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The Cost of Uncertainty and the Value of Flexibility in Water and Wastewater Infrastructure Planning

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Planning of urban water and wastewater infrastructures is based on assumptions about the long- term future of the service area. Important factors, such as demand development, carry large uncertainties and have a substantial impact on plant size and ultimately on costs. In this paper we attempt to quantify the economic consequences of these uncertainties for wastewater treatment plants. As a measure for the specific costs we applied the specific net present value (SNPV) as introduced by Maurer (2009). Based on an exponential growth rate model we simulated random scenarios with different demand development and their economic effect. The results demonstrate that the SNPV rises with increasing rate of demand growth or decline, as well as with increasing uncertainty about the future demand. This indicates that ignoring uncertainty in an engineering economic analysis, may considerably under-estimate specific costs. Over-sizing plants as one strategy to cope with future demand uncertainty increases the specific costs even further. Implementing flexible systems as another strategy, however, reduces such additional costs as they can follow the actual demand more closely than large centralized plants. Consequently, there is an economic value of flexibility. We discuss its role in strategic planning of urban water infrastructure.
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Keywords: engineering economic analysis; flexibility; specific net present value; strategic planning; uncertainty; water and wastewater infrastructure

Document Type: Research Article

Publication date: 2010-01-01

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