Using Real Options in the Optimal Design of Water Distribution Networks
Publication: Journal of Water Resources Planning and Management
Volume 141, Issue 2
Abstract
Water supply systems have to satisfy water needs in terms of quantity and quality. The constant changes in urban areas require the regular adaptation of the water supply infrastructure to meet new circumstances. However, decisions to design and operate water networks have to be taken under uncertainty. Flexibility is thus the key to more robust and confident decisions. An approach called real options (ROs) can be used in these situations. This approach makes it possible to use adaptive strategies in the decision process. Some decisions can be delayed pending future conditions. Water distribution systems are very costly and complex infrastructures. Once built, their operating structure cannot be changed significantly. This work presents an innovative ROs approach to define an objective function to cope with some future scenarios in a specific case study. The objective of our proposed model is to find a minimum cost solution for the first period of a planning horizon, while considering various possible future conditions that the network could have to cope with. The results of this work show that building flexibility into the decision strategy makes it possible to take an adaptive approach that can avert future lack of network capacity. In the case study, an adaptive design of the network incurs an extra initial cost, but this cost can easily be lower than the cost of reinforcing the network in a longer planning horizon. The real value of ROs is their ability to adapt systems to different possible future scenarios.
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Acknowledgments
This work has been financed by Fundo Europeu de Desenvolvimento Regional (FEDER) funds through the Programa Operacional Factores de Competitividade (COMPETE), and by national funds from Fundação para a Ciência e Tecnologia (FCT) under grant PTDC/ECM/64821/2006. The participation of the first author in the study is supported by FCT through grant SFRH/BD/47602/2008.
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Published In
Journal of Water Resources Planning and Management
Volume 141 • Issue 2 • February 2015
Copyright
© 2014 American Society of Civil Engineers.
History
Received: Mar 27, 2013
Accepted: Feb 28, 2014
Published online: Jul 10, 2014
Discussion open until: Dec 10, 2014
Published in print: Feb 1, 2015
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