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• Appendix E

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• Waitaki Catchment

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• E.1 Description of Existing Conditions
  • E.1.1 Existing Enterprises
• E.2 Likely Potential for Viticulture
• E.3 Transition Outcomes, Irrigation Sector Expansion
  • E.3.1 Why the Sudden Increase in Irrigation Applications?
  • E.3.2 Requirements for Assessing Potential Irrigation Demand
  • E.3.3 Responses to "Over-Allocation" Issues
  • E.3.4 Potential Areas for Irrigation
  • E.3.5 Expected Land Use Change
  • E.3.6 Peak and Annual Consent Rates
  • E.3.7 "Return" Issues for Irrigation Consent Allocations
  • E.3.8 Economic Value of Irrigated Agricultural Production
  • E.3.9 Costs of Achieving Irrigation Transition
  • E.3.10 Transition to Full Agricultural Production
  • E.3.11 Economic Life of Infrastructure
  • E.3.12 CO₂ Emission Estimates from Agricultural Expansion
  • E.3.13 Support Industry and Downstream Impacts (Not Included in Assessment)
  • E.3.14 Additional Productivity Benefits of Irrigation
• E.4 Transition Outcomes, Hydroelectric Generation Expansion
  • E.4.1 Agricultural Sector
  • E.4.2 Costs
  • E.4.3 Summary
  • E.4.4 Economic Value of Lost Production

The available agricultural information is considered disparate, inconsistent, and highly variable throughout the catchment areas investigated. The data provided in this report are not definitive as they are not based on primary data collection methods. Where provided, the consistency and application of data supplied by consent applicants and workshop participants varies widely.

At best the agricultural sector information should be seen as the basic requirements for evaluation, and the data required of each consent application will require review before making any decisions on water allocations that relate to the agricultural sector.

E.1 Description of Existing Conditions

E.1.1 Existing Enterprises

The agricultural sector throughout the Waitaki Catchment consists of mainly of dryland grazing enterprises in the Mackenzie Basin, with more intensive agriculture in the Lower Waitaki Valley and the Hakataramea Valley.

For properties located in the Mackenzie Basin, a minor area (<2,000ha) is irrigated to pasture and specialist crops. Without additional water allocations to irrigation, it is unlikely that the value of production from this area will increase significantly. Information provided at the workshops suggested that current productivity was in decline, and larger contiguous parcels of land were required to ensure overall viability.

Increases in enterprise area leads to conflict with the Land Tenure review process, which is seeking to replace some of the pastoral lease land with Department of Conservation reserve. This will serve only to reduce the total production potential of the catchment, and may place threat upon the viability of existing enterprises.

Further down the Waitaki Valley, much more intensive irrigation development has occurred involving several large supply schemes. Irrigation development has enabled intensive dairy enterprises to exist in the catchment, as well as improved productivity for grazing and livestock finishing systems. A small area of horticulture has been within the lower Waitaki Catchment for a long period of time, however some indications of greater viticulture potential are apparent.

Recent consents granted will enable land to the south of the Waitaki catchment to be irrigated ("Downlands"), and smaller consents have been granted for the Lower Waitaki Irrigation Company to increase its area of supply. However the development of new large schemes is typically constrained by existing landowners' willingness to pay for irrigation supply as well as reduced ability to source funds for debt investment. Both can delay the commissioning of large new schemes.

Without additional allocations to irrigation, it is expected that usage of existing consents will increase through abstractions of water over longer periods (but within peak consent rates) to expand the area of irrigation. With continued growth, some degree of on-farm storage might be required to meet peak summer demand. As there is low penetration of volumetric metering of irrigation takes, there is a lack of information for consent holders that would prompt re-allocation of spare water to another consent holder.

E.2 Likely Potential for Viticulture

Responses from workshop participants indicated that continued development of viticulture is considered possible in the Lower Waitaki Catchment. The project team understands that Crop and Food Research have recently identified locations with suitable heat unit values, however this has not been verified. Existing grower survey data is available that indicates there has been considerable growth in the area planted to viticulture in the Central Otago region (Keesing, 2002).

Given that this investigation does not include primary research of the viticulture industry, assumptions with regard to the Waitaki catchment can only be considered broad preliminary estimates. However, some information can be developed from the information provided in the survey described above.

Keesing (2002) forecast an increase of approximately 3500ha in the regions of Canterbury/Waipara and Otago by 2005 (see Figure 8). Much of the increase in the Canterbury/Waipara category is confined to the Waipara region, and this growth is not expected to benefit from additional diversion of water from the Waitaki River. However, it is possible that the growth in the Otago region might be attributed to expansion within areas that could be supplied by the Waitaki River.

Figure 8: Projected Increase in Planted Area (from Keesing (2002))

→ Full size version of Figure 8 [11KB GIF file]

Keesing (2002) reports a forecast profile of viticulture in 2005 to consist of Pinot Noir (66%), Pinot Gris (8%), Chardonnay (7%) and Riesling (5%). Typically, these types of developments would be supported by micro-irrigation (dripper type systems) in the early growth phases. For the red winegrape varieties, water is used sparingly in order to provide for quality berry fruit that produces approximately 4t/ha at full production. In Australia, "Regulated Deficit Irrigation" (RDI) is becoming more accepted method of reducing water use for some varieties of wine grapes and a review of grower websites in New Zealand indicated that this method was being practiced in some areas.

For the purposes of this assessment, it is important to note that:

• Some of the comments received from the workshops suggested that viticulture development would tend to replace existing pasture based enterprises (where heat values were sufficient), with grazing confined to the "hill" country
• It is the experience of the consulting team that the viticulture water demands are typically 50%-75% of that required for pasture, and that for red wine varieties irrigation is used sparingly to ensure berryfruit achieves optimal requirements. Crop demands are greater during the first 2-3 years of growth, then reduce as the vine reaches maturity.

Based on the information above, forecasts of future development (and water demand) over the next 20 years are extremely difficult to make, especially as the current information suggests the local industry is within an early growth phase. Based on current (early) trends, it could be expected that at least 3500ha would transition to viticulture over this period, although this is considered a very preliminary estimate. It would be expected that only a part of this development would require access to water resources from the Waitaki Catchment.

It is important to recognise that community irrigation scheme proposals will tend to exclude this type of development on the basis that it speculates on what is considered a relatively small demand. Essentially, irrigation development must be able to demonstrate capacity to serve conservative agricultural profiles, and be viable on this basis.

However, peak demands and water supply continuity requirements are different for vine irrigation (and pipfruit) as compared to pasture. This may have implications for constructed irrigation schemes that are based upon an irrigation profile for pasture.

E.3 Transition Outcomes, Irrigation Sector Expansion

E.3.1 Why the Sudden Increase in Irrigation Applications?

Over the last 20 years, irrigation has completely transformed the agricultural productive capacity of the South Island. In the Canterbury region, irrigation has expanded to the point where existing surface water resources are reaching a maximum committed level without additional storage construction and additional groundwater supply is constrained by the costs of extracting water from greater depths. Continued technology development has reached a point where rolling country can be irrigated with reasonable investment in capital, and the economic climate is favouring dairy production, sheep and beef finishing systems. Agricultural transition to higher value production such as viticulture and horticulture is also being actively investigated in the region, and this will require financially viable irrigation development to maintain growth.

Irrigation development in the Waitaki Valley was previously constrained by the delicate nature of the soil profile and the relatively steep land outside of the terraces which lend themselves to border-dyke irrigation. Until recently it was not economical for enterprises to intensify grazing operations alongside investment in large mechanical irrigators.

The introduction of K-line systems has improved the capacity of enterprises to support grazing operations with greater drought security. While K-line technology is not applicable for large expansive areas that might be observed in the Mackenzie Basin, centre-pivot irrigators have answered this need, with the ability to ensure that soil moisture is maintained with more frequent applications of less depth than would be required for border-dyke irrigation.

During consultation within the catchment, it emerged border-dyke irrigation was considered by some as "old technology" that should not be pursued in the future. This attitude is seen as predicating the developments of today with those of twenty years ago.

Border-dyke irrigation does, however, require specific soil characteristics with a soil water holding capacity as a requirement of "roster" type irrigations applied. Provided that farm planning allows for optimal bay widths and lengths, and constructed by laser guided equipment, efficiency gains greater than 80% can be achieved.

It is largely this problem of soil water holding capacity that has restricted irrigation development in the Mackenzie Basin. As current technology (such as centre-pivots and K-lines) enables more regular management of soil moisture deficit, this constraint has been removed. However, the application of this technology requires more certain outcomes from water resource management as the following example demonstrates.

As enterprises become adept at precise irrigation to respond to soil moisture deficit using the new technology, there is increased financial risk associated with short-term restrictions, since the system cannot "catch-up" over a short time frame. While in-season shortfalls are unlikely to be seen on the main stems of the Waitaki River, this issue could emerge in smaller tributaries. Anecdotal evidence provided by workshop participants located in several tributaries of the Waitaki River suggests that this might already be occurring.

Local issues with land tenure in the Mackenzie Basin are also proving to be catalysts for transition to irrigation. Discussion at the Fairlie workshop indicated that the current negotiations of existing 99-year pastoral leases (to freehold titles or nature reserves) raised questions of how irrigation could maintain overall viability. There was a concern raised that for some freehold titles, irrigation would almost be necessary to maintain overall viability as possible aggregation with neighbouring farms would be constrained by the location of nature reserves.

E.3.2 Requirements for Assessing Potential Irrigation Demand

Irrigation development that benefits the economy must satisfy technical criteria ("Can it work?"), environmental criteria ("Does the design avoid adverse environmental impact to an acceptable level?" and financial criteria ("Should overall investment goals be attainable if capital expenditure is made?").

Provided that the constraints listed above are met, then analysis of the national costs and benefits must recognise that the lowest cost of supply will be most efficient for the national economy. This implies that the following assessments should be undertaken:

• The ability to source supply from groundwater, without significant impact to the reliability or quality of other groundwater or surface water diversions (i.e.. within a prescribed cap for the resource)
• The ability to source supply from increased yield production from in-catchment surface water resources through development of storage options (off-stream or on-stream), so as not to affect the reliability or quality of existing surface water diversions, or groundwater diversions in close proximity to surface water resources
• Where the suitable conditions cannot be found within the catchment, the costs of reticulation from a nearby catchment from either surface water or groundwater, but ensuring that the reliability of supply to existing users is not affected.
• In any cases where existing reliability of supply is affected and results in an economic outcome, that this is recognised as a cost incurred at the national level as a result of developing a new diversion.

In the case where the last dot-point requires assessment, it is critical for economic assessment of national implications to separate the economic outcomes for an "entity" as compared to the industry as a whole.

In the irrigation proposals provided to Sinclair Knight Merz as part of this study, the technical comparisons were often limited to one source of supply, presumably as other options were considered infeasible or transferability of existing allocations considered limited. The question must be asked, "Is it demonstrated that the preferred supply source for each irrigation proposal represents the most efficient option available to the enterprise, and to the nation?"

This assessment does not seek to evaluate individual proposals, and the cost information provided may or may not represent the true cost of satisfying all technical, environmental, social and cultural requirements.

The additional energy required to operate the additional irrigation infrastructure has not been included as part of the irrigation sector assessment. It is suggested that a more complete analysis would adjust the overall generation potential of the Waitaki System for additional irrigation development.

E.3.3 Responses to "Over-Allocation" Issues

Submissions received from workshop participants also reflect "over-allocation" type issues emerging in tributaries within the Waitaki Valley. Several comments indicated the increasing use of "sleeper"⁵⁹ licences, and changes to the minimum flow specifications on consent renewal.

From the perspective of an agricultural enterprise, investment to develop irrigation is considerable, and any investment is put at significant risk if the reliability of supply might decrease in the future. Reliability of supply issues fall into two categories. The first is the ability to obtain a parcel of water on an annual basis; the second is the ability to extract the water at the time required for irrigation. Generally speaking, as transition to higher value production occurs, the greater amounts of investment associated with this transition tend to demand much greater levels of reliability of water supply, and attribute less economic value to opportunistic seasonal diversion.

If reliability problems emerge after investment in irrigation transition, then this is likely to result in over-capitalisation of enterprises and redundant assets. While the example of "sleeper" licences was provided in the discussion above, similar uncertainty and investment risk is posed by "revisiting" minimum flow requirements at a time of consent renewal, and constraining the total volumetric take from that originally proposed.

Another potential problem is the occurrence of in-stream shortfall periods, which increases the requirement for on-farm storage to meet annual irrigation demands. Examples of this type of landholder response in the Hakatarmarea Valley were provided to the project team. While some landholders had taken this initiative, they have found that a combination of increased allocations and greater application of previous "sleeper" licences has since threatened the viability of several irrigation properties in the district. In response to these reliability issues within the Hakataramea Valley, a consent application has been lodged to supply some farms to ensure viability is sustained.

The project team is concerned that consent applicants have poor access to knowledge with regard to their existing reliability of supply (regardless of the actual use within the catchment). Because of this, requests for additional irrigation allocations are being sought to correct reliability issues that reflect prevailing water resource management policies.

E.3.4 Potential Areas for Irrigation

Irrigation is a significant feature throughout the Waitaki Catchment, ranging from small irrigation development areas (<50ha) to large community irrigation schemes with command areas of approximately 20,000ha. It is estimated that total area under irrigation in the catchment is in the order of 50,000ha (MAF Statistics, Agricultural Production Survey 2002).

The project brief indicated a need to identify the "significant proposals" to take water from the Waitaki catchment. While the called-in applications (presented in Table 27) give an indication of the area of called in consents, the information is not considered a complete representation as:

• the area of irrigation was not always specified, so was excluded from calculations
• the list does necessarily represent the ultimate irrigation potential of diversions from the catchment (e.g. Gravity Irrigation Scheme is missing)
• the list excludes those proposals where the irrigation consent has been granted, however has not yet been commissioned (e.g. Downlands Scheme)

Source: Ministry of Economic Development (pers. comm. 3/11/2003)

Consultation with MAF representatives, community irrigation schemes, and attendees at the workshop in Kurow yielded a considerable amount of information about the potential irrigation schemes. Several organisations forwarded information and literature to assist in the development of economic information specific to different proposals, and clarify areas where overlap was apparent. Assuming that additional consents could be granted to irrigation developments, an optimistic schedule of irrigation development over the next 20 years should at least consider the following:

• Mackenzie Basin / Ruataniwha District (approx. 10,000ha)
• Aoraki Water Trust Proposal (approx. 30,000ha)
• Lake Benmore, Lake Aviemore (approx 2,000ha)
• Other "Called in" Consents - Above Waitaki Dam (1,750ha)
• Irrigation North Otago (INO) Schemes Gravity and Downlands (approx. 20,000 - 50,000ha)⁶⁰
• Lower Waitaki Irrigation Scheme (approx 3,000ha)
• Hakataramea Valley (irrigation potential of 6,000ha)
• North Bank / Elephant Hill Area (6,000ha)
• Waihao Downs (potential for 14,000ha, 6,000ha on current consent applications)
• Other "Called in" Consents - Below Waitaki Dam (1,500ha)

Based on the information above, it is estimated that the optimistic total area under irrigation would be in the order of 124,250ha. Given that the total area under irrigation at present is of the order of 41,600ha, full development would represent an increase of approximately 200%. In broad terms, this would require the additional allocation of approximately 50 cumecs (however peak demands could be considerably higher) throughout the catchment, given that irrigation efficiency is improving, and this criteria is likely to be a requirement of future consents.

Present groundwater availability in the North Bank and Waihao Downs areas currently provides a low cost substitute to additional surface water diversions from the Waitaki catchment. If these resources became fully developed, or the cost advantage was lost due to eternal factors, then it is likely that further demand would then be sought from surface water diversions.

E.3.5 Expected Land Use Change

By expanding the current area of irrigation, it is expected that the predominant farming system of dryland grazing production models will change to more intensive grazing enterprises, and support other enterprises such as dairy, dairy support and deer. The transition is expected to be different in each of the major regions, and a discussion of each is provided.

Fairlie and South Canterbury

The data for the proposed irrigation supply to the Fairlie and South Canterbury region is that largely based on the current proposal by the Aoraki Water Trust. The project team wishes to acknowledge the assistance of Aoraki Water Trust, and in particular, Andy Macfarlane (Macfarlane Rural Business Ltd) for his assistance with collating information for this area.

The current proposal of 30,000ha irrigated on an annual basis, is expected to impact on a total enterprise area of approximately 60,000ha. It is expected that irrigation will be fully developed to to support dairy, deer and arable industries. On average it is expected that 34% of the area will be irrigated on sheep and beef, and dairy support properties.

Notes:
a) Includes "Beef and Lamb" Finishing, Breeding Ewes

Mackenzie Basin

Data from the workshop suggested the most likely applications for irrigation water were to capitalise on the relatively short, but effective summer growing season to intensify grazing operations overall. This ability is seen as crucial to support enterprise viability in the long term through providing opportunities for feed for use over the winter months.

Another message observed at the workshops was that the major incremental benefit for grazing operations was achievable on relatively small percentages of irrigation. One group commented that the majority of production benefits were reached at the time when 10% of the farm was under irrigation, with reducing marginal benefits beyond this threshold. However this is considered to be a broad generalisation, and some properties are proposing greater proportions of farm area under irrigation with current consent applications.

"Wholesale" dairy operations were considered possible in the Mackenzie but unlikely in the short or medium term. There is however reasonable opportunity for dairy support enterprises applying irrigation to provide for dry feed, run-off areas, and dairy heifers. It was estimated that 4,000ha might be put to this purpose in the workshops, but comparisons with other data suggest that this would be an upper bound.

Relatively small areas of high-value crops supported by irrigation are also seen as possible in the Mackenzie Basin, but the overall area is considered limited due to soil and climate characteristics.

Irrigation opportunity is considered to have wider land management implications in the Mackenzie Basin, and this is discussed in Appendix B.3.1.

Waitaki Catchment Below Mackenzie Basin

Projections in the remainder of the catchment identify several likely transitions. Clearly in the lower river terraces there has been a notable shift towards dairy enterprises (69% in total) over a thirty year period as Table 29 indicates.

Source: SKM (2000)

A similar profile is expected in the Morven Glenavy area on the north bank, and future extensions in the Waihao district are also forecast.

The recent availability of K-Line systems has enabled irrigation on relatively steep slopes that had not been possible previously. This relatively low cost irrigation technology has provided additional economic viability to support grazing operations. The introduction of this system has also been received favourably from a soil management perspective, with areas less susceptible to wind-blow (wind erosion) and improved capacity for direct seeding of pasture.

Proposed developments in the Hakatamarea Valley are expected to enable greater intensification of grazing enterprises, with reduced need to over-populate dryland areas. Feedback gathered from the workshops and subsequent consultation reported that the some smaller grape developments have been initiated over the past 2 years.

Irrigation North Otago

As part of the scoping study for the Gravity Irrigation Scheme (Irricon & MWH New Zealand, 2002) the land transition proposed was 40% of the area developed towards dairy production, and 60% of the area to irrigated sheep and beef production. The total area proposed to be irrigated was in the range of 47,000ha with the land use transition assumed to occur over the 5 years following the first supply availability.

While the downlands developments proposed is considered smaller (approximately 20,000ha) the expected agricultural profile suggested 55% to sheep and beef production, 21% to dairy support and arable, 15% to deer production, and 8% to dairy production. This is more conservative than the original estimates (pers. comm. Jock Webster, Downlands Irrigation Company).

The land-use transitions will not always occur with present enterprise owners. Irrigation development will attract those individuals with the skills and capital resources to develop a property to take advantage of irrigation. In some cases existing enterprises may not want to take on this risk (e.g. operators close to retirement, constrained ability to raise capital) and through property sale and transfer, land use transition is facilitated.

A summary of the agricultural profiles for the areas considered for irrigation is provided in Table 30 below. This data will be used to develop more accurate assessments of the likely change in agricultural profile from existing land use, to that when irrigation is made available.

Note:
1) The data above should not be considered definitive, and should be reviewed by the government (with independent audit) prior to making any water allocation decisions.

For the final report the production enterprise data for "Arable" and "Dairy Support" has been separated based on comments received on the draft report.

E.3.6 Peak and Annual Consent Rates

Consents for irrigation are generally specified in terms of a peak extraction rate (either L/s, or m³/d) and sometimes a secondary rate over a longer period (e.g. m³/week). For the larger developments, the peak allowance has typically calculated on the need to meet crop water demand for a 1 in 10 on-farm climatic event (e.g. Downlands, Aoraki Water Trust), which represents the short period over summer where crop water requirements were at their maximum.

Most new schemes are allowing in the range of 0.4 - 0.5L/s/ha for the peak extractions rate, and the average take across the entire year is estimated to be 40%-55% of the peak extraction rate. This should be considered a broad estimate only, as this will reflect the distribution efficiency and application efficiency of specific proposals.

Peak irrigation rates are fundamentally important for the design of infrastructure, so tend to be more visible in irrigation feasibility reports. From the perspective of water resource management, it is also important to understand the annual volumes of demand. The quotation of annual volumetric rates is more critical for schemes that have a degree of pumping, as improved productive efficiency results in direct financial benefits for irrigators. The security of these annual volumes should also be discussed to ensure that economic responses to shortfalls are catered for.

The volume of water used on an annual basis is significantly less than that for the peak flow volumes. Since metering of individual usage is not apparent for existing consent holders within the catchment (apart from inference of individual pump electricity records) so estimates of annual water demand tend to rely on non-calibrated crop water requirement models and personal experience.

For the purposes of calculating the reduced value of power generation capacity within the catchment it is more realistic to consider the volume of water extracted over a 12 month period. This valuation approach excludes the seasonality and climatic induced demand of both irrigation demands and hydro-electric power generation, factors which may change the value of lost generation capacity significantly.

The economic problem identified as a result of existing consent definition is considered to be a major source of the debate currently held in the upper catchment. For economic analysis, the greater majority of water is committed to hydroelectric generation, therefore any allocations to irrigation would remove this benefit. The quantum of the impact must be measured on the annual volume of water lost, and the appropriate opportunity cost for water.

It can be assumed that the existing consent definition for peak irrigation demands effectively "locks up" water that is not used throughout the season. However, examples have been provided to Sinclair Knight Merz where a diversion to winter storage occurs through winter months for irrigation in the summer period. Broad assumptions regarding the availability of off-season water cannot be made.

In contrast, anecdotal evidence would suggest that Meridian Energy has expressed willingness to secure access to off-season irrigation consent rights held by existing consent holders in the lower catchment if Project Aqua were to proceed. In some cases, Meridian has sought to integrate existing irrigation schemes on the south bank to increase power generation capacity.

Annual demand information is not readily retrievable from consent application information supplied by ECan, and was only included in some of the consent applicant documentation and supporting feasibility studies made available to the project team.

Economic modelling of the power generation trade-off are therefore limited by the fact that the annual water demands, if available, are not developed in a consistent manner. The project team used the following principles in applying estimated water demands in the model:

1. If provided to the project team with a reasonable basis, the estimate of annual average volume of water abstracted from the river was applied.
2. If not provided, an estimate of the annual average volume of water was calculated using both the agricultural profile expected for a specific demand (See Appendix E.3.5), and an estimate of the annual demand for each component of the profile.

The estimated irrigation demand was developed using specific calculations of water demand from pasture growth models presented in feasibility studies and consent applications, input from community consultation held within the catchment (see Table 31 below), and in the case of the Aoraki Water Trust, specific submissions received by the project team.

Notes:
a) Note only one response received
b) This is considered a lower bound estimate, given the response in the Upper Waitaki Valley (which broadly extends from Ruataniwha to Waitaki Dam
c) It was estimated that spray irrigation afforded a 10% reduction in total water application volume

The apaprent variation in required climatic conditions of the relevant irrigation demands across the Waitaki Catchment is an area of concern. At a broad level there are considered to be at least three broad zones being the Mackenzie Basin, Hill Country and East Coast. However specific annual crop water information is not available for the combination of soil types and irrigation application for all the zones considered.

The irrigation demands presented in Table 32 assume an upper and lower bound to the irrigation demands to be applied in the modelling, which was used if calculated annual demand information was not available. While the distinction between the Mackenzie Basin and remaining catchment areas appears a broad grouping, for the most demands they will reflect inclusion in either classification. The possible exception to this is the Hakataramea Valley, which would fall between the two categories.

Notes:
a) Note only one response received
b) This is considered a lower bound estimate, given the response in the Upper Waitaki Valley (which broadly extends from Ruataniwha to Waitaki Dam
c) It was estimated that spray irrigation afforded a 10% reduction in total water application volume

During the consultation process, comment was provided that the irrigation demands listed are towards the lower bound for traditional border dyke enterprises. The area of potential expansion of border-dyke operations is relatively small relative to the size of the proposed irrigation demands due to the typical landforms irrigated. Therefore the irrigation rates adopted are considered broadly representative of the irrigation demands to be experienced throughout the catchment.

An estimate of the annualised water demand was calculated by the model based on the combination of agricultural profile and the estimated irrigation demand for each profile. The estimates of annual water demand are presented in Table 33 below.

Notes:
a) Submitted by Attwells Irrigation Consultants (pers. comm. 14 Sept, 2004)

These estimates (above) are coarse, and specific information should be sought from consent applicants regarding the correct annualised take required. Comments received from Meridian Energy have highlighted the need for greater clarification regarding the ability for a consent holder to effectively "control" all volumes of water up to the peak consented rate. This creates a property rights concern beyond that of calculating the change in economic contribution for different applications of the resource.

E.3.7 "Return" Issues for Irrigation Consent Allocations

It is recognised that abstractions for irrigation application may not be considered a complete extraction from the river system due to system returns such as groundwater recharge, surface water runoff, and volumes escaping through canal bywash. If this were to occur upstream of another demand then the net abstraction from the river is considerably lower, with the lower opportunity cost to the nation as a whole.

However, if the application efficiency were to improve in the future such that recharge and runoff were minimised, it is possible that expanded areas of irrigation would then be pursued by enterprises. A consequence of this is that the net abstraction would increase with increasing opportunity cost to the nation. If water allocation has been made on the basis that returns are assumed to reenter the system, increases in the net abstraction eventually lead to over-allocation of the system.

While not actively practiced in the Waitaki Catchment, anecdotal evidence collated by the project team suggested several enterprises were actively engaged in developing on-farm recycle systems to expand the irrigated area by effectively irrigating twice from a single abstracted volume. Provided that water quality can be maintained above critical thresholds, productive capacity of the recycled water is not diminished for secondary application. The recycling described is an example of an improvement in application efficiency.

Implementing recycle dams and improvements of irrigation infrastructure will gradually decrease the potential of irrigation returns to contribute economic value downstream abstractive demands.

Young and McColl (2002) also demonstrated that transfers out of the primary catchment through reticulated water systems effectively removes any potential for returns into the system. In scenarios where future water trade moves gross application volumes of water towards these demands, the potential irrigation returns to the system decrease further, again leading to "over-allocation".

If returns are to be recognised as part of the allocation system then the irrigation application area must be defined. In the case that consent conditions supply greater flexibility with regard to transferability, then the transferable portion of the entitlement volume must be restricted to the net volume of application.

More information on the topic of returns, and a basic example of the impact is presented in Counsell (2003, pgs 66-68).

E.3.8 Economic Value of Irrigated Agricultural Production

In order to ascertain the typical economic values that represent the transitions to agriculture, the following variables become important:

• The expected increment in returns that could be expected upon transition to agricultural enterprise
• The required capital investment in order to obtain these returns
• The expected additional operation and maintenance costs of operation

The estimates presented here will suffer in the same way as many other studies about farm management in that it seeks to provide simple estimates to cover complex situations. It is recognised that all farms are unique, and would be expected to behave differently when assessing irrigation options. This analysis has aimed to identify typical ranges that can be attributed to alternative transitions, and understand the relative economic implications of one transition over another.

The agricultural returns have been calculated using data gathered at the workshops, enterprises financial data received from consent applicants. The project team ensured some degree of consistency in figures adopted by completing broad application of this data to the MAF agricultural models (using 2003/2004 forecasts) where possible. Even so, the data does not represent the accuracy that would be associated with the primary data collation from existing enterprises, or specific formal requests for each applicant to provide an economic evaluation of the consent proposal.

The typical measure of economic return for transitions is "Gross Margin", which is equivalent to the expected farm gate income, less the variable costs of production. Generally speaking the gross margin represents the cash flow available to the enterprise to cover the capital investment costs of the transition.

However this indicator has not been used for measuring the economic benefit of irrigation. Rather, a modified estimate of gross margin from farm operations (sometimes referred to Earnings before Interest, Depreciation, Tax, and Amortisation, or "EBITDA") has been used to estimate the economic contribution to the nation. This figure has removed any irrigation expenditure reported as part of the farm model. This method is able to capture the changes in variable costs and fixed costs resulting from transitions supported by irrigation with greater accuracy than gross margin alone.

Given that comprehensive economic statistics of farm management in the Waitaki Basin do not exist, any estimate for the farm output provided in this assessment should be considered with a wide error band (+/-30%). It should also be noted that:

• the prevailing stocking rate for dryland grazing could be considered greater than the 6 - 7 STU/ha adopted in some regions. If this were to increase, it would decrease the benefits attributed to irrigation transition.
• the potential returns for irrigated sheep and beef are considered to be middle bound for sheep and beef grazing. Under more intensive operations (e.g. "Canterbury/Marlborough Breeding and Finishing Model", MAF 2003e), it is expected that the contribution of irrigated area could be in the order of $1100/ha, an increase of approximately 45%.

The mid-point of the gross margin range presented in Table 34 was applied for the modelling, with upper and lower bounds used for sensitivity tests.

Abbreviations:
1 STU = 1 Stock Unit. Equivalent to the annual feed requirements of one 55kg ewe rearing a single lamb. 1 STU requires approximately 520kg of good quality pasture dry matter per year.

Limitations:
The data above should not be considered definitive, and should be reviewed by the government (with independent audit) prior to making any water allocation decisions.

Notes:
a) By comparison, MAF (2004) suggests a return of approximately $1,500/ha
b) MAF models to represent dairy support enterprises are not available; Submissions by AWT (pers. comm. Andy MacFarlane Sept. 2004) suggest that this figure could be up to $1600/ha.
c) If processing potatoes are considered within the agricultural profile, the upper bound of this estimate could be up to $3,000/ha, however the rotation constraints may also be present for this farming model.

Several comments received following the draft report focussed on the valuation of the increased agricultural production that might be associated with the irrigated grazing transition. It is broadly accepted that where irrigated grazing transitions occur for sheep and beef enterprises that a proportion of the farm will be irrigated. In the case of the Mackenzie Basin this proportion is likely to be in range of 5%-10%, whereas for South Canterbury it is expected to be between 30% and 50% for grazing enterprises.

With irrigation, enterprise pasture production is likely to increase by considerable amounts, potentially in the range of 1.5 to 2.0 times the existing volumes of digestible dry matter. This has the direct benefit of raising the potential income from the enterprise. Greater reliability associated with feed rotations may also be drivers for improvements in fertility, and the quality of finished stock which would further contribute to enterprise returns.

While this benefit may be realised across the entire enterprise, the valuation model adopted assumes that the entire benefit is associated with the irrigated component. This approach is not necessarily problematic from a modelling perspective, provided that the estimated return from the irrigation transition is equivalent to the increased economic contribution of the enterprise as a whole.

Comments received subsequent to the draft report highlighted that in addition to the production benefits described above, irrigation transition was often related to changes in enterprise ownership, with more aggressive investment in pasture management upon remaining dryland areas. These actions would also increase the value of production in the catchment, however whether the impact is attributed to enabling irrigation development is a contestable assumption from an economic modelling perspective.

Consultants assisting the Aoraki Water Trust (AWT) proposal made submissions after release of the draft report. In addition to the grazing outcomes highlighted, they also suggested alternative estimates for the the valuation of irrigation transition for dairy support and arable enterprises. While these estimates have not been included in the modelling, sensitivity analysis has been undertaken for these values. The key differences and considerations for further refinement are discussed below.

For the dairy support model, SKM has assumed a gross margin of $900/ha but recognises that MAF farm monitoring reports do not cover these operations explicitly. The AWT estimates returns closer to $1,600/ha.⁶¹

For the arable model, SKM has assumped a gross margin of $1,100/ha broadly based on the MAF farm monitoring models (MAF, 2004). The category of arable farms extends across grain, seed, and fresh and processing vegetables. Typcial gross margins are presented in Table 35 below.

Source: MAF (July 2004), pgs 13-14, 22

By comparison, the AWT submission received after the draft report highlighted the assumption of an average of approximately $2,000/ha which is within reasonable bounds, but assumes a constant proportion of processing potatoes (30%-40%) throughout the district with the remainder of the area to processing vegetables. From the perspective of a national cost benefit analysis, this assumption also assumes that additional production is an expansion of the existing industry and does not resemble a transfer of production from another region (for exmple existing processing vegetables within the Canterbury region).

SKM has not conducted a review of the potential processing industry ramifications from irrigation induced expansion, and a conservative assessment has been undertaken.

Given that such variations are recognised within the arable model, a sensitivity analysis has been performed with an estimate of $2,000/ha for the arable component of the demands above Lake Tekapo. It is also noted that the extention to the Waihao Downs development irrigation area also has a significant proportion of arable development (30%) where assumptions regarding process vegetables may also be relevant.

E.3.9 Costs of Achieving Irrigation Transition

The transition to irrigated agriculture will involve some investment of capital. These costs will incorporate the investment in infrastructure to reticulate irrigation water to the farm boundary, the costs of on-farm reticulation, and the additional farm investment required to transition towards irrigation development. The indicative ranges for these costs are presented in Table 35.

Limitations:
The data above should not be considered definitive in any way, and should be reviewed by the government (with independent audit) prior to making any water allocation decisions.

Notes:
The farm transition cost for irrigated dairy includes the following major components: Fencing & Ancillary ($1,500/ha), Dairy Shed (2,000/ha), Dairy Company Expansion ($2,500/ha). This estimate is considered an upper bound given that the degree of dairy company infrastructure investment is essentially unknown, and dairy company shares are considered a weak proxy value as these may in part represent transfer payments within the economy.

For some of the major schemes, the capital costs included in the model is considered to be at a preliminary estimate with costs within ±20% band. Those included within this category include the Aoraki Water Trust, and Downlands (including integration with Project Aqua). While a preliminary scoping study was complete for the Gravity Irrigation Scheme (Irricon Consulting et al, 2002), it is understood that more recent costing information has been prepared for Irrigation North Otago.

A similar scoping study had been completed for the Hakatamarea Valley, however the contingencies are considered to be at a level where the costs and benefits are not well defined. SKM were advised that more robust figures could be presented at the completion of a feasibility study (pers. comm. Allan Kelly 7/12/2003).

Comments received subsequent to the draft report indicated that several irrigation schemes considered for feasibility studies had off-farm capital costs in excess of $5,000/ha. In these instances it is considered highly unlikely such schemes would be financially viable for the transitions concerned, and have been ignored on this basis.

In addition to these costs, there will be annual operations and maintenance costs associated with the pressurised supply to the farm boundary, and additional costs on-farm. These costs are likely to vary considerably depending on the type of irrigation adopted, and the reticulation to farm.

For example, the annual operation and maintenance costs associated with a canal system supplying border dyke irrigation is likely to be very low, however the capital cost will be a greater proportion of the overall investment. A pumping scheme may have less capital requirements, but instead have greater operation and maintenance costs.

The annual operation costs are likely to vary considerably, with the following examples given:

• $25-$50/ha/annum were listed for existing gravity canals with gravity supply to border dyke irrigation
• $100 - $150/ha/annum appeared likely for pumped extraction from the streams or existing canals, and
• in excess of $200/ha/annum for expansive schemes that required a considerable pumping requirements, or relatively small operations that could not benefit from economies of scale.

The infrastructure cost and useful life information that is currently available across all of the potential irrigation demands varies considerably. As such, definitive comparisons between schemes should not be drawn.

For the small expansion of the Lower Waitaki Irrigation Scheme, expansion is proposed from the existing canals, so the additional costs to the farm boundary are negligible.

Because of the discrepancies between the available cost information for different proposals, it would be unwise to use the results from the model to make comparisons between irrigation proposals.

E.3.10 Transition to Full Agricultural Production

It was assumed that if any of schemes received a water allocation, that they could start development within 2 years (i.e. July 2005). For the smaller schemes is was assumed that full agricultural transition could be made within 2 years from this time, whereas 5 years was adopted for larger schemes (see Table 37). This is considered a fairly optimistic timeframe, however in the context of economic analysis highlights the need for consideration of the relative benefits of temporary allocations for water should developments not proceed as rapidly as assumed.

E.3.11 Economic Life of Infrastructure

It was assumed that the economic life of the infrastructure would relate to the size of the scheme proposed. For the larger schemes, an economic life of 70 years was adopted to reflect the large investment in pipe reticulation or canal construction, which is likely to dominate the asset portfolio. For smaller pumped schemes, the pump-station infrastructure is likely to dominate, therefore a shorter economic life of 30 years was adopted (see Table 38).

The economic life of all on-farm investment (including irrigation and non-irrigation capital investment) was estimated to be 30 years.

E.3.12 CO₂ Emission Estimates from Agricultural Expansion

Sinclair Knight Merz were asked to provide an estimate of the increase in greenhouse gas emissions as a result of the transition to more intensive agriculture. Based on the estimated changes in stocking rates the change in the amount of methane (CH₄) has been estimated. This has been converted to an equivalent amount of CO₂ using the Greenhouse Warming Potential (GWP) factors provided in the Common Reporting Format (CRF) tables of the Inter-governmental Panel of Climate Change (IPCC).

The method used should be considered a broad estimate only and is based on overall New Zealand averages for 2001. The total given is for all irrigation areas, which should be considered the upper bound estimate for possible development, and when reduced reduced to a $/ha basis assumes a specific irrigation development profile.

Source: Table 11, Chapter 5, New Zealand Greenhouse Gas Inventory 1990-2001 [New Zealand Government link]

The increase in CH₄ represents approximately 1.2% of the national total in 2001. It is therefore assumed that a proportional increase would be associated with N₂O emissions through enteric fermentation, manure management (including that to pastures). In 2001 this totalled approximately 1.018GgN₂O. The proportional estimate associated with the irrigation transition proposed above would be in the order of 0.02GgN₂O.

Both the methane and nitrous oxide estimates need conversion into a CO₂ equivalent to estimate the economic impact. This has been achieved using the standard GWP (based on those presented in Intergovernmental Panel on Climate Change [external link]) for both gas species.

The above estimate excludes the impact of additional irrigation upon the energy requirements of the country, and the carbon tax payments that would be applicable under this scenario.

Concept Consulting (2004) applied a carbon tax charge of $15/tonne of CO₂ in the energy sector. Applied to the agricultural expansion provided above, this would represent annual tax upon development of $4.6m/annum. Given that the total area estimated for irrigation is 124,250ha, the imposition of this charge would represent an increased cost of in the order of $37/ha/annum to allow intensification of the enterprise.

Comments received after the issue of the draft report suggested that the existing stocking numbers presented in Table 39 may be considered a lower bound, therefore overestimating the incremental impact of greenhouse gas emissions. It was also noted that dairy development contributes to a substantial proportion of methane emissions, and a grazing development would be associated with much lower greenhouse emission estimates per heactare. To reflect these concerns, sensitivity analysis was also performed on these variables:

• If the existing stocking rates was in the order of 14 STU/ha for dryland grazing in area outside the Mackenzie Basin (in comparison to 7 STU/ha assumed) the overall emissions charge was estimated to reduce to approximately $25/ha/annum
• If the dairy development was excluded from the calculations, it is estimated that the irrigated grazing transitions would have a emissions charge in the order of $10/ha/annum.

For the purposes of economic modelling, a lower bound estimate of $25/ha/annum was applied in the model for all irrigation demands. While this is a broad assessment, this cost represents around 3%-5% of the total present value costs that are attributed to irrigation development. It is therefore unlikely that the results for individual irrigation demands will be significantly affected by changes in the valuation of greenhouse gas emissions.

Applying a discount rate of 7.5%, and analysis period of 30 years, and assuming the charge is applicable from 2005 to 2033 (i.e.. 28 years) within inclusion of the residual payment, this would represent a present value cost of $29.7m.

E.3.13 Support Industry and Downstream Impacts (Not Included in Assessment)

Sinclair Knight Merz were asked to provide an estimate of the economy wide impacts associated with increased output from the agricultural sector. As general equilibrium modelling was not undertaken as part of this assessment, indicative estimates have not been calculated.

At this stage, the assessment only includes the direct impact associated with the expansion of the sector as the inclusion of any additional amount as a "coarse" estimate in a national cost benefit analysis has little foundation.

E.3.14 Additional Productivity Benefits of Irrigation

Additional irrigation is seen to deliver economic benefits above that of production increases, and extends into land management benefits not achievable in a scenario without irrigation. Two major examples were given of improve soil conservation, and also sustaining shelter belts that improve protection from fohn winds.

In the Mackenzie Basin, it is argued that over-stocking has placed unsustainable pressure on the landscape units, and land erosion continues to be a major problem. Continued erosion, estimated at between 4mm to 25mm over a 40 year period, reduces the ability of soils to maintain nutrients, and reduces the capacity of the soil to retain organic matter. The water holding capacity is relatively low in comparison to heavier soil types and continues to reduce as the organic matter in the soil profile declines. Because of this condition, it can be considered that the economic productivity of the land is in continual decline.

It is suggested that irrigation would allow enterprises to remove sensitive areas from grazing as increased viability is enabled through irrigation. Improved management of soil erosion could assist in maintaining the productive value of the land applied to agriculture.

By enhancing soil retention measures, it is expected that sediment build-up in streams and reservoirs might be reduced, although catchment scale changes are unlikely due to the relatively small proportion of land under consideration for irrigation.

In the Lower Waitaki anecdotal evidence would suggest that pasture development and subsequent intensive dairy enterprise has improved the organic matter of the soil profile considerably. The importance of this improved soil matter is reflected in re-boderdyke operations, where the measures are taken to ensure topsoil is removed and stockpiled, while landforming is undertaken.

The benefits afforded by shelter-belts also came to the attention of the project team. One submission estimated that the presence of shelter enabled a five-fold increase in production due to the reduction in severity of the hot and dry fohn winds. As the example shows, irrigation will also support shelter requirements, further increasing farm productivity.

E.4 Transition Outcomes, Hydroelectric Generation Expansion

E.4.1 Agricultural Sector

If sufficient allocations were increased for the purposes of hydroelectric generation such that they supported Project Aqua, it is expected that a development of this nature will have a significant economic impact on the existing agricultural enterprises that operate in the Lower Waitaki Valley. The scope of this assessment is to identify the incremental impacts of additional allocations to the power sector, and how this relates to existing agricultural enterprises.

In response to the planning processes for Project Aqua, it is evident that decisions that affect economic output from the agricultural sector are already being incurred by the existing enterprises. Media reports (e.g. 20/20 Report, TV3 2/11/2003) highlight that enterprises are taking a much shorter-term planning horizon, delaying capital expenditure, and reduced incentive to train new staff until uncertainty with regard to the allocation decision, and related consent process is removed.

Profitability for these enterprises might reduce over this period of uncertainty, in turn reducing the agricultural sector contribution to the nation as a whole. However, such costs will be incurred regardless of the decision regarding increased water allocations and are related to the length of the uncertainty period until allocation decisions are made.

This assessment concentrates on the following key issues in assessing overall economic impact of increased allocations to hydroelectric generation:

• The impacts that occur to agricultural sector as a result of increased water allocations to Project Aqua
• The degree to which these impacts are mitigated by the Project Aqua capital investment
• The economic consequences of those impacts that are not mitigated in full.

In the case that economic impacts are considered to be mitigated in full, the assessment will exclude calculation of the potential impact without mitigation. Rather, the capital value of providing mitigation will be included. The major exception to this will be the valuation of land and property, which will focus on the lost productive capacity of the land, rather than apply valuations for compensation arrangements.⁶²

This agricultural sector assessment will concentrate on the economic impact of the following issues:

• Changes to the reliability, or quality, of water supply for irrigation, stock and domestic purposes
• Decreases in river level resulting in changes to water diversion infrastructure and annual diversion costs
• Changes to the groundwater level resulting in changes to water diversion infrastructure and annual diversion costs
• Economic impact of decreases in water quality
• Lost productive capacity of land under designation requirements, or under permanent loss due to canal footprint
• Increases to the costs of production as a result of farm partition due to canal construction
• Additional production costs associated with managing seepage loss from canals
• Potential benefits for existing irrigation networks with the replacement of canal infrastructure

Each of the impacts will be assessed using information obtained from workshops, communications with various stakeholders, and information provided by consent applicants.

E.4.2 Costs

With an additional allocation to hydroelectric power generation, several issues relating to the water supply for existing enterprises are raised. In particular existing enterprises are concerned with the ongoing security of their existing surface water supply, groundwater supplies and the quality of the water available for diversion. Each of these issues will be explored in detail below.

Surface Water Impacts on Water Supply to Existing Enterprises

It is expected that with a large demand on the system such as Project Aqua, the surface water levels in the Waitaki River below Kurow would decline between 0.44m and 0.59m (Table 3-7 URS, 2003). Such a decline would increase the costs to existing water takes of approximately 2 cumecs for private diversions (12-13 no.), and approximately 40 cumecs of irrigation scheme diversions (5 no.) (URS, 2003 Figure 3-4).

For private diversions, and assuming an average total take of 2 cumecs over 100 days, the estimated additional power cost of these diversions is in the order of $50,000/annum. It is also estimated that modifications may be required to pump infrastructure to extend or replace suction lines, and improve the ability of the infrastructure to withstand larger variations in flushing flows from a regulated level. Broadly speaking, emplacement modifications might be considered in the order of $4,000 per diversion location.

In addition to the reduction of water levels, concerns were raised in submissions to the project team of the ability for diversion infrastructure to withstand the proposed variations in river flow. Examples were given where rapid changes in river flow had impacted on not only diversion infrastructure, but property damage totalling $13,000 to replace. Additional capital modifications might be required to reinforce existing emplacements in this regard.

In addition to infrastructure modifications, consultation with the chairperson of the following irrigation schemes was conducted by SKM:

• Maerewhenua District Water Resource Company
• Lower Waitaki Irrigation Company
• Morven-Glenavy and Ikawai Irrigation Company Limited

Of the schemes located on the south bank, the Maerewhenua scheme is proposed to receive supply from the Project Aqua canal, whereas no integration is currently proposed for the Lower Waitaki Irrigation Company at present. No integration is proposed for any irrigation schemes on the north bank.

All authorities have engaged in discussion with Meridian Energy with regard to the potential issues in construction and operation of Project Aqua. The decrease in river levels is assumed not to create hydraulic capacity issues for supply, but it is expected that longer inlet construction will be required to direct water into inlet ponds. The proposed impacts of flushing flows is also likely to impact upon operational expenditure with the removal of debris, and reinstatement of infrastructure however it appears that mitigation arrangements have, or will be, developed in this regard.

Outstanding concerns related to the following:

• Security of supply throughout the period of construction is also considered a major issue. Water supply shortfalls experienced during the irrigation season will have substantial impacts on yields, especially for the prevailing border-dyke systems, which operate on a fixed roster basis.
• The reduction of flows in the river that might induce additional consent conditions. The example was given that reduced flow in the river is likely to increase the density of fish, and therefore increase the risk of fish entering the screens. In response it is considered a possibility that larger allocations might bring forward capital expenditure requirements for fish screens or similar deterrents.
• Due to environmental conditions, the Morven-Glenavy and Ikawai Irrigation Company are keen to ensure that supply water quality from the Waitaki River is maintained within specified thresholds throughout construction and also during operation, such that their own discharge specifications can be achieved. Failure to achieve discharge requirements may impact upon the irrigation scheme shareholders in financial terms.

With the exception of the first issue, the impacts listed above are not specific to Project Aqua as such, but start to reflect issues with much larger total of abstractive demands placed upon a river system. As demands increase the dilution effect is lost, and the concentration of water contaminants would be expected to increase in the majority of cases. Other water parameters such as turbidity, improvements are possible with reduced variation in river flow.

Such threats are considered possible actions to bring forward investment for all abstractive users to respond to the requirements of maintaining water quality, aquatic species and habitat above certain thresholds.

If Meridian Energy were to integrate Project Aqua into overall catchment operations, it would also be expected to change the long-term operational storage levels, and therefore change the diversion cost for some consent-holders. Available information on the proposed lake operating conditions is not available in the public domain.

The operational variation in storage levels is governed by consent conditions and Meridian Energy is not necessarily liable for compensation arrangements for variations within a specified range as part of their consent. However, changes in the operational regime will impart an economic consequence to existing diverters and so should be recognised at the national level.

Meridian Energy (2002) does not provide sufficient information to understand the quantum of the variation in lake levels. Given the relatively small proportion of abstractive demands that are likely on Lake Ruataniwha in relation to other reservoirs within the Waitaki system, the benefits are likely to be positive if the proposed operational regime proposed in Meridian Energy (2002) were adopted.

It should be noted that the surface water impacts would not be realised until the commissioning of Stage 1 of the Project Aqua, with the full impact realised on the commissioning on Stage 2.

Groundwater Impacts on Water Supply to Existing Enterprises

The impacts presented in URS (2003) shows the extent of groundwater impacts that are likely to be generated by the construction, and long-term operation of Project Aqua. The economic impacts of Project Aqua to existing groundwater supply will reflect:

• bores located within the land designation and/or construction zone that require decommissioning due to construction requirements,
• declines in the prevailing groundwater level that requires capital investment for new bores (or extending the depth of existing bores), and increased annual pumping costs to maintain existing pumped supply, and,
• declines in the prevailing groundwater level as a result of removing the natural benefit of water holding capacity (through capillary action) for a small area of soils on the North Bank, resulting in the need for investment in irrigation infrastructure to maintain production.

URS (2003, Table 2-3) details the summary of estimated consented groundwater takes within the study area of approximately 40 locations, with a peak consented take of 1.317m³/s. However, there is concern that this estimate neglects a substantial number of takes for domestic and stock purposes. While the volumes of the takes are likely to be small, the capital cost of extending bore depth, or complete replacements could be substantial.

SKM (2002, Table 9) estimated a total of 110 active bores in the Lower Waitaki Irrigation Area alone, of which more than 50% were categorised as domestic (only), stock (only) or stock and domestic over an area of 16,000ha. Based on a proportional estimate, it would be expected that there are nearer to 120 bores located in the area affected by forecast declines in water levels, extracting in the order of 600,000m³/annum.

Table 41 is reproduced from Keating and Boffa Miskell (2003). It shows that the area affected by a decline in water levels is approximately 28,380ha.

Source: Reproduced from RD Keating, 2003 Addendum II Table 5

1) Note that in the report this was stated as 39,800, a minor rounding error

Declines in the water level in these areas would be likely to face an total increment in annual water extraction costs of $10,000 per annum across the region, provided that bore infrastructure was capable of maintaining yields. It is understood that ensuring a continued source of groundwater supply is a priority for Meridian Energy mitigation agreements.

Early replacement of bore and reticulation infrastructure is likely to be beneficial to landholders in that it may improve the replacement profile, but this is offset by the value of replacing a larger asset. It is possible that if the impacts from groundwater supply are mitigated with a new bore and benefits in the replacement profile are realised, then the annual impacts of increased pumping to enterprise productivity or household spending will tend to net out in economic terms.

Increases in water level can also have significant impact upon the soil drainage characteristics, and lead to productive losses through waterlogging and "pugging" impacts upon soil structure soils (MDBC, 1999a). It is difficult to determine where predicted rises in groundwater level will occur to the extent that impacts will be imposed on agricultural enterprises as the rises must increase the groundwater level above a threshold for capillary action (which is related to the natural surface level). It would also be expected within the confines of the canal alignment, with accounting for this impact elsewhere.

Impacts of Water Quality

The projected decrease in water quality (NIWA, 2003) as a result of lower flows in the river is unlikely to impose additional costs to agricultural enterprises. It is likely that the standards for the stream, upstream of the outfall to be of sufficient quality as untreated drinking water, and may increase the annual costs of treatment processes for domestic and stockwater use.

NIWA (2003) signals some risks from the continued intensification of agriculture in the catchment. If abstraction levels were to reach the level of Project Aqua, NIWA (2003, Executive Summary) highlights that "intensified agriculture poses a significant risk of impaired water quality for the lower Waitaki" and that the risk will increase if dilution capacity should reduce.

Exploring this impact further would suggest that current practices with relation to agricultural enterprise nutrient management must change in the future to meet water quality thresholds. This could be implemented through irrigation and drainage technology, fertiliser application technology, land use controls, and other management techniques. In the majority of cases, this would be expected to impose increased costs to agricultural enterprises.

While in a scenario without Project Aqua, it is possible that these issues will be addressed in response to protecting the quality of groundwater resource in the Waitaki Valley, rather than maintaining surface water quality. The imposition of Project Aqua has the potential to bring forward the potential for these controls, and have implications for economic viability of transition arrangements.

Impact of Increased Duration and Risk of Frost

NIWA (2003) reports that the construction of the canal embankments in some locations along the alignment would increase the frequency of frost frequency, and intensity. The period of risk for frost occurrence is also expected to increase in some cases. The area affected by these conditions is indicated in diagrammatic form only, with no estimate of the area affected. Using the diagrams provided in the report, the area affected is estimated to be in the vicinity of 1,000-2,000ha, however this figure should be confirmed with more accurate spatial analysis.

The gentle sloped south of the embankment could conflict with future site potential for stone-fruit and viticulture. An issue raised at the workshops was the potential for increased risk to preclude the affected land from future development to these enterprises. While this potential is recognised in the NIWA (2003) report, no assessment is made of the potential impact of increased frequency, duration, or seasonal period of influence.

Frost risk is well understood by both viticultural and horticultural enterprises and is managed though measures such as frost fans, heating sources, canopy management, overhead sprinklers, and in some cases helicopters.⁶³NIWA (2003, pg 7) reports that frosts are "common on the lower Waitaki plains". The information provided is not sufficient to estimate impact, but the following questions should be asked

• To what level to do existing enterprises invest in infrastructure to provide frost protection?
• What are the costs of operating and maintaining this infrastructure?
• Can this infrastructure effectively provide protection to the incremental frost risk consequence that might be imposed as a result of constructing a canal to support Project Aqua?

Essentially, if canal construction means that additional frost protection is needed that would make the proposal unviable, then the economic impact can be measured as to the extent that income from future land development is precluded. It should also be noted that some frost protection measures (such as frost fans, and helicopters) provide noise impacts adjacent landholders, which might seek to prevent the issue of resource consents and present a barrier to development

If the additional investment indicates the development is still viable, then the economic impact should have regard as to whether the incremental impact imposed by canal construction requires additional investment in prevention infrastructure.

In addition to incremental capital cost expenditure, the economic impact must reflect the additional annual costs associated with operations and maintenance that might be expected from increased frequency and duration of frost events for the area affected.

Impact of Land Designation, Construction Footprint and Surrounds

The construction phase of Project Aqua is likely to temporarily restrict the future production options that are presently available to some agricultural enterprises, and in a limited case remove the land from agricultural production altogether.

The economic impact to be captured from the National Cost Benefit Analysis is the decrease in agricultural sector value added. The direct impact is typically considered to be the Gross Margin (expressed in $/ha) of the farm gate revenue minus the costs of production (ignoring overheads). For consistency with other agricultural impacts, the enterprise gross margin has been utilised (see Appendix E.3.8).

Clearly, the canal footprint will exclude agricultural production, but instruments such as the Land Designation, the requirement for noise and dust buffer zones, and the disruption to farm operations will also result in further negative economic impacts. The requirements of Project Aqua are also likely to preclude future agricultural transitions, which would also imply that the current agricultural profile does not necessarily represent the opportunity lost as a result of this development.

It is expected that for the area impacted by the canal construction that it represent close to the optimum agricultural profile given the land capability, with ability to increase the current area of horticulture in limited areas where soil conditions, and heat unit thresholds are met. The ability to allow this transition is lost on areas for required for the canal, and could not be advanced until after canal construction if within the designation area, and then only after approval from Meridian Energy.

The project team understands that Meridian Energy is working in conjunction with local irrigation infrastructure groups to assist the development of future irrigation potential. The following comments refer to a hypothetical scenario raised by members at the workshops, and communication with Meridian Energy clearly indicated that the mutual benefits of integration were realised by both parties.

During the period of consultation, concern was raised about future diversions on the south bank of the Waitaki River, and the possible requirements to intersect infrastructure with the proposed canal. Concerns centred on the possibility that Meridian uses the land designation to commercial advantage over consent applicants in the future.

A typical worst-case scenario was that additional irrigation consent applications that require reticulation infrastructure to intersect the canal would require approval from Meridian. Clearly, Meridian Energy would realise financial gains in any arrangements where it was able to integrate the demand from the canal, and it would object to any infrastructure plans (or provide economic barriers through design requirements) that ensured this was the preferred outcome.

The example given above is an extremely negative view of current arrangements, as it is understood Meridian is negotiating agreements with existing and proposed water authorities to provide mutually beneficial outcomes for both parties. From a National Cost-Benefit Analysis perspective, it is difficult to predict whether this obstruction would relate to an opportunity cost of land that could not be irrigated, due to failure of negotiations with Meridian Energy to obtain consents.

Anecdotal evidence would suggest that the financial risks of infrastructure failure are considerable, and that the design requirements would be significantly greater than for a development in a scenario without Aqua. What can be concluded is that the costs of irrigation development will be greater with the canal alignment, but the benefits from integration with Meridian Energy may provide more efficient outcomes for the economy, provided that the level of service is maintained with integrated development.

E.4.3 Summary

A summary of the estimated areas for impacts is presented in Table 42 below. The quantity for the impacts have generally been sourced from Meridian Energy (2003a), Meridian Energy (2003c) and direct communications with the company. Shaded values have been estimated by the project team to represent an indication of upper bound of production impact that could occur with the inclusion of buffer zone distances. The assessments should not be considered technical assessments, but broad ranges which the impacts are expected to be within.

It is also noted that Meridan Energy (2003c) did not explicitly reference the data provided in the NIWA (2003a) which highlighted the potential loss of between 35-111ha of dairy enterprise prod

GIS data base information was applied in Meridian Energy (2003) to calculate the agricultural sector impact of the make-up of agricultural impact that might be expected as a result of Project Aqua. Table 43 indicates the proportion of the agricultural developments within the zones identified.

It is understood that in the order of 100ha of potential vineyard development, an existing cut-flower operation, and nearby orchards will also be impacted by the alignment of the canal, however these were excluded from the impact estimates provided in Meridian (2003).

Source: Meridian (2003) - Proportions based on figures presented in Table 1

This impact assessment has assumed a crop profile from the construction zone, adjusted for the proportions relating to stage 1 and stage 2 for the long-term impacts. In addition, a small percentage of the area has been re-classified from arable to "horticulture" and "viticulture" to capture this lost value.

A similar land use profile was used for the land under designation, but not permanently impacted by the canal. A "potential" land use assumption was created to reflect the transition to greater areas of viticulture and horticulture from grazing enterprises (see Table 44).

The land use assumptions for the designation scenario were also used to develop estimates of the capital infrastructure required to support such a development. It should be noted that this considered a preliminary estimate and at the upper bound of what might be expected with available data.

E.4.4 Economic Value of Lost Production

The "gross-margin" is considered the most appropriate value for the production loss that will occur as a result of the canal construction. This valuation method is conservative, in that it assumes the productive inputs will be reduced in the same proportion as the farm gate returns. It is likely that the disruption associated with canal construction will actually raise the costs of production (and decrease the gross margin) in response to management of varying requirements for construction management.

The agricultural returns have been calculated using data gathered at the workshops and enterprise financial data received from consent applicants. The project team ensured some degree of consistency in figures adopted by completing broad application of this data to the MAF agricultural models (using 2003/2004 forecasts) where possible. Even so, the data does not represent the accuracy that would be associated with the primary data collation from existing enterprises.

The typical measure of economic return for transitions is "Gross Margin", which is equivalent to the expected farm gate income, less the variable costs of production. To simplify the inputs to the model, it was assumed that the contribution from the irrigation sector (see Appendix E.3.8) would be of similar quantum to the change in gross margin. However, given that the fixed costs are likely to remain similar to the present, the impacts calculated using this method could be underestimated by up to 10% using this method.

Based upon the data presented above, the economic impacts of canal placement have been estimated. The results reflect an upper and lower bound on the potential impacts that might be observed. It is recognised that data on the existing groundwater infrastructure is a "guesstimate" but seeks to highlight some omissions from the Meridian AEE documentation.

⁵⁹"Sleeper" or "Dozer" licences are descriptions used for those consent volumes that are currently allocated, but not actively applied to irrigation. Without access to system security information, subsequent consent-holders observe a reliability of supply greater than if the "sleeper" licences were activated, possibly leading to over-capitalisation of the enterprise. As "Sleeper" licences are activated, these properties experience a decrease in the reliability of supply and may suffer significant economic losses if they are unable to access other consent volumes.

⁶⁰It is noted that the Downlands Irrigation proposal has already obtained a consent for approximately 8 cumecs.

⁶¹This estimate is based on additional production over the whole farm including the dryland areas, but calculated over the irrigated proportion of the farm.

⁶²Compensation arrangements for a resource (e.g. land) represent "wealth transfer" from one party in the nation, to another party with no net economic impact. A national cost-benefit analysis must seek to calculate impacts based on the opportunity cost of alternative productive application of a resource.

⁶³Refer to West Australian Department of Agriculture, Frost Prevention and Protection [external link] and Ministry for Agriculture and Forestry Frost Protection - Resource Consents for Wind Machines [New Zealand Government link]