible, changes to existing social and environmental values that might be incurred as a result of these additional abstractive volumes.
2.1.1 Calculating the Net Benefit of Proposals
The cost-benefit analysis aims to compare the additional benefits of a specific proposal above a base case, with the additional costs that are required to achieve those benefits. The measurement of the overall benefits is often expressed as the subtraction of the costs from the benefits to leave a measure of "net benefit". In some cases the "Benefit Cost Ratio" is used to report the benefits as a proportion of the costs to provide some measure of rank between proposals. A superior method for evaluation of water allocation plans is to express the net benefits attributed to a specified quantity of resource allocation.
Suppose that the net benefits of irrigation proposal "A" total $1million/annum, and the consent entitlement is 0.5 cumecs. As cumecs is a measure of flow (m³/s), it is equivalent to annual volumetric usage of approximately 15,768,000m³. One method of describing the result is to conclude that the allocation of 15,768,000m³/annum to proposal "A" would result in a net benefit of $1m to the economy.
Alternatively, the overall returns ($1m/annum) could be divided by the usage (15,768,000m³/annum) and conclude that proposal "A" delivers $0.063/m³ to the economy. This is considered a neater way to rank proposals, although water allocation must take into account the total volumes required of each proposal and, if the volumes for specific proposals are large, the degree to which they might become mutually exclusive.
Each of the proposals that require a water allocation aims to deliver the national economy a net benefit at a future point in time. But it can be expected that for each proposal the timing of the initial investment and when benefits are received will be different. Given that the benefits and costs are received over a period of time (say 30 years) it is important to have a method of comparing benefits and costs that occur at different times over the analysis period.
To compare these proposals we use a method that assumes a opportunity cost for invested capital (specified by an interest rate) that must be achieved by all proposals under consideration. This is often referred to as "discounting" the benefits and costs representing the minimum acceptable return for the investment. Discounting converts future costs and benefits, as they are expected to occur, into present value costs and benefits that can be added up to represent a proposal's net present value (NPV). The NPV of proposal A can then be compared with the NPV of alternative B, and so on. The proposal with the largest positive NPV is expected to make the greatest contribution to economic growth. Thus calculating a NPV requires estimation of all the costs and benefits, including their timing, associated with a proposal and a discount rate.
The NPV represents a unitised value of the net benefits over the period of analysis and is considered an important measure when reporting results of alternative proposals. The annuity equivalent3 of the NPV can be used to estimate the average economic value of water consistent with the earlier description of expressing the resource value per unit of resource use.
2.1.2 Defining the Resource Allocation
Understanding the underlying definition of the water allocation is required to make comparable assessments of the economic value attributed to it. Defining the nature of allocations requires an understanding of:
- the basic hydrological characteristics of catchments, including an understanding of supply security,
- the requirements of consents for alternative allocations,
- the existing resource consents that are present within the catchment and future demands that may be expected.
Essentially, diversion of flows from a regulated river system such as the Waitaki must have regard for the annual stream inflows, the location of these inflows, influence of storage and nature of return flows within the catchment.
Ignoring the presence of any demands on the Waitaki River catchment, the total inflows available will increase upon moving downstream. Given the inflows at any location, it could be expected that a minimum flow volume for environmental purposes would be set, and upon flows reducing to this level, it would be expected that consumptive demands could not be met. More complex arrangements for progressive reductions may also be developed.
The definition of the resource must also have regard for return flows that can be re-allocated to demands located further downstream. In the past, there has been confusion over the term "consumptive demand" and the treatment of demands with a high proportion of return flows.
Traditionally, consumptive demands that include water takes destined for stock and domestic purposes, urban and commercial supply and irrigation are often described as "abstractive" demands. Once taken from the river, these volumes are no longer available for downstream users. While it might be argued that groundwater recharge and system returns could be expected from irrigation demands, the continued emphasis on application efficiency will seek to remove these return volumes over time. There are several examples in Australia where ignorance of this fact has essentially led to over-allocation of the resource (Young, M. & McColl, J., 2002).
Hydroelectric demands are considered consumptive demands upstream of the power-station inlet, as the operator would expect that their prescribed share of inflows is exclusively available to them. However, a high percentage of return flows can be considered downstream of the power station, and the flows are available for re-allocation within the next section of the river downstream. Detailed modelling is required to understand what the operator could do within consent conditions to ensure that the security of the entitlement can be communicated to downstream diverters, as well as inform diverters of the rate of rise and fall of river and storage heights for infrastructure management and operation.
On-stream fish farms and minor hydro-developments are likely to have specified level of returns mandated within the consent process, so can be considered in a manner similar to that for hydroelectric power generation.
In addition to demands for extraction, proportional reservations of flow may be used to represent minimum environmental thresholds, or alternatively, additional levels of flow to support recreational activities and seasonal flow regimes. If storage capacity is available, this allocation can be used as a discretionary environmental flow that may be released at an optimum time (e.g. a flushing flow) to mimic a natural cycle. While the current consent definitions may reflect the environmental requirements, explicit statements of the share of inflows allocated to the environment cannot be easily determined in the Waitaki Catchment.
2.1.3 Existing Consent Conditions and Economic Evaluation
The structure of consent conditions is considerably different between abstractive demands and hydroelectric generation. This has implications for how the water usage is calculated for alternative uses. A basic description of the consent conditions is discussed below.
Provided that instream flows are above minimum environmental thresholds, the structure of existing consents for abstraction demands is typically:
- a maximum allowable daily flow, specified in cumecs (m³/s)
- a maximum allowable weekly flow, specified in cumecs (m³/s)
It is acknowledged that some demands (e.g. domestic and stock uses) may not be subject to minimum flow restrictions.
For hydroelectricty generation consents, the consented rates can be in excess of the median daily flows in the Waitaki River and its tributaries. This allows the generator to use water in storage. Specific environmental, storage level and volumetric release criteria can also affect the allowable water takes for hydroelectric generation purposes.
In basic form, the existing hydroelectric consents enable the generator to store all water volumes above thresholds for environmental conditions and requirements for abstractive users water takes upstream. Based on this definition, the actual volume of water available for generation purposes will vary annually based upon the consent limitations imposed.
The available water for hydroelectric generation purposes can only be calculated accurately with computer simulation. Without the availability of modelling results the "reliability of supply"4 implications for other consent-holders on upstream storage, and those consent holders downstream is unknown. Reliability of supply encompasses a number of variables including abstractive volumes available on an annual basis, limitations imposed upon abstractive infrastructure, and the length and severity of in-season shortfalls.
While it may seem improbable given the current levels of abstractions, a fully utilised system may induce different consumptive behaviour to that presently observed. The combination of poor information and the likelihood of increased consumption could result in properties over capitalising with infrastructure to deliver water that does not have the same security of supply to that observed historically.
The example is given of "spare capacity" attributed to limited irrigation extractions over the winter period. As catchment water consumption increases, individual landowners could improve their security of supply with on-farm storage to extend the period of extraction, or they could improve irrigation efficiency.5 Increasing storage would increase the utilisation of existing consents above their existing levels.
Lincoln Environmental (2000 pg 99) reports that "consents are generally issued for 35 years, with review clauses on all consents." It is suggested here that conversion of the existing consents could take considerable time if reviews cannot enforce additional conditions upon the consent. The report also states that there is no metering infrastructure associated with consent diversions, with reviews of peak infrastructure capacity provided at the consent renewal time.
Essentially this means that the measurement of water usage is virtually non-existent, except in the case of pump meter records or measurement facilities at the major irrigation system offtakes. This has several implications for the economic evaluation of different irrigation proposals:
- the measurement of efficiency gains will be limited to "theoretical" estimates based upon the irrigation technology applied.
- there is limited ability for conservation management programs to provide measurable outcomes
- for large co-ordinated irrigation schemes it is very difficult to achieve efficiency gains without individual metering, as it is possible for a small proportion of less-efficient irrigators to erode the improvement made by the rest of the scheme.
- existing consent-holders will be reluctant to trade any water as they don't really know how much they are using, and cannot make an informed judgement on what amount is surplus to their requirements.
Given the limitations above, it is close to impossible to determine an indicative estimate of the economic value of water other than to use general estimates of farm performance, broad estimates of irrigated area, and broad estimates of irrigation demand for alternative enterprise profiles.
2.1.4 Requirements to Achieve Effective Water Allocation
The national cost benefit analysis seeks to provide information to assist the effective allocation of water in demonstrating the most beneficial allocation structure for the wealth of the nation. The economic principle behind this objective is that of allocative efficiency. Satisfaction of allocative efficiency criteria requires that the water resource be allocated to its highest value application, that this allocation can change in response to economy signals, and that economic welfare is maximised through including the impacts of externalities in the overall evaluation. The topic of allocative efficiency is discussed in greater detail in Appendix A.
Given the stage of current consent structure, it is difficult to ascertain whether economic efficiency could be achieved within present conditions. Apart from consent reviews (on a 35-year cycle) individual consent holders have little incentive to pursue efficiency objectives (unless pumping costs are significant). Without individual agreements between consent-holders, there is no method by which re-allocation of unused water resource allocations can occur, other than "interventionist" type re-allocation at the expiry of the 35-year consent timeframe.
For a system close to allocation capacity, water resource management would require regular metering requirements and monitoring to ensure fairness to all beneficiaries of the water resource. Given that this does not occur in the catchment at this time, considerable changes would be required to ensure that any externalities are captured appropriately. Acquiring this information would also be useful in understanding the changes in the profile of annual irrigation demands, which can be used to further refine water allocation models and planning processes.
If meter reading were undertaken on an annual basis, it would appear sensible that an annual volume is specified for annual consumptive demand (e.g. m³/annum). The annual economic output of the enterprise can then be related to the volume of water used.
2.2 Developing a Base Case
A base-case definition is critical for cost-benefit analysis such that evaluations can identify the incremental impacts of alternative proposals. For the values under consideration, the base case should identify whether these values would be increasing, decreasing or remaining stable in the future if no additional water allocations are made.
For the purposes of the analysis, the base case assumes that all existing consents within the Waitaki River catchment are renewed indefinitely. The one exception to this is the exclusion of the Downlands irrigation area from the base case, as it has acquired consent to take water but development has not commenced. It is assumed that all existing power generation plants continue to operate in the base case. The base case does not include Project Aqua or any new irrigation proposals.
It is also assumed that areas seeking irrigation transition presently have a dryland grazing agricultural profile, and that this would continue without irrigation development.
While the statement above appears relatively simple, the hydrological implications for irrigation demands is unknown. While hydrology data for part of the catchment is provided in supporting information to the Project Aqua Assessment of Effects on the Environment (Opus, 2003), it represents historical data and not that of a modelled system operating under full irrigation demand.
Consequently, it is not known with accuracy what level of irrigation demand actually persists in the catchment at this time or the impact that activation of unused water consents would have in comparison to historical flows. It is not known whether the security of supply to existing consent holders is adequate on all tributaries.
For the energy sector it is assumed that the nation adopts a specific sequence of implemented generation capability if Project Aqua were not to proceed. Based on this generation sequence it is assumed that the nation would be subject to a specific long-run price path for the energy sector. It is assumed that there is limited ability to increase the efficiency of generation plant within the Waitaki system.
The statement of the base case for environmental, cultural and social values is considerably more difficult than for irrigation and energy demands. In many cases the base case may reflect "background" degradation or improvement, however monitoring information is not available to demonstrate these trends beyond personal experience. There can be a temptation to say the value is stable in the long-term, whereas a more accurate interpretation may be that information cannot be found to prove otherwise.
A detailed analysis of the base-case has been undertaken for each of the different "sectors" described above. This is presented in the following sections of the appendices
- Environment Sector (Appendix B.2)
- Social, Recreation and Tourism Sector (Appendix C.1)
- Cultural Values (Appendix D.1)
- Agricultural Sector (Appendix E.1)
- Energy Sector (Appendix F.1)
Each of the options defined in the analysis will be compared to the relevant criteria under the base case.
2.3 Valuation Methodology
The preparation of a National Cost Benefit Analysis of the various allocation scenarios for the Waitaki Catchment requires that all impacts, positive and negative, are considered in an unbiased manner and from a national perspective.
The terms of reference direct the analysis to consider the impacts and outputs upon functioning regional or national markets (such as irrigation and energy), and also the nationally significant impacts that may be experienced by the natural environment, tourism, recreation and society. The latter impacts may be described in dollar terms, or other quantitative or qualitative terms.
As the sectoral impacts are related (e.g. additional irrigation demands could initiate environmental changes that in turn change recreational values), care is taken to ensure that the consequences of impacts are not counted more than once. The assumptions regarding each of the sectors are described below.
2.3.1 Environment
Premise of Analysis: The existing nature of the Waitaki River valley confers substantial value at the local, regional and national levels. These values are related to both observable uses of the valley (recreational and tourism values) and non-use values, such as "existence value" which are separate from consumptive or non-consumptive uses of the river valley assets. Because of their disassociation with personal use, these non-use values may be experienced among a large group of people, such as a national population, depending on the level of significance of the environmental asset being considered.
Additional water allocations that impact upon flow regimes downstream of the Waitaki Dam will have a measurable impact on these values, at the local, regional and national levels. Mitigation works which are intended to offset changed flow regimes (and any loss of use or non-use values) have a quantifiable cost themselves and must be included in any overall cost benefit analysis.
The incorporation of environmental impacts into cost benefit analysis may be achieved by a number of different means. The form that the environmental impact analysis will depend on the level of scientific certainty regarding impacts and the nature of the change (whether discrete or continuous, short or long term, use-related or non-use etc). More detail about the specific approach to incorporation of environmental impacts is discussed below in Section 2.4.
2.3.2 Tourism and Recreation
Premise of Analysis: The current flows within the Waitaki River are beneficial in supporting a range of water based tourism and recreation values, which take place both "instream" and "out of stream". Additional allocations that change the pattern and size of instream flows are likely to have an impact to these uses. In some proposals for additional allocations, mitigation works have been proposed which are intended to retain, or possibly enhance, tourism and recreation values in the region.
The analysis of tourism and recreation impacts relates to both the national perspective adopted, and the projected impacts in the long-term.
The national perspective of analysis of economic costs and benefits must have regard for the potential for substitution of specific regional values of tourism and recreation within the national economy. Tourism developments add to economic welfare at a national level when they result in either additional value-added from international visitation or from direct injection of capital from overseas into new tourist infrastructure.6
When considering how a regionally-relevant resource allocation will affect tourism at a national level, the possibility of substitution between areas arises. The loss of a tourism development opportunity in one region may be often be substituted by an offsetting growth in tourist income (and value added) in another region within New Zealand. Substitution of growth or a tourist attraction in Area A with one in Area B reduces the economic loss to one of regional relevance, rather than national relevance. In assessing the impact of a change in tourism futures, the extent of substitutability within the Waitaki Valley and other regions must therefore be weighed before any conclusions can be made about national impacts.
The other consideration regarding tourism impacts (and others) are the long time span (30 years) which this national cost benefit is concerned with. In the case of tourism, it is acknowledged that there is generally a considerable amount of uncertainty regarding predicting tourism futures at a regional scale due to the potential for relatively rapid changes. Regions may become "discovered" or fall into decline over a decade or less due to changes in infrastructure, marketing, demographic changes or the behaviour of competitors. The "base case" situation with respect to tourism in the Waitaki Valley and both its current and predicted positions within the national economy is described in Appendix C.
Recreation
There may also be a change in the level of recreational opportunity from changed environmental quality or access conditions at a local level which causes a loss of consumer surplus or economic welfare among local residents for which there are no adequate substitutes. When there is a loss of welfare without compensation or mitigation, the loss of economic value is still technically relevant at the national level, even though the change is only to a local resource. However, its significance will be related to its overall magnitude and where only a small number of people are involved, the significance of the welfare loss will be reduced accordingly.
The recreational and tourism impacts considered in this report relate to the expected net change in welfare at a national level from the three scenarios being compared - the base case (no changes to water allocation) irrigation development and hydroelectric power development scenarios.
2.3.3 Social Impact
Premise of Analysis: Capital investment associated with any additional allocations may induce positive or negative impacts for the existing regional communities. A range of social impacts is expected to occur during both the construction/capital investment stages and the operation phases associated with different water allocation outcomes.
In terms of this analysis, social impacts (i.e. deviations from the "base case") are expected to be caused by both changes to the physical and the socio-economic environments for communities in the Waitaki Catchment.
Although some of these social impacts may be quantified (such as loss of productive land), most of the likely social outcomes from the water allocation decision (such as short or long term social disruption or dislocation) are intangible and therefore only able to be described in qualitative terms. The lack of quantitative or monetary expression of these impacts does not indicate a lack of relevance or importance and should not be viewed as such. Rather, attention should be given to comparing these intangible, social impacts with the more discrete and certain outcomes for other sectors.
2.3.4 Agricultural Sector
Premise of Analysis: The development of irrigation is likely to enable increase land productivity within the agriculture sector. At the same time, however, the output of the agricultural sector may be reduced by encroachment of competing land uses (e.g. a hydroelectric canal), restrictions upon certain development activities (e.g. through land designation), or altered micro-climate effects by alternative developments (e.g. frost, dust).
Additional irrigated land would increase the value of farm output from its current levels, therefore the base case needs to identify the prevailing economic use of land, and recognise any normal transition that might be expected upon irrigation allocations.
From a national cost-benefit perspective, the direct value added by agricultural enterprises will be the key measure of economic contribution, but there will also be capital costs of transition for water supply to the farm boundary, on-farm reticulation costs, and on-farm transition costs. It is assumed that no additional investment is required by agricultural service industries, or downstream processing industries are required in order to achieve additional economic contribution.7
The agricultural sector would also be impacted by losses occurring due to land encroachment of other land uses (e.g. a hydroelectric canal), required changes to irrigation infrastructure as a result of lower in stream flows, and costs incurred because of changes to groundwater conditions.
Again, the measure of direct impact would be the lost economic contribution of the agricultural enterprise. This is measured in terms of the gross margin ($/ha/annum).
2.3.5 Energy
Premise of Analysis: From an economic valuation point of view, it is important to understand the system impacts of increases or decreases in generation capacity.8 It is assumed that decreases in medium term energy generation capacity must be substituted for development of new generation plant to maintain the same security of supply to the economy
Concept Consulting (2004) focussed on the evaluation of scenarios at the national scale where Project Aqua does, and does not enter the generation network. If Project Aqua does not enter the system (the base case) then the investment in alternative capital plant and transmission infrastructure would be brought forward to meet increases in electricity demand. The implications for required investment in the HVDC (High Voltage Direct Current) links (which feeds power between the North and South Islands) also need careful consideration, as scenarios with Project Aqua are likely to affect the timing of the HVDC upgrade.
There is supply risk associated with any increases in the development of hydroelectric generation capacity. Supply risk is defined as the probability associated with available inflows for generation capacity. Emphasis must be placed on the installation of generation capacity to meet a minimum acceptable annual production requirement, where as the average annual operation may assume that all installed capacity is available for operation. Concept Consulting (2004) employed a methodology by which a dry year scenario was assumed for installation of peak capacity, however average conditions were used to model annual costs of production.
Due to the structure of the consents in the upper catchment, any additional abstractive allocations in the upper catchment (if permitted) will have an adverse financial impact upon Meridian Energy Limited. In output terms, the upper bound estimate of irrigation demands in the Upper Waitaki catchment would reduce generation potential by 0.4 - 0.6% at the national level. The likely practical outcome is that alternative generation investments will be brought online more rapidly. The economic impact therefore requires analysis of what infrastructure would be brought forward as a consequence of reduced generation capacity in the Upper Waitaki.
The direct economic impact of these additional costs is incorporated into the cost benefit analysis. The alternative generation schedule is also expected to have an impact on the long-run price implications for consumers, and therefore demand. Analysis must be undertaken in the overall change in consumer and producer surplus associated with the change in price levels.
2.4 Approaches to Valuation of Impacts
A cost benefit analysis undertaken at the national level must consider when impacts are of national consequence and when they are of regional or local consequence only. The former is expected to occur in instances where there is a tangible, expected change in the level of national output or welfare and the latter where impacts are substitutable between localities or regions and are therefore not relevant for decisions made at the national level.
This national cost benefit analysis of options for use of water in the Waitaki catchment addresses two major options (irrigation development and hydroelectric power development) against the status quo, or base case. Both development options have the potential to bring significant environmental changes, which have broad social and recreational/tourism implications at the local, regional and national levels, most of which are not automatically captured in functioning markets and therefore have no market price (opportunity cost).
The Value Problem
The lack of a demonstrated market "price" for environmental, social and cultural values for the Waitaki River gives rise to a problem when these values are compared with outcomes that are measured in dollar terms which are not strictly commensurable. If the less tangible, non-market resources are not articulated in some measurable form, a resource allocation decision based on measurable, expected outcomes may fail to take them fully and accurately into account in the process resource efficiency may be reduced rather than increased.
In order to address this shortcoming of market based cost benefit analysis, economists have developed a taxonomy of types of value which help clarify the welfare tradeoffs involved in dealing with such intangible assets as environmental quality, and a range of techniques to estimate these types of value.
The relevant concept of economic value can be divided into two components, use values and non-use values. For a resource such as the Waitaki River, the use values of its instream flows are related to the opportunity it gives for recreational activities of all kinds as well as irrigation, mahika kai, municipal water supply, power generation and other extractive uses of water, both now and in the future. Non-use values, which are completely disassociated from any consumptive or non-consumptive interaction with the river, are gained from merely knowing that the river exists in its present condition. At the end of the non-use scale of values is pure existence value.The relative rarity of the landscape of the Waitaki River is believed to give rise to non-use values for the resource as it stands today among a wide population.
MfE (1998) has summarised the definition of "instream values" as:
Instream values include those associated with the river's natural environment, its traditional uses for Māori, and its recreational and aesthetic values. Examples of out-of-stream uses include abstraction, diversion of water from or into a river, damming, and changing land-use patterns for example, by urbanisation or converting pasture into pine.
The task for economists conducting a cost benefit analysis involving non-marketed resources is to determine likely bounds on these portions of Total Economic Value9 so that these resources can be considered in the same light as other outcomes. Several techniques have been established in New Zealand, Australia and the US over the past three decades that capture part or all of the TEV equation. The techniques can be described as either "stated preference" which can capture all elements of TEV (via a survey of personal willingness to pay or some other implicit tradeoff among resources and dollars) techniques or "revealed preference techniques" which involve the distillation of an implicit measure of value from observations of actual resource use. Stated preference methods include contingent valuation and choice modelling and are capable of capturing all components of Total Economic Value, including existence values. Revealed preference techniques, including travel cost and hedonic pricing, rely on observed behaviour and cannot capture existence values.
There is a long history of non-market valuation being undertaken in New Zealand, with the earliest published studies of recreational values emerging in the late 1970s. Numerous techniques have been applied to determine the value of recreation, environmental quality, aesthetics and existence values so that these resources may be considered more accurately in an economic decision-making framework.
To date, however, no studies of economic use or non-use values have been undertaken in the Waitaki Catchment.10 Hence the estimates discussed in this analysis are based on results found in other catchments with comparable characteristics. The method of inferring values for one situation from another is known as "benefit transfer" and can only be made in circumstances where the set of assumptions behind the original estimates (environmental characteristics, demographics, etc) are understood and are comparable. The closer the two sets of circumstances are, the more robust the benefit transfer is.
In the context of this study, it is also noted that benefit transfer of values is more appropriate for use values (associated with recreation) than for non-use values such as existence values. Studies of existence value for nationally significant environmental resources are generally highly site specific as they capture a particular range of public perceptions and preferences about a resource's uniqueness, the extent to which it complements other resources, the reversibility of any changes that are made to it, its public profile (or the level of public awareness of it), the support that it may give to other types of value (such as habitat) and its longevity. While there have been a number of existence value studies completed for other natural resources in New Zealand (some as part of previous Water Conservation Order Applications) none have been undertaken in or for the Waitaki Valley, and hence the existence values for the Valley are unknown.
One of the more major studies of the existence values for a significant natural area was undertaken for the Kawarau Gorge as part of the Ministry of Works and Development's hydroelectric power investigations (Kerr, 1985).11 That study involved a contingent valuation study of 1,000 people randomly selected from a nationwide sample frame, administered by mail. Recipients of the survey were asked whether or not they would be willing to pay more for electricity to prevent a series of dams from being built in the Kawarau Gorge. A number of different development scenarios were presented across the sample, in an attempt to prove whether New Zealanders were more or less likely to pay to prevent more or less intrusion and modification of the Gorge.
The study found that approximately 70% of New Zealand households were willing to pay something to prevent the proposed schemes in the Gorge from being built. These willingness to pay values captured both use (visual amenity and some recreation) and non-use (existence) values (Kerr, 1985).
In the context of a national cost benefit analysis of options for water development in the Waitaki Valley, the omission of this piece of information is significant and it is recommended that a separate study of the economic extent existence values of the Waitaki Catchment held by the country as a whole be undertaken as part of the overall decision making process.
2.5 Summary of Evaluation Structure
Given the findings above, the quantitative aspects of the national cost benefit analysis are limited to the economic variables that can be monetised. Changes in non-monetised attributes must be compared in qualitative form. The following is a summary of the benefits and costs to be considered in the quantitative evaluation of scenarios relative to the Base Case.
Electricity Benefits
- Investment Outcomes Avoided (i.e. avoiding the Base Case generation profile)
- Capital Expenditure
- Operations And Maintenance
- Incremental Emissions Cost
- Incremental Fuel Cost
- Economy Impact of Electricity Charges
Electricity Costs
- Investment Outcomes With Project Aqua (i.e.. adopting the with aqua generation profile)
- Capital Expenditure
- Operations And Maintenance
- Incremental Transmission Costs
- Reserve Plant
- Agricultural Output Contraction
- On-Farm Infrastructure - Renew/Mitigate
- Operations And Maintenance - Renew/Mitigate
Irrigation Benefits
- Increased Agricultural Output
Irrigation Costs
- Investment for Irrigated Production
- Capital Investment for Irrigation
- Off-Farm Irrigation Infrastructure
- On-Farm Irrigation Infrastructure
- On-Farm Transition Costs
- Operations and Maintenance Cost of Irrigation
- Incremental Emissions Cost
- Lost Generation Capacity from Hydroelectric Generation Plant
A summary of the assumptions behind for the criteria listed above is provided later in Sections 3.3 and 3.4.
2.6 Potential Development Scenarios
2.6.1 Introduction
The scenarios broadly represent most likely categories (irrigation, hydroelectricity) for increases in water allocations that require significant volumes of water. To develop a better understanding of the economic implications of these demands, the scenarios were constructed to represent a range of demands within the system. The following scenarios were considered in the economic modelling:
- Base case (existing irrigation demands and hydroelectric generation)
- Project Aqua with no additional irrigation
- All Irrigation Demands without Project Aqua
- All Irrigation Demands with Internal Rate of Return > 5% without Project Aqua
- Additional irrigation above Waitaki Dam at the following locations:
- upstream of Tekapo,
- upstream of Ohau
- upstream of Benmore.
- Additional irrigation below Waitaki Dam
- Additional irrigation below Waitaki Dam integrated with Project Aqua where possible
It should be noted that the additional irrigation demands above and below Waitaki Dam are not additive for the purposes of comparison with All Irrigation Demands with Internal Rate of Return > 5% without Project Aqua.
The evaluation for each scenario above compared the benefits and costs of each scenario to that of the base case described in Section 2.2.
The analysis only referred to the first three scenarios for the evaluation of non-economic variables (environmental, cultural, and social). The environmental section distinguishes between the possible impacts in the locations above and below Waitaki Dam for each of the scenarios considered in this section.
It is also acknowledged that the competing uses of water also extend to commercial manufacturing uses. Analysis of this sector is considered separately from the uses above (see Appendix G) due to the anticipated small volumes of water required (see Glasson Potts Fowler, 2001), and the relatively minor impact this would have upon catchment hydrology.
Section 2.4 summarises the method of analysis for each of the major "sectors" considered as part of this investigation. It shows that detailed economic modelling can be undertaken for the irrigation and hydroelectric generation sectors, whereas a broad quantitative assessment was undertaken for commercial manufacturing. The environment, cultural and socio-economic impacts were assessed qualitatively.
Table 4: Analysis of Impacts| Sector | Quantitative Modelling with Hydrology Model | Quantitative Modelling | Qualitative Assessment |
| Additional Hydroelectric Generation | Yes | - | - |
| Additional Irrigation | Yes | - | - |
| Additional Commercial Manufacturing | - | Yes | - |
| Environmental Impacts | - | - | Yes |
| Social Impacts | - | - | Yes |
| Cultural Impacts | - | - | Yes |
A description of the major variables describing the expansion of the irrigation and hydroelectricity sectors is provided in the following sections. It outlines the optimistic development of each to be incorporated in the model
2.6.2 Irrigation Sector Expansion
Should additional irrigation allocations be made to support more intensive agricultural enterprises to support domestic and export markets, it can be expected that this sector and those associated with intermediate inputs and processing would also benefit.
At this time, the consents under consideration include approximately 40,000ha of irrigation taking water from upstream of Waitaki Dam, and 9,000ha of irrigation downstream of Waitaki Dam (see Appendix E.3). There is considered to be greater areas of development beyond that represented by new applications for consents.
Based on consultation with consent holders, consent applicants and departmental authorities, the potential irrigation areas that could be developed over the next twenty years were identified (Table 5). This list was adopted for the purposes of economic modelling to capture key variables specific to regions within, or adjacent to, the Waitaki catchment.
The following assumptions should also be noted:
- In some cases, resource consents were already issued, however demands were included to understand the economic consequences of specific arrangements. For example, the Downlands and Lower Waitaki demands were included to understand the economic benefits of potential integration with the Project Aqua canal. It should also be noted that the hydrology information available for modelling purposes does not have the Downlands demand incorporated within it.
- The modelling includes some demands (e.g. "McKenzie/Ruataniwha") at several locations within the system to understand the ranges of trade-offs that could occur with existing generation capacity. It should be noted that the area of potential for the McKenzie/Ruataniwha district appears limited by the costs of irrigation to support more intensive grazing enterprises, however if higher value transitions (e.g. specialist crops / dairy) it is likely a greater area of transition might be achieved. The question then becomes one of the ability for such transitions to be facilitated.
- It was assumed that all diversions were from the Waitaki River proper, whereas tributary allocations may not be able to sustain the developments proposed.
Table 5: Potential Future Developments for Irrigation| District | Area (ha) | Average Annual Water Take (m³/s) |
| Mackenzie Basin / Ruataniwha District | 10,000 | 1.6 - 2.2 |
| Aoraki Water Trust Proposal | 30,000 | 4.0 |
| Lake Benmore, Lake Aviemore | 2,000 | 0.4 - 0.5 |
| Other "Called in" Consents , Above Waitaki Dam | 1,750 | 0.3 - 0.4 |
| Irrigation North Otago (Downlands, Gravity) | 20,000 - 50,000 | 3.8 - 12.7 |
| Lower Waitaki Irrigation Scheme | 3,000 | 0.6 - 0.8 |
| Hakataramea Valley | 6,000 | 1.1 - 1.5 |
| North Bank / Elephant Hill Area | 6,000 | 1.1 - 1.5 |
| Waihao Downs | 6,000 - 14,000 | 2.6 - 3.5 |
| Other "Called in" Consents - Below Waitaki Dam | 1,500 | 0.3 - 0.4 |
| Total | 86,250 - 124,250 | 15.8 - 27.5 |
Source: Various - See Appendix E.3.6. AWT Demand was forwarded to SKM by Attwells Irrigation Consultants after the draft report was issued. SKM has not verified the basis for this estimate, but it is expected to be reviewed by the Water Allocation Board.
Providing irrigation water increases the security of agricultural production (avoiding drought periods), and therefore sustains investment and supporting industries. Allocations must be clearly defined, and the implicit reliability of supply must be maintained to facilitate continued investment in more intensive agriculture.
The most optimistic projections for production over the next 30 years would add approximately 3%12 to the national annual agricultural output (ignoring processing and support industries). Additional irrigated production that supports export growth may also generate increased productive capacity through processing opportunities and contributions from support industries. However, it can be argued that at the national level this increase would simply divert production from another part of the economy. The actual result is likely to be somewhere between the two.13
The external impacts of intensive agriculture must also be managed appropriately. The option of applying intensive irrigation on a proportion of the enterprise may assist in retiring degraded land that has been subject to over-production, without prejudicing overall business viability. The environmental risks associated with intensive agriculture must also be managed. Issues for consideration include include surface runoff and groundwater recharge, management of livestock waste, and planning issues relating to maintenance of agricultural buffer zones. This will largely be represented in the direct costs of mitigating infrastructure or operations, or through adjustment on the likely productivity to be achieved.
Additional allocations to irrigation in the Waitaki catchment above Waitaki Dam will also impact the reliability of consent rights held by existing hydro-generation capacity, and agricultural production. Therefore additional allocations without replacement of existing rights would only serve to reduce the reliability of supply to existing consent holders.
The aggregation of demands to fit the modelling framework suggested by the steering committee was completed in the following manner:
- Maximum irrigation without Project Aqua: maximum irrigation demands in Table 5 above)
- Irrigation with Internal Rate of Return of at least 5% without Project Aqua: All irrigation demands in Table 5 above that have an internal rate of return of 5% or greater over the period to 2033. This scenario aims to identify the total area of transitions that could be considered most likely to be advanced over the next 30 years.
- Project Aqua with no additional irrigation: no irrigation demands
- Project Aqua integrated with new irrigation downstream of Waitaki Dam: irrigation demands of Irrigation North Otago (Downlands), Lower Waitaki Irrigation Scheme, North Bank / Elephant Hill Area, Waihao Downs, Other "Called in" Consents - Below Waitaki Dam.
- Additional irrigation upstream of Tekapo: Aoraki Water Trust
- Additional irrigation upstream of Ohau: Ruataniwha demand located upstream of Ohau A within the model
- Additional irrigation upstream of Benmore: Lake Benmore, Lake Aviemore
It should be noted that many of the smaller consents apply to tributaries, however the modelling assumes the abstraction is from the Waitaki River, instream storages, or the Meridian energy canals.
2.6.3 Energy Sector Expansion
With the completion of the Upper Waitaki power projects, the remaining undeveloped potential in the district lies in the Lower Waitaki River. The Government's Energy Plan of 1981 (MOE, 1981 in WCC, 1982) gave development priority to the then named Lower Waitaki Power Development. Meridian Energy's Project Aqua is now the successor to that proposal and the only major additional hydroelectricity generation option in the catchment.14 As such, the analysis in this section focuses on the likely environmental impacts of Project Aqua assuming that no other hydropower development is likely to be developed.
As Project Aqua is located "off-stream" it acts as an consumptive demand on the river over a length of 62km. The proposal is for six hydroelectric power stations each rated at between 83MW and 92MW. When fully operational, the estimated power output from this plant is estimated at approximately 2,900GWh if the median flows over the period 1927 - 2000 are applied. This represents an annual generation capacity increase of around 38% in the Waitaki and 8% nationally. It should be noted that with integration of existing irrigation schemes south of the Waitaki River, the generation capacity could potentially increase above 3,000GWh but this has not been assumed in our analysis.
It is recognised that small efficiency improvements have been undertaken at Aviemore Dam (75GWh), and similar improvements are planned for Benmore Dam. This would represent an increase in generation capacity of 0.3% nationally.
If the Project Aqua consent application is considered in isolation, its addition to the system demands cannot impact upon the supply reliability of existing diversions downstream of the Kurow offtake under normal operating conditions. The most recent information for the "Intake Diversion Flow Permit" consent conditions (pers. comm R Moss, Meridian Energy 03/11/2003) indicate that all abstractive demands identified in the Irrigation Scoping Study (Glasson Potts Fowler, 2001) would be satisfied before inflows to power stations take place. The abstractive demands include any irrigation demands on the canal, and Waitaki demands downstream of Kurow).
Even in cases where flows in the Waitaki River increase below levels where power stations cease to operate, the proposed consent conditions indicate that flows to irrigation supplied via the canal (e.g. Downlands and any integration with existing schemes) must continue.
2.7 Consultation Undertaken as Part of the Study
The national cost benefit analysis was to draw primarily upon existing data available in relation to current and future proposals for water allocations from the Waitaki Catchment. This included public reports and studies and others which were completed under private commercial arrangements. When important gaps in the data were apparent (or expected) this was to be identified and an expert consensus developed.
A series of workshops was completed in Christchurch, Fairlie, Oamaru, Kurow and Wellington over the period 4/11/2003 to 11/11/2003. The main objective of these workshops was to explain the purpose of the National Cost Benefit Analysis, identify potential data sources and allow the project team to start to understand the inter-relationships of many issues related to water allocation in the catchment.
Based on this initial contact, the project team made phone and personal contact with key technical specialists, representative organisations, and referred contacts that could provide additional data and evidence to support the economic assumptions. Based on this set of initial data, a draft report was prepared.
Following the draft report, written submissions were received, and additional comments were collected at a series of workshops completed in Fairlie, Waimate, Kurow, Oamaru and Christchurch over the period 13/09/2004 to 14/19/2004.
The project team is grateful to the many individuals and organisations were able to provide assistance at such short notice. The project team appreciated that a considerable amount of the information forwarded to the project team was commercially sensitive and has reported information in an aggregated manner that recognises these commercial sensitivities.
Extensive public consultation was not undertaken as part of this analysis. It should be noted that the participation of individuals and organisations through the data collation process does not necessarily imply support of the methodology adopted or of the outcomes from the analysis.
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