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• 4. Analysis of Proposals

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• Waitaki Catchment

• Final Report
• Terms of Reference
• Model Scoping Report
• Project Aqua
• Media Statements

• 4.1 Economic Analysis
  • 4.1.1 Scenario Results
  • 4.1.2 Sensitivity Tests
• 4.2 Assessment of Commercial Manufacturing
• 4.3 Environmental Analysis
  • 4.3.1 Additional Allocations for Irrigation
  • 4.3.2 Additional Allocation for Hydroelectric Generation
• 4.4 Recreation and Tourism Analysis
  • 4.4.1 Additional Allocations for Irrigation
  • 4.4.2 Additional Allocations for Hydroelectric Generation

4.1 Economic Analysis

4.1.1 Scenario Results

The results from the preliminary economic analysis are presented in Table 8 below. The results present the various combinations of irrigation demand and Project Aqua inclusion which are additive through the table.

The following examples are given to demonstrate the interpretation of results assuming a discount rate of 7.5%, and analysis period of 30 years:

• The results indicate that if additional water allocations were made to Project Aqua in isolation with no additional irrigation development (Row 2, Column 4), this would return a net benefit of $329.1m to the economy.
• If additional water allocations were sufficient for all irrigation developments proposed and excluding Project Aqua (Row 3, Column 3), this would return a net benefit to the economy of $122.5m.
• If additional water allocations were made to all irrigation developments proposed and Project Aqua (Row 3, Column 4) were also to proceed, this would return a net benefit to the economy of $169.2m. The result for this option is additive of Project Aqua (Row 3, Column 3:$329.1m) plus Irrigation Development (Row 2, Column 4: $122.5m) less the incremental lost generation capacity of ($444.8m-$167.6m = $277.2m) which equals $169.2m

A coarse estimate of financial viability was used to identify those schemes that were able to return sufficient funds to service a commercial loan. A first-order filter was applied to schemes that could return a positive NPV at a real pre-tax discount rate of 5% (representing a commercial loan in the order of 7% p.a. in nominal terms). The estimated irrigation area satisfying this rule is approximately 76,250ha, which suggests that it is unlikely for all irrigation proposals to proceed. Demonstration of financial viability is more complex than the rule adopted, as it must be demonstrated that all proposed customers must realise gains from irrigation development.

The cause of some schemes failing to be viable could be attributed to the economic value of agricultural transition or the cost to reticulate the water to the farm. These variables can have substantial impacts upon the net benefit of the various schemes, not to mention the opportunity cost of lost generation capacity. Demands further downstream have lower impact upon generation capacity, and tend to also have higher value agricultural transitions (through greater proportions of dairy enterprises) which improve overall viability.

a) This table presents 7 different scenarios which combine Project Aqua with irrigation takes and assumes that Project Aqua is viable for each. At some point, however, irrigation takes would mean that Project Aqua would not be financially viable. The point where this would occur has not been calculated in this analysis and it is assumed that a reduction in flow through existing or proposed turbines is simply calculated on the cost of providing an alternative electricity supply.

b) A coarse estimate of financial viability was used to identify those irrigation schemes that were able to return sufficient funds to represent a commercial loan, and thus encourage private enterprises to pursue development. A first-order filter was applied to schemes that could return a positive NPV at a real pre-tax discount rate of 5% (representing a commercial loan in the order of 7% p.a. in nominal terms). The estimated irrigation area satisfying this rule is approximately 76,250ha. However, tests of financial viability are far more complex given that individual enterprises must realise gains from irrigation development. This result cannot be developed using the aggregate of the demands presented subsequent.

The results indicate that by integrating some of the lower schemes with Project Aqua, this will deliver a net benefit for the nation of approximately $39.0m (the difference between "Project Aqua" / "Takes Below Waitaki Dam" and "Integration with Project Aqua"/ "Takes Below Waitaki Dam").

The data gaps in the current information do not allow allow conclusions to be drawn of specific proposals. It is possible that through the process of aggregation the results of viable low cost schemes are obscured. The data underlying the irrigation impacts in particular requires further liaison with consent applicants, with acquisition and auditing of data that support economic evaluation.

Without the ability to use information from these sources, the economic analysis must rely upon sensitivity testing of key variables to understand the likely impacts of changes in variables, and the ability to make recommendations on the data presently available.

If the measure of economic efficiency is NPV, then Project Aqua reflects the most efficient use of water in the lower catchment. Alternative methods of ranking are limited because of uncertainty in the calculation of economic contribution and the absence of a hydrology model. Even so, basic calculations would show that the Lower Waitaki irrigation demands are able to deliver up to 42% of the net economic benefit of Project Aqua, using less than 5% of the annual water volume required by the hydroelectric scheme.

The conclusions from this part of the study are constrained by assumptions of technical feasibility and financial viability. Large irrigation proposals require that the greater majority of enterprises within an area support the development of a water supply such that economies of scale can be maintained. Also, the risks associated with the development must be managed in such a way that allows financing of the development to be secured. It cannot be inferred from the above findings that if the scheme is demonstrated to have net economic benefits that it will proceed. Rather, continued investigations are warranted to develop the proposal further.

4.1.2 Sensitivity Tests

Discount Rate

If a reduction in the discount rate of 7.5% to 5% is considered, the benefits of Project Aqua increase by 2.1 times, which is slightly less than the change in all irrigation demands (3.1 times).

A lower discount rate tends to improve the viability of those proposals that have long term benefits. The results show that some irrigation demands in the upper catchment can provide net economic benefits at a lower discount rate. As both irrigation and the hydroelectric development fall into these categories, the economic viability improves considerably for both developments (see Table 9), except in the case of takes above the Ohau and Benmore hydro-generation stations.

Note:
a) This method assumed that individual irrigation scenarios with an internal rate of return greater than 5% were included in the analysis. The method was used to ascertain a more probable estimate of the likely irrigation transitions that might be pursued in the next 30 years.

In accordance with standard New Zealand Treasury (Guidelines for Costing Policy Proposals) results for a 10% discount rate is also presented as a sensitivity test in Table 10.

Note:
a) A coarse estimate of financial viability was used to identify those schemes that were able to return sufficient funds to represent a commercial loan, and thus encourage private enterprises to pursue development. A first-order filter was applied to schemes that could return a positive NPV at a real pre-tax discount rate of 5% (representing a commercial loan in the order of 7% p.a. in nominal terms). The estimated irrigation area satisfying this rule is approximately 76,250ha. However, tests of financial viability are far more complex given that individual enterprises must realise gains from irrigation development. This result cannot be developed using the aggregate of the demands presented subsequent.

Energy Sector

Based on guidance from the Concept Consulting (2004) report and indicative gross margins for the opportunity cost of land, a sensitivity test has been performed on key variables (see Table 11).

The mid-point value represents the assumption used in the modelling, whereas the results from some sensitivity tests required the uncertainty to be applied in only one direction. For example, the inclusion of reserve generation capacity will only serve to reduce the benefits attributed to Project Aqua as the current assumptions have assumed no need for additional reserve generation capacity. As there is no test result that extends above the initial model results, the upper bound is the same as the mid-point result.

The results show that the merits of the Project Aqua proposal are most sensitive to changes in the capital cost of the investment. If the costs were to increase by 20% in real terms, it is expected that the proposal would reduce the net benefits by approximately $150m. The opposite result (i.e. an increase of approximately $150m) is observed if the alternative generation sequence increases in cost by 20%.

If the Net Present Value is converted to an annuity, the benefit is equivalent to $27.9m/annum over a period of 30 years. The total volume of water used on an annual basis to support hydroelectric generation for Project Aqua is approximately 6,900 million m³/annum. The value of the water to the economy could be described as $0.004/m³.

Using the extreme scenarios presented above, it is estimated that the value of water to the economy is valued at between $0.002/m³and $0.006/m³.

Irrigation Sector

Given the relatively low confidence in the information available, the sensitivity analysis was completed on the following variables within the model:

• Irrigation Transition Benefits: upper and lower bounds
• Annual Irrigation Demand: upper and lower bounds (affects lost generation potential)
• Large Schemes Off-Farm Capital Expenditure Estimate: variation of +/- 30% undertaken
• Off-Farm Capital Expenditure Estimate: For demands not located within a specific scheme, or taking water from a pre-existing canal. Undertaken at $200/ha and $2500/ha.
• On-Farm Capital Expenditure: upper and lower bounds
• Operations and Maintenance Expenditure: upper and lower bounds

Based on the outcomes of the sensitivity test for each option, the most extreme impacts were reported. This provides some idea of the likely variables that require closer analysis, as they will have the greatest influence for results overall. As the results in Table 12 indicate, the value of the agricultural returns has the greatest influence of individual irrigation demands. In the case of demand above Tekapo, and those above Benmore the selection of the upper bound irrigation returns improves the overall viability to the extent of returning a positive net present value for these irrigation developments.

Note:
1) Project Aqua has been assumed not to occur in the above sensitivity tests with the exception of the Below Waitaki - Integrated scenario
2) The opportunity cost for power generation ($88.4m) is compared with the non-integrated scenario, which results in an opportunity cost of power of approximately $108.9m. Therefore there is a power generation benefit from integration of approximately $20.5 m.

Impact of Irrigation Transition upon (Lost) Generation Capacity

Following comments received after issue of the draft report, it was suggested that the assumption regarding immediate uptake of new consents (see Section 3.4.2) may be overly-conservative given that irrigation development was proposed over a 2 to 5 year period. If consents were structured in such a way to reflect a gradual take up, it could be assumed that the lost generation capacity would also transition to a maximum value over this period.

The objective of this sensitivity test was to understand the typical change for each of the irrigation demands used in the modelling. The results presented in Table 13 show that if a transition assumption is used this would decrease the present value (opportunity cost) of lost generation capacity between 13% and 20%.

The change is sufficient to have impact on the final results for at least one irrigation demand. For example, the opportunity cost of lost electricity generation from the "Takes above Tekapo" is reduced by $23.1m which moves the overall Net Present Value for this demand to a positive measure ($6.0m) applying a discount rate of 7.5% while it had previously been negative ($-17.1m). For other irrigation demands, the impact of the transition assumption would only improve the Net Present Value presented.

Other Tests

Following comments received after issue of the draft report, two additional sensitivity analyses were suggested regarding the demand above Lake Tekapo. These have been completed to highlight the differences observed by modelling undertaken by others, and also to reinforce the assumptions made by Sinclair Knight Merz in developing the model assumptions. The details of the sensitivity tests are as follows:

• Annualised Irrigation Demand of 15 cumecs: This scenario assumes that the combined irrigation demand and streamflow contribution to neighbouring catchments were to continuously extract 15 cumecs from Lake Tekapo over the entire year. Project Aqua is not assumed to operate. (see Appendix E.3.6 for greater discussion of irrigation demands adopted in the base model).
• AWT Irrigation Contribution (Arable, Dairy Support): This scenario assumes that the gross margins from irrigated arable farming is assumed to be $2,000/ha, and that from irrigated dairy support is assumed to be $1,600/ha. (see Appendix E.3.8 for greater discussion of gross margins adopted in the base model), and upper bound selected elsewhere.

The results for these sensitivity tests are located Appendix I.8, with a summary presented in Table 14. The results indicate that the assumption regarding and annualised demand of 15 cumecs above Lake Tekapo results in a negative contribution to the national economy of $320.6m. Conversely, the increase in gross margins for the demand above Lake Tekapo increases the estimate of overall contribution to the economy by $114.2m.

It is considered that more precise definition of the consents above Lake Tekapo (rather than reliance on peak consented rates alone) will reduce the quantum of the impact that could be observed, with recent discussions from workshops indicating this is likely to be considered by consent applicants including Aoraki Water Trust.

The arable estimate presented here is significantly greater than that assumed for common arable models, however it could be justified on the basis of a sustained profile of processing vegetables (particularly potatoes) throughout the irrigation area while assuming that this production did not displace that already present in the economy. While it is acknowledged that estimates for dairy support may be appropriate, this information cannot be reconciled with MAF farm monitoring information, nor is it supported by primary data collected.

4.2 Assessment of Commercial Manufacturing

An assessment of the benefits of water allocated to commercial manufacturing is presented in Appendix G. A separate analysis of this demand was undertaken as the volumes are likely to be relatively small in comparison to those proposed for irrigation and hydroelectricity.

Even though there are limitations in the accuracy of the data available and the assumptions that pertain to calculations, the results of economic contribution are considerably greater than for irrigation or hydro-electricity generation on a per m³ basis. A conservative estimate of the industry returns expressed as a unit of water use was calculated to be in the order of some $7.50/m³, but this is considered the "extreme" lower bound estimate. Even so, the benefits are considerably greater than both irrigation and hydroelectricity per unit volume consumed.

The estimate provided assumes that additional allocations would facilitate increased productive output, and assumes efficiency levels equivalent or better than at present. A different valuation method is required to assess allocations that serve only to improve "security of supply".

4.3 Environmental Analysis

A summary of the environmental impact risk and benefits associated with the additional allocation for the respective irrigation and energy scenarios is presented in Table 15 and discussed below.

4.3.1 Additional Allocations for Irrigation

Under the scenario of additional water allocations for irrigation (described in Section 2.6.2) the most significant environmental benefits in the Upper Waitaki are reduction in wind related soil erosion, and increase in groundwater levels, which will enhance groundwater dependent features and habitats such as lower-terrace wetlands, springs, springfed stream and river baseflows. Additional irrigated agriculture is also anticipated to enhance the food supply for game birds.

The most significant risks of additional irrigation in the Upper Waitaki are loss of the visual character of the Mackenzie Basin, deleterious water quality effects in the rivers and streams, and development pressure on the remaining native grasslands. In part improved land management practices will mitigate these outcomes associated with surface runoff and infiltration to aquifers. The proposed Canterbury Natural Resources Regional plan¹⁷ provides tightened land management arrangements to mitigate the impacts of irrigation development. The Fonterra Accord,¹⁸ which has the goal of minimising the impact of dairying on streams, rivers, lakes and wetlands so they are suitable for fish, drinking by stock and swimming, provides useful guidance for dairy farmers.

Even with improved land management practices, irrigation abstraction could place additional pressure on smaller tributaries though reductions in available flow in both the upper and lower areas of the Waitaki catchment.

No significant environmental benefits or risks are anticipated in the main stem of the Lower Waitaki from expanded irrigation development because the catchment is already significantly developed for irrigated agriculture and horticulture. In addition, the estimated maximum irrigation requirement from the Lower Waitaki River (approximately 40m³/s) constitutes approximately 10% of the mean flow and 30% of the 7-day mean annual low flow, which suggests that the probability of this abstraction having a significant effect on the rivers' flushing ability and overall flow regime is low and if any for only a short duration.

4.3.2 Additional Allocation for Hydroelectric Generation

There is a general lack of information concerning the environmental effects in the Upper Waitaki from additional hydroelectric generation that would occur in the Lower Waitaki (described in Appendix B.4.1). No significant environmental benefits or risks are apparent, although it should be noted that flow regime effects in the Upper Waitaki, which are currently poorly understood or documented, are more likely to deleteriously effect rather than benefit the environmental values described in Table 15.

In the Lower Waitaki, additional generation will pose significant risk to all the environmental values considered. The most significant risk areas (even with the mitigation proposed) include Salmonid (trout and salmon) populations, and braided river geomorphology and ecosystems (birds and insects) and the interdependencies of these aspects.

4.4 Recreation and Tourism Analysis

Table 16 summarises the expected outcomes discussed in Appendix C for various socio-economic, tourism and recreational values as a result of the three main scenarios for the Waitaki catchment (upper and lower). As a result of the amount of research undertaken for the Meridian Project Aqua proposal, there is a higher level of understanding of the issues for the lower catchment than for the upper catchment, and for the hydro electricity proposal compared with the irrigation proposal.

The outcome under the two development scenarios (hydroelectric power and irrigation) should be interpreted in terms relative to the base case (existing trend) scenario. In an instance where the base case indicates a decline, (a single cross mark) then a "zero" or no-change for a development scenario would indicate an improvement, since that is what it represents relative to the base case.

The overall outcomes for the various issues are as follows:

Under the Base Case Scenario:

• Population sizes in both the upper and lower catchments are expected to decline, as a result of ageing populations. As a result of the continued ageing, the long term viability of some small communities is also in decline
• Recreation across the upper and lower catchments is expected to largely remain as it is at present. Continuation of adaptive management practices (as described in Appendix B.2) is assumed to protect the range of in-river and out of river recreational pursuits to their current levels. The current levels of congestion associated with in-river recreation is assumed to remain at its current, low, level.
• As there are no major changes to land-use incorporated into the status quo, no loss of amenity value from construction activities (whether long or short term) is anticipated in either the upper or lower catchments.
• Within the upper catchment, tourism is closely associated with the scenic route taken by coach tours and "free and independent" tourists travelling between Central Otago/ Queenstown and Canterbury. Other specialist pursuits (such as gliding and heritage tourism) add to the mix of tourist attractions in the area. Under the status quo option, no significant change is expected in the range or type of tourist activity within the upper catchment.
• Any changes to tourism in the catchment are likely to be of regional, rather than national significance, given the range of substitutes for the tourist product which are available elsewhere within New Zealand. Tourism in the lower catchment is focussed on the town of Oamaru, with several key attractions (including the blue penguins and heritage architecture) drawing in large numbers of international tourists (some 60,000 passed through the Oamaru Visitor Information Centre in 2002) as well as local tourists. In the mid-catchment tourist activity is considerably smaller, as indicated by visitor counts at the Kurow Visitor Information Centre (less than 5,000 visitors in 2002). While there have been some examples of new tourist attractions in the mid-catchment, there do not appear to be any significant emerging trends in the tourism industry which indicate a major departure from its current modest size.
• The existence values associated with the Waitaki catchment under the base case cannot be determined with certainty, but on the balance of available data and expert opinion, it appears that the existence values will experience a slight overall decline associated with anticipated changes to river geomorphology (braided structure) and water quality noted above in Section 4.3.

4.4.1 Additional Allocations for Irrigation

• The introduction of wider scale irrigation would be expected to bring significant social change, including an acceleration of the succession of land holdings to a younger, more entrepreneurial generation and an overall increase in population. For the upper catchment (Mackenzie District) irrigation would bring a significant increase which would overcome the anticipated decline entirely. In the lower catchment, the likely extent of irrigation would slow the anticipated population decline but not stop it entirely based on estimates provided in Appendix C.2.
• Recreation would remain largely unaffected by these changes, assuming that the off-site effects of intensive irrigation (nutrient and pesticide runoff, groundwater seepage) were managed effectively. Some camping grounds in the upper catchment which are located on the banks of the hydro lakes may be affected from more variable water levels. No significant congestion effects or other declines in resource quality are expected.
• There would be some loss of local amenity during the construction phase of the broad scale irrigation development, due to dust and noise associated with heavy equipment. More intensive irrigation transition may have odour problems, and increased traffic on roads.
• The existence values associated with the irrigation option are unclear, since it is difficult to predict whether the wider community will hold values for the status quo (dryland country landscape in the upper catchment and limited irrigation in the lower catchment), which would be changed following the introduction of irrigation.
• The introduction of irrigation into the Waitaki Catchment may have an impact on tourism, depending on the type of crops that were supported. The crop with the closest association with tourism, wine grapes, has already been established in the lower catchment, however the potential for expansion of wine tourism in the Waitaki catchment is not able to be determined on available data.

4.4.2 Additional Allocations for Hydroelectric Generation

• Like irrigation, the introduction of hydroelectric power into the Valley (via Project Aqua) will have both short and long term impacts on the local and regional communities. In the upper catchment, Project Aqua will not have a long-term impact on population, but will have an impact on community structure over the short-term, with the likely influx of construction workers to the lower part of the upper catchment, especially during the first stage of construction.
• Within the lower catchment, significant changes are expected to occur to the local population, with more significant social disruption associated with the proposed workforce. The long-term consequences of this inflow for the local community are unclear, as some workers may elect to stay in the area and others who are temporarily displaced deciding not to return.
• By reducing the mean daily flow of the Waitaki River downstream of the Kurow bridge, Project Aqua is expected to have a significant impact on a number of recreational activities, generally by changing the type of river flow (from a "wild" to a calmer more predictable river). Users who appreciate its current state (jet boaters, expert fishermen) are likely to lose recreational value, while others who prefer the new scenario will likely benefit from increased river access and safety (novice fishermen, swimmers, canoeists). At the same time, however, the reduced water flow is expected to increase the level of congestion between recreational users which may lead to an overall reduction in amenity. (The recommendations from NIWA that Project Aqua will not cause an overall decline in salmonid numbers has been assumed to be accurate in this assessment). The impact on other river recreation (such as regionally-significant hunting) is unclear, as it will depend largely on the capacity of local game species to adapt to the new flow regime.
• Local amenity loss from dust and noise is expected to be significant during the construction period along the proposed canal route and adjacent to borrow pits and other localised sites (such as the Kurow landfill site, etc). The impact from dust and reduced aesthetics of the river are expected to remain following the construction period and will be experienced by at least the local community.
• The large scale construction activities associated with Project Aqua would also be expected to cause delays to various road networks, many of which are potentially of national significance.

The changed nature of the Waitaki River is expected to have significant consequences for the environmental existence values of the area at a potentially national scale. It is recommended that these values be investigated in more detail as part of the overall planning process.

¹⁷Refer to Natural Resources Regional Plan [external link].

¹⁸Refer to Fonterra.com - Case Studies [external link] as an example publication.