A real options approach to the design and architecture of water supply systems using innovative water technologies under uncertainty

Abstract

Water supply has become a priority for developed and developing nations of the world. Conventional water resources alone cannot meet the growing demand for water in urban cities. Management of the problem is amplified by uncertainty associated with different development strategies. Singapore has limited conventional water resources and progressively architects its water supply system through acquiring and sustaining multiple (alternative) water resources through innovative technologies. The full rationale and merits of such a policy cannot be properly understood based on traditional project valuation methods alone. This paper provides decision support using a real options approach by evaluating innovative water technologies from multiple perspectives under uncertainty. This paper demonstrates that incorporating innovative water technologies into water supply systems can concurrently improve water supply from the financial, political and socioeconomic perspectives. The development of innovative water technologies provides flexibility to the water supply system, and is a fundamental and effective means of risk management. The evaluation of innovative water technologies is based on an integrated real options approach, which provides decision support for architecting water supply systems under uncertainty. The approach gives specific tangible values for the water technologies and complements the general prescriptive Integrated Water Resources Management (IWRM) framework. © IWA Publishing 2012.