Water Trading

Discussion on the drivers and barriers to water trading
H Eggestrand, K Gan, M Moglia
Publication Date (Web): 4 January 2017
DOI: https://doi.org/10.21139/wej.2017.002

Since the Millennial Drought, the Melbourne Region has moved towards a more secure water supply system through the construction of a desalination plant and the North-South Pipeline. In addition, there has been considerable progress in the use of recycled water, rainwater and stormwater. Despite these advances, the challenges of rapid population growth and a drying climate can still put the region’s water supply under stress in the mid to long term. In recent years, the concept of trading water over a highly connected water system has gained interest as part of a range of options.

The Melbourne water supply system enjoys a high degree of interconnectedness with the adjacent systems of Western Water, Barwon Water, Westernport Water, Gippsland Water, South Gippsland Water and Southern Rural Water. These systems are further connected to their neighbours. Through the North-South Pipeline, the Melbourne system is connected to the Goulburn-Murray Irrigation District in northern Victoria. Melbourne’s three water retailers and a number of adjacent water corporations currently have the right to individual delivery entitlements from water catchments and the desalination plants in a way that facilitates trading of these entitlements.

This article combines literature review with insights from industry representatives to examine the drivers and barriers to water trading in the Melbourne Region. In all, six interviews were undertaken with water industry professionals. The literature highlights the role of markets in supporting efficient water use so that water is transferred to the highest value uses and water security benefits are shared, while costly supply augmentations may be delayed or avoided. On the other hand, such efficiency may not take social and environmental aspects into account, resulting in negative public perceptions and less water for the environment. Transactional costs in transferring water can also offset efficiency gains.
While interviewees were in agreement with the drivers and barriers identified in the literature, they also noted particular ones pertaining to the Melbourne Region. Chief among these are the limited number of potential traders and the lack of heterogeneity amongst them as they are all located within the same climatic zone. The lack of antecedent trades makes it difficult to adopt appropriate market positions especially in regard to the value of water and this is exacerbated by the current lack of clear security criteria for the supply of water. As there is a strong case for uniform water restrictions over the whole of Melbourne whenever they are imposed, any water trading that results in substantial supply imbalances amongst the three retailers is likely to require artificial corrective measures. A further barrier is the prohibition on the transfer of water through the North-South Pipeline which limits urban-rural trades.

The Victorian Government has proposed the development of clearly defined market trading rules and a five-year trial of the southern market. One approach could involve the use of agent-based gaming software whereby various players act out their decisions within a simulated representation of reality. This enables the interplay of various human, climatic, spatial and temporal factors to be explored.


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