The use of spot markets for water allocation
Research is underway throughout the world into alternative approaches to water allocation that can maximise economic efficiency while respecting environmental bottom lines and ensuring the rule of law. One innovative programme, led by researchers at the University of Canterbury, is examining the potential for a spot market for water. Building on the successful implementation of a spot market for electricity in New Zealand, the approach would accept bids for the purchase or sale of water, and then find the water allocations that optimise the economic benefit to society. The approach uses a number of constraints on optimisation reflecting the physical limits to water availability, and also reflecting environmental objectives. The latter can include a minimum stream flow constraint and a maximum drawdown constraint to limit seawater intrusion. Unlike other water trading approaches, this approach does not require negotiating and evaluating a series of transfers between pairs of users; instead, the approach can consider all water users and their unique needs simultaneously, while ensuring environmental compatibility. The research is advancing along three lines: (1) investigation of the level of model sensitivity and its effects on the operation of the market, (2) study of the potential methods of operation of the model (e.g., 'user-pays', 'user-trades', user cooperative), and (3) consultation with interest groups to identify practical concerns.