Economic Analysis of Long- Run Water Management

by

Eli Feinerman (Hebrew University) Israel Finkelshtain (Hebrew University) Franklin Fisher (MIT) Annette Huber-Lee (SEI) Brian Joyce (SEI) Iddo Kan (Hebrew University) Ami Reznik (Hebrew University)

Funded by the Parsons Water Fund Water Management in Israel  Property rights: By law, all water sources are state property, centrally managed by the Water Authority.  Managing water supply: . Extraction licenses and fees based on metering; . Contracts with desalination plants and wastewater- treatment plants. . Preparing a long-run program of infrastructural development.  Managing water consumption: Prices and quotas (increasing block-rate tariffs) of freshwater, treated wastewater and brackish water, for urban, industrial, agricultural and environmental uses.  Management considerations: Supply reliability, cost recovery, equity, efficiency, externalities.

The Multi- Year Water Allocation System model Topology

Model Topology Sea Water and Urban Waste Water National Brackish and Water Sources Agricultural Ground Water Natural Fresh Demand Treatment Carrier Surface Water Demand Nodes Desalination Water Sources Nodes Plants Junctions Sources Plants 3100 3000 1100 1000 Golan 1200 5000 Golan Sea of Galilee Golan Carmel • 16 aquifers Golan Zalmon Coast Local 3001 Eastern 3101 Galilee 1201 1001 Tzfat Tzfat Golan 3002 Western • 19 wastewater treatment plants Galilee 1202 3102 Kineret 1002 Kineret Western Kineret 3003 GW Lower Jordan 1101 River Hadera 3103 1203 5001 Menashe WG Acco Beit Shean • 3 surface reservoirs 3004 Local 1003 Jordan Valley Western Galilee 1204 3104 Kishon Haifa 3005 Carmel Coast 1004 • 5 sea-water desalination plants 1205 Lower Galilee 3105 Western 1102 Jeezrael 3006 Hadera Galilee Palmachim Valley 1206 5002 1005 3106 3007 Jordan Metzer Eastern Aquifers • 4 brackish-water desalination plants Jordan Sharon South Valley Eastern Valley Local 3008 1207 3107 Judea and 1006 North Coast North Mountain Judea and Samaria Samaria 1103 3009 1208 Ashkelon Tel Aviv Central 3108 Coast 1007 Hadera Carmel Coast 3010 1209 5003 Lod Rosh Haain Yarkon Carmel Demand Regions 3109 Coast Brackish 1008 Sharon 3011 Northern Coast Jerusalem 1210 Nesher 1104 Southern 3110 Coast Petah Tikva 3012 1009 • 18 agricultural regions Modieen 1211 Central Coast Shafdan 3111 Tel Aviv 3013 Adolam 1212 5004 1010 Southern Achisemech Southern Central Mountain • 21 urban/industrial regions Coast Coast Brackish 3112 3014 Ramle Granot 1213 1105 Judea and Negav Samaria 1011 3015 Southern Coast 3113 Western Rehovot Negev 1214 Shfela 3016 1012 3114 Lachish Negev Coastal GW Jerusalem 1215 5005 Holda Negav Negev Coast Brackish Connections 3017 1106 Ramat Negev Arava 1013 3115 Southern Ashkelon 1216 Mountain 3018 Negev Dead Sea • 183 pipelines for fresh water 3116 1217 1014 Negev Negev Aquifer 3019 Dead Sea Arava

3117 1218 5006 1107 Arava Arava 3020 Zohar Eilat Brackish 1015 • 58 pipelines for marginal water Eilat Arava Arava Topology

Freshwater System Freshwater + Non- Wastewater System Fresh water system freshwaterFresh and Brackish - Agriculture water for Waste water system 3002 Agriculture Western 3001 3000 Eastern Galilee Golan Golan Galilee WG Local Golan GW Local Western Galilee Western Kineret Golan WG Local Local 3003 Western Galilee GW Sea of Galilee Golan GW Lower Jordan 1202 1201 1200 River Golan 3103 1205 Kineret Tzfat 3001 3000 Acco Western Galilee Eastern Galilee Golan Carmel 3100 1204 Coast GWD 3103 Golan Kishon 3102 3101 3100 Acco Kineret Tzfat Golan 3002 Western Kineret 3102 3101 Carmel Coast Western GW Galilee Sea of Galilee Kineret Tzfat Lower Galilee 3104 Haifa 3006 3006 3003 Carmel Coast 1203 Carmel Coast Beit Shean Lower Jordan 3108 River Hadera Hadera 3105 3004 Zalmon Jeezrael Valley 3106 SWD 3105 Eastern 1207 Jordan Valley Jordan Valley Jeezrael Valley Local North Coast 3104 3007 Lower Galilee 3007 Carmel Coast Haifa Hadera Menashe 3009 Hadera Northern Coast 3109 Judea and Sharon Samaria 1206 Jordan Valley 3004 Zalmon 1208 Northern Jordan Valley Central Coast 3008 Metzer 3008 Sharon South Mountain 1213 Sharon South 3110 Judea and Carmel Menashe Petah Tikva Samaria Coast 3108 Brackish 3106 Eastern Hadera Jordan Valley Local 1209 3107 Central Coast Yarkon Eastern Aquifers 3111 Judea and Rosh Metzer Samaria 3010 Tel Aviv 3010 Haain Northern Coast Tel Aviv Tel Aviv 3011 3107 Lod 3013 Judea and Eastern Aquifers 3011 Central Samaria Lod Modieen 3012 Mountain Jerusalem 3009 3005 1211 1210 Judea and Dead Sea Northern 3109 Rosh 3005 Palmachim Achisemech Samaria Shafdan Nesher Dead Sea SWD Mountain Sharon Haain 1214 3014 3012 Adolam Jerusalem Shfela 3114 Jerusalem 3112 3114 Ramle Jerusalem 1214 3013 Dead Sea Southern Coast Holda Modieen Central Coast 3110 Petah Tikva Achisemech 3018 Lachish

3014 3112 3015 Adolam Central Mountain Granot 3111 Ramle 3015 Southern Granot Coast GWD Tel Aviv Zohar Holda Southern Coast 1212 Brackish Southern Coast 3113 3019 Ramat Negev Ashkelon Negev Coastal Southern 3018 Rehovot SWD GW Mountain Lachish Southern Coast 3115 3113 Ashkelon Rehovot Negav Brackish Zohar 1215 Negev Coast 3019 Negav GWD 3115 3117 3118 Ramat Negev Arava Ashkelon Negev Arava 3016 1216 Southern 3016 3118 Western Negev Negev Western Negev Mountain 1218 Arava GWD Eilat S/GWD Arava Arava Negev Aquifer Negev Coastal GW Negev Aquifer 3117 Negev

Arava 3021 3020 Brackish Arava 3021 3020 Eilat Arava Eilat Arava

Inter-regional connections actually turn Israel into one water basin. Demand Functions  Urban-sector demand: Constant-elasticity demand functions based on Bar Shira, Cohen and Kislev (2005) + calibration.

   Q     The demand grows in time.

 Agricultural-sector demand: Incorporates the substitution between freshwater, treated wastewater and brackish water; calibrated, using elasticity estimates (Bar Shira, Finkelshtain and Simhon, 2006) and regulations for exchange rates.  QQQ  w    Optimization  Nationwide allocation: For each year, determines the optimal water production by sources (aquifers, reservoirs, desalination plants, wastewater treatment plants) and inter-sector water allocation (urban and agricultural demand regions).

 Intra-agricultural sector allocation: For each year, characterizes the optimal allocation of fresh, brackish and recycled water to the various agriculture regions.

 Infrastructure capacities: Determines the optimal course of infrastructural capacity extensions.

 Exogenous factors: Costs (energy, operation, maintenance, capital), natural recharge, demands, constraints (aquifer’s minimal stocks, sewage treatment, end-point constraints). Scenarios  Optimal Solution: MYWAS maximizes the present value of net benefits over a specified time period. The model produces the water shadow values – forming the basis for an efficient pricing and scarcity-charge policies.  Administrative Tariffs: First, a pricing scheme dictates the water consumed by the various consumers; Then, MYWAS searches for the solution that minimizes the costs associated with supplying the water demanded by each consumer.  Assumptions: Urban demand for freshwater increases in time. All sewage must be treated, and then treated wastewater can be used in agriculture. Consumptions and Average VMPs

Administrative Tariffs Optimal Solution 3000 4.5 3000 4.5

4.0 VMP/MWTP/Prices ($/CM) 4.0

2500 2500 3.5 3.5 VMP/MWTP ($/CM) 2000 3.0 2000 3.0 2.5 2.5 1500 1500 2.0 2.0

1000 1.5 1000 1.5

Consumption (MCM) Consumption 1.0 (MCM) Consumption 1.0 500 500 0.5 0.5 0 0.0 0 0.0

Industrial Agriculture Urban Industrial VMP Agriculture VMP Urban MWTP/Price

Under both scenarios water consumption in the urban sector increases due to population growth. Under Administrative Tariffs the freshwater price is too high. Agricultural Consumption of Water Sources and Average VMPs

Administrative Tariffs Optimal Solution 1100 0.7 1100 0.7 1000 1000

0.6 0.6

900 900 VMP/Prices VMP/Prices ($/CM) 800 800 0.5

0.5 VMP ($/CM) 700 700 0.4 600 0.4 600 0.3 500 0.3 500

400 400 0.2

0.2

300 300 0.1

Consumption (MCM)Consumption Consumption (MCM) Consumption 200 200 0.1 0.0 100 100 0 0.0 0 -0.1

Saline Recycled Fresh Fresh VMP/Price Rec VMP Saline VMP

Under both scenarios: treated wastewater replaces freshwater. Under Administrative tariffs: larger use of brackish water, lower use of freshwater and treated wastewater. Freshwater Storage Capacity, Stocks and Shadow Values of Stock Minimal Constraints

Administrative Tariffs Optimal Solution

6000 0.60 6000 0.60 ScarcityRents ($/CM)

5000 0.50 5000 0.50 ScarcityRents($/CM)

0.40 4000 4000 0.40 0.30 3000 3000 0.30 0.20 2000 2000 0.20

0.10

Quantities (MCM) Quantities (MCM) Quantities

1000 0.00 1000 0.10

0 -0.10 0 0.00

Storage Capacity Storage Scarcity Rent

Under both scenarios the storage is low, and in many aquifers it hits the minimal low-level constraint. Desalination Levels and Shadow Values of Desalination-Capacity Constraints

Administrative Tariffs Optimal Solution

600 0.25 600 0.25 Shadow Shadow Values ($/CM)

500 500 Shadow Values ($/CM)

0.20 0.20

400 400

0.15 0.15

MCM/yr) MCM/yr) 300 300 0.10 0.10

200 200 Quantities ( Quantities

0.05 ( Quantities

0.05 100 100

0 0.00 0 0.00

Palmachim Production Ashkelon Production Hadera Production Sorek Production Palmachim Capacity SV Ashkelon Capacity SV Hadera Capacity SV Sorek Capacity SV

Under both scenarios the desalination capacity does not reach the current existing capacity of 600 MCM/yr. Treated Wastewater Production and capacity

Administrative Tariffs Optimal Solution 800 800

700 700

600 600 500 500 400 400

300 300 Quantity (MCM) Quantity Quantity (MCM) Quantity 200 200 100 100 0 0

Capacity Production Conclusions W.R.T. Administrative Tariffs  Welfare loss under the administrative prices: $100 millions/year.  Freshwater consumption is too low  the price is too high! This is because the price serves as the single instrument for cost recovery. Policy recommendations:  Prices should reflect marginal costs only.  Recovery of fixed costs should be achieved through charges that do not affect consumption (constant payments and/or connection fees).  Optimal desalination capacity accumulates to 500 MCM/yr – far below the current capacity of 600 MCM/yr. Policy recommendations:  Slow down the capacity extension process.  Do not operate the entire existing capacity, or sell water to neighbors at marginal desalination costs. MYWAS as a Framework for Analyzing the Water Nexus

 Agricultural policy and technological changes: Affect the agricultural water demand.  Energy policy: Affects the supplying costs (mainly desalination).  Environmental policy: Water for nature and for future generations can be introduced as a constraint and/or as part of the objective function. Positive and negative externalities of agriculture can be incorporated. Thank You