The cost of price stability controls: water tariff design for multipurpose hydropower reservoirs

Crawford School of Public Policy | Arndt-Corden Department of Economics

Event details

PhD Seminar (Econ)

Date & time

Friday 03 May 2019


#132 Crawford Building, Seminar Room 1, Lennox Crossing, ANU


Paul Wyrwoll


Paul Burke, Economics PhD Seminar Convener

Regulatory incentives are required for profit-motivated hydropower companies to provide water services. This paper estimates the costs of prioritising price stability over economic efficiency in the design of water tariffs for irrigation extractions from multipurpose hydropower reservoirs. A hydro-economic model of stochastic electricity prices and weather is calibrated to a reservoir in Tasmania. Drawing on this governance context, the study simulates the deployment of alternative tariffs and estimate the relative costs of deploying price stability controls across: (i) foregone hydropower profits, (ii) foregone hydroelectricity generation, (iii) additional electricity purchases (to meet an electricity supply obligation), and (iv) the reduced efficiency of water allocation (i.e. the reduced total net benefits of water use). These costs are compared to the private benefits from the indirect subsidy of irrigation water provision. A methodological contribution is a heuristic for incorporating the intertemporal opportunity cost, or ‘marginal user cost’, of water provision into water tariff design. The presentation will include an overview of the PhD thesis motivating the paper.

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