• Home
• Energy & Resources
• Water
• Water Bodies
• New Zealand Water Bodies
• 4.0 Economic Valuation

• Water

• Water Bodies

• Geothermal Resource
• New Zealand Water Bodies
• Hydroelectric Resources

• 4.1 Domestic Water Supply
  • 4.1.1 City and District Supplies
  • 4.1.2 Individual Household
• 4.2 Stock Water
• 4.3 Industrial Use
  • 4.3.1 Example of Valuation - Waimea Plains
  • 4.3.2 Ministry of Agriculture and Forestry Estimates

This chapter reviews the known quantitative information on the economic values of water, with a focus on New Zealand. Estimates of the economic value of water in New Zealand are based of few observations and few published analyses. This section summarises New Zealand studies of:

• the total economic value of water
• estimates the unit value and costs of water for domestic supply
• the unit value of water for stock watering and field watering
• the unit value of water for industrial production.

The economic value of water to New Zealand is likely to be significant. For example Waugh (1992) estimates the economic value of New Zealand's water resource at $2340 million and the economic value of water supply to agriculture, industry, and domestic sectors at $450 million. However, White (et al. 2001) consider the Waugh (1992) estimate as too low and estimate the productive value of consumptive water use alone in New Zealand at $24 billion to $25 billion based on the study of productive value of water to users in the Waimea Plains, Nelson (White, et al., 2001). These values are equivalent to a capitalised economic value of water.

An estimate of the economic value of a unit of water for domestic and industrial users is ideally based on what users are willing to pay. The notion of demand relating price (willingness to pay) to quantity applies to domestic and industrial users. Ideally, price-quantity observations would enable functional relationships to be estimated for both sectors. The reality is that this is rarely possible and estimates must be obtained using other techniques.

4.1 Domestic Water Supply

4.1.1 City and District Supplies

The value of domestic water will reflect the multiple uses - drinking, cooking, washing, toilet, irrigation, swimming pools, and so on - by households. Water demand will be a function inter alia of family size and composition, income, relative prices and household technology. Water used for indoor purposes is general thought to be more highly valued - relative to out-doors use - and least responsive to price changes (Saliba and Bush, 1987). The value attached to water will vary within a given year - summer demand for out-door use will be higher than demand during winter months. Clearly, water demand will also vary spatially - other things being equal, water demand can be expected to be higher in the drier regions of New Zealand, often because of the water needs of domestic gardens.

Estimates of water values are ideally based on willingness to pay (WTP) for urban water. However, to do this we need estimates of the quantity demanded over a wide range of observed prices to develop WTP estimates, and this data is not known to the writers. Insufficient variation in prices within urban supply areas means that there rarely is an opportunity to observe how demand responds to a price changes. Where water use is metered and priced - as in Auckland - the price paid provides some evidence on a lower bound estimate of average willingness to pay but little insight into marginal willingness to pay.

Tasman District Council (TDC) is the bulk water supplier for householders in Richmond and Brightwater and for industry in Richmond and Stoke and the water they use can be valued by a cost of alternative method. Water is supplied to these areas by groundwater taken from near the coast. The present scheme is estimated to have a capital value of $65 million, and annual running costs of approximately $1.6 million per year. An alternative scheme, should groundwater not be available for household supply, is a water-supply dams. A water dam is estimated to cost an extra $20 million of capital expenditure. The annual cost of the water dam is estimated at $2.3 million.

An estimate of the value of the groundwater resource to the bulk water supplier is the sum of the capital expenditure required for a non-groundwater scheme ($20 million) plus the difference in annual running costs capitalised at 10%. The difference in annual running costs is $0.7 million which calculates the value of the groundwater system to the bulk water supplier at $27 million. The annual water use by TDC is around 3.2 million m³/yr and therefore the annualised value of the water, at a 10% discount rate, is estimated as:

$27 million/3.2 million/10m³/year = $0.84/m³/yr

The estimated values of water for water supplies in Christchurch and the Manawatu-Wanganui region using the cost of alternative method are between $0.05/m³/yr and $0.77/m³/yr (Table 18).

Source: GNS unpublished surveys.

* Ruapehu (6 supplies), Wanganui City, Manawatu District Council (13 supplies), Rangitikei District Council (6 supplies).

Estimated water values are considerably lower in Christchurch than in other cities and councils because Christchurch has low infrastructure costs and low treatment costs. Christchurch takes it water from good-quality groundwater. Much of this water is under artesian, or sub-artesian, pressures and therefore pumpage costs are likely to be relatively low. Long supply lines (such as commonly required for the other councils listed in Table 18) are not required for Christchurch. The value of water in Christchurch is also reflected in a low cost of water supply compared with the costs of water supply to other New Zealand cities and districts (Table 19).

Renzetti (2003) provides the water price figures for Canadian water supplies:

• the smallest municipalities have an average price for residential supply of C$0.12/m³ and the marginal cost of supply is C$1.15/m³;
• for the 5 largest municipalities the average price is C$0.21/m³and marginal cost is C$0.45/m³.

The Renzetti (2003) study illustrates that average price charged is not good indicator of WTP. This work suggests that supply at the going price is not sustainable without subsidy because the average price is less than the marginal cosy of supply without subsidy.

Surveys of householders indicate that the willingness to pay to maintain water quality can be significantly greater than the cost of the water. For example an unpublished survey of Christchurch householders completed by the authors and Geoff Kerr, Lincoln University, aimed to assess the in-situ values associated with the Christchurch groundwater resource, particularly the maintenance of the groundwater quality. A total of 931 questionnaires were sent households selected randomly from approximately 85,000 households on a Christchurch City database.

Two surveys were undertaken. One survey, the "Quality Survey", addressed willingness to pay for water quality by asking people to identify whether they were prepared to pay a premium for high quality groundwater drawn from deep aquifers, rather than to meet Christchurch's water needs by drawing and treating water from the Waimakariri River.

Confidence intervals were obtained, estimating a mean willingness to pay of $628/yr/household to $640/yr/household to maintain the quality of groundwater that Christchurch now has. Christchurch's estimated household use is 50 million m³/yr, or around 600m³/yr/household. Therefore estimated value of water for water quality is around $1/m³. The average Christchurch household pays $85/yr for water (Christchurch City website) and so the average cost of water is $0.14/m³ (Table 19). The estimated value of water, as a WTP, is therefore considerably greater than the estimated cost of water for the city.

Household demand for water is typically inelastic (not very responsive to price). Recent estimates of residential demand find short-run price elasticities of -0.26 and long-run elasticities of -0.40 (Nauges and Alban, 2003). On the other hand, industrial firms in the Gironde district in France were found to be sensitive to water price. Elasticity for treated water was -1.42 at the mean-sample, varying from -0.90 to -2.21 according to the industry considered (Reynaud, 2003).

4.1.2 Individual Household

The value of water to individual households who provide their own supply is estimated using the cost of alternatives.

For example, the cost of placing a well (White and Sharp, 2002) in the Manawatu is estimated as:

Water use is estimated as 10-25m³/day of domestic wells, say 17m³/day giving an estimated annual use of 6205m³/yr. Depreciating the drilling and pump cost over, say, 10 years gives the value of water as $0.3/m³/yr.

Users may have to truck in water should their own supply become unavailable. For example the cost of trucked water in the Waimea Plains, Nelson is $12/m³ delivered to the house. This large cost shows that water becomes more valuable as it becomes less plentiful.

4.2 Stock Water

Ideally, the value of stock water to farmers would be valued using the cost for alternatives. To do this, information is required on the number of farms supplied by stock water schemes, the number of stock, estimates of costs for alternatives etc. These figures are not known to the authors.

A simple method to estimate the value of this water can be provided from an estimate of land values without stock watering, the number of animals per hectare, and the water consumption by animals. White and Sharp (2002) estimate that stock water systems in the Manawatu-Wanganui region increase land values by $50-$300 per hectare. Dairy cow density in New Zealand was 2.7 cows/ha in 1998/1999 (Dairy Board pers. comm.) and peak daily water requirements for cows are between 70L/cow/day (lactating cow) and 45L/cow/day (dry stock), (AgResearch pers. comm.). An estimate of the value of water for stock with a land value of say $100/hectare (or $10/ha/yr with a 10% discount rate), cow density of 2.7 cows/ha and 50L/cow/day (= 18m³/cow/year) is around $0.2/m³.

Stock water races provide recharge to groundwater systems (Table 17) and it is likely that this water will have an economic value to agriculture and to urban water supplies where supplies are "downstream" of the stock water systems. This value is not included in the present work.

Stock water systems also provide emergency water for fire fighting. This value is not included in the present work.

4.3 Industrial Use

Water can be viewed like other inputs - such as labour and materials - as a factor of production. Water quality can be an issue for industry. For example, water quality standards are likely to be higher in food processing and beverage industries relative to industries using water for cooling processes. Industrial use usually involves water degradation and therefore involves compliance costs, such as meeting regulatory conditions attached to water use or water discharge, which serve to reduce the net value of water to industry.

In general, water costs are a small fraction of overall production costs. Like urban water, there is little information available on the price-quantity relationships. One approach to estimating the value to industry is to base value on the cost of recycling water. Presumably, an industrial user would not pay more for water than it would cost to treat and reuse water already being used. Alternative sources of supply - such as pumping from an aquifer rather than using reticulated urban supply - provide scope for estimating value based on the least-cost alternative. Information on the least-cost alternative supply provides an upper bound on industry's willingness to pay for additional water.

4.3.1 Example of Valuation - Waimea Plains

All sixteen industrial users of groundwater in the Waimea Plains were approached in June 1999 and thirteen contributed to the survey (White et al., 2001). The classes of industry that contributed to the survey include those who process timber, animal products, fruit, and gravel. Businesses include those supplied with groundwater by the Tasman District Council. The value of these businesses with their present operation is a total of $517.4 million.

Businesses were asked how their production, therefore business values, would respond to a decline in groundwater availability. Other water supplies were options presented in the questionnaire to industrial groundwater users. This was not a practical option to the majority of groundwater users as the cost would be such to make the business uneconomic. A majority of the businesses in the survey are relatively sensitive to water availability as a decline in water availability would lead to a decline in product output. A number of businesses would close down or move out of the Waimea Plains should groundwater be unavailable.

The estimated total valuation of the fourteen businesses in the survey with no groundwater availability is $379.8 million. This calculates the value of the groundwater resource to commercial/industrial users in the sample of $138.6 million. These industries use, they estimate, 4.727m³/day of water, or approximately 1.7 million m³/yr. An estimate of the annualised value of the water is therefore $138.6 million/1.7/10 million m³/yr or $8.2 per m³/yr of water use. This estimate is at average productivity. Should diminishing marginal productivity be accounted for (along with other considerations such as the rate of substitution of water by capital) in production then the values would probably be smaller.

4.3.2 Ministry of Agriculture and Forestry Estimates

Ford et al. (2001) use estimates of national input-output tables and water use per $1 million of output in each sector of the economy to calculate direct value and total value by water use (Table 20). This information is based on water allocation and value generation for 50 industries. Direct value is assumed as value at (say) sheep at the farm gate. Total value is assumed to include other inter-industry linkages with (say) sheep production e.g. inputs from the fertiliser sector and inputs from meat processing and so on.

The use of value added (VA) as a measure of price (willingness to pay or WTP) is not ideal. The problem is that "price" in sector i is determined by WTP(i) = VA(i)/wateruse (i). Obviously other factors of production go into VA(i) e.g. capital, labour. Thus we should be careful when using the approach as a guide for water (re)allocation. For example, highVA/low water use gives high WTP/m³; lowVA/relatively low water use could also give high WTP/m³. However, the values of Ford et al., 2000 appear to be the only indicator available at the time of writing. In addition the indicator is an average and not WTP in the sense of demand price. One can accept the values of Ford et al. (2001) provided one accepts the limitations inherent in using the indicators.

The mean of the Ford et al. (2000) estimates of total value-added water values (Table 21) is $0.07million/20000m³/yr. This figure is about ten times the estimate of water value for Waimea Plains industrial users of $0.008million/20000m³/yr. The difference in values can be explained by Ford et al. (2000) including generation of "downstream" economic value by industrial users, whereas the Waimea Plains valuation approach does not.