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Urban water in Australia |
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| Demand for urban water |
| Householders are the primary consumers of urban water. The Water Services Association of Australia (2005) estimates households accounted for approximately 62 per cent of total urban water use in 2000–01. Figure a displays urban water consumption in the ACT since 1960. ACT water consumption displayed strong growth during the 1960s and 1970s before peaking in the early 1990s. Urban water consumption is highly seasonal, with demand highest in summer and lowest in winter. |
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Source: Actew, personal communication, 2006. |
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| Econometric studies have used a range of variables to explain observed variation in urban water demand over time and across households. Common explanatory variables include population, income levels, water use efficiency, housing characteristics, water prices and weather conditions such as temperature and evaporation (Dalhuisen et al. 2003; Hoffman, Worthington and Higgs 2006). The responsiveness of urban water demand to changes in price has been the focus of a substantive volume of economic literature. While estimates of price responsiveness vary substantially, a number of recent Australian studies have found that demand is relatively responsive to changes in price (see box 1). |
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box 1
The price elasticity of urban water demand
The responsiveness of demand to changes in price can be measured in terms of price elasticity. The price elasticity of demand refers to the percentage change in the quantity demanded of a good in response to a given percentage change in price. Econometric techniques are commonly used to estimate price elasticities based on historical data on quantities and prices. A large number of econometric studies have attempted to estimate the price elasticity of urban water demand both in Australia and overseas. A wide range of elasticity values has been estimated, generally from 0 to –1, where an elasticity of –1 means that a 10 per cent increase in price results in a 10 per cent reduction in demand. As noted by the Productivity Commission (2008), a large amount of the variation among different studies can be explained by differences in study methodologies.
Dalhuisen et al. (2003) present a comprehensive meta-analysis of 64 US econometric studies, estimating a mean price elasticity of –0.41. A study by Graham and Scott (1997) estimated the price elasticity of residential water demand in the ACT region to be in the range of –0.15 to –0.39. Grafton and Kompas (2007) estimated the price elasticity for urban water in Sydney to be –0.35. Hoffman et Al. (2006) conducted a panel data study (data across multiple regions and over time) of urban water demand in Brisbane and estimated a contemporaneous price elasticity of between –0.67 and –0.55. Another panel data study, by Xayavong et al. (2008) for Perth, estimated an indoor elasticity of between –0.70 and –0.94, and an outdoor elasticity of between –1.30 and –1.45. |
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| Supply of urban water |
In Australia the majority of water supplied to urban consumers is captured in large surface water storages, which are reliant on catchment rainfall and runoff. Australian urban water storages are large by international standards as a result of the relatively high variability of rainfall. Figure b shows storage inflows and demand in the ACT since 1960; inflows display extreme variability relative to demand.
Figure c displays ACT total storage capacity and actual storage volumes since the 1960s. Increases in storage represent the construction of new dams. Traditionally, growth in Australian water demand has been met by the periodic construction of new dams. Until recently, much of urban Australia had received very little in the way of new water supply infrastructure for several decades. Currently, substantial investment in supply augmentation is occurring in most capital cities.
In most capital cities, a lack of suitable sites and concern over adverse environmental impacts has reduced the attractiveness of investment in new dams. The potential for climate change to result in a reduction in future rainfall and runoff has raised further concern over the effectiveness of new dams. Two of the main alternatives to new dam construction are water recycling and desalination. Both of these alternatives have the capacity to provide a stable source of water insulated from rainfall variability (at least partially* ). However, both options involve substantially higher capital and operating costs. |
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Source: Actew, personal communication, 2006.
Source: Actew, personal communication, 2006. |
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| Although not the focus of this report, another option for sourcing urban water is to acquire it through trade with rural water holders. This depends, of course, on the existence of a physical connection between rural and urban water systems, which in some cities would require investment in pipe and pumping infrastructure. CSIRO and the Centre of Policy Studies (2006) demonstrated the potential economic gains of urban rural water trade in Australia using general equilibrium modelling. The potential for urban rural water trade using options contracts is considered by Page and Hafi (2007). |
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