Social and economic impacts of the Basin Plan in Victoria February 2017

14Effects of the different approaches to water recovery

The Commonwealth has engaged in three primary approaches to water recovery to achieve the SDLs of the Basin Plan. These are:

Buyback – Entitlement purchases via a Commonwealth tender process

Delivery system water savings – infrastructure projects involving delivery system modernisation

On farm water savings –infrastructure projects involving on-farm irrigation upgrades

The costs of these are significantly different. The Department of the Environment (2014) noted that:

The ‘market multiple’ is the cost of water yield to the Australian Government compared with the prevailing market price for the same entitlement at the time of the project approval. On-farm irrigation upgrades generally yield water savings at a market multiple of between 2.0 and 2.5, whereas delivery system modernisation projects are usually more expensive in terms of the relative cost of the water savings.

However, often the outcomes of the two types of ‘water savings’ projects are considered comparable. This seems likely from comparative static analysis because:

Delivery system water savings reduce the losses incurred with delivery of water via the IIO channel network. This means that the same volume of water can be delivered to farms while reducing river diversions (by the volume of the water savings). Hence the same water can be used on farm to produce the same level of farm output.

On-farm water savings reduce the losses associated with on farm water use. The improvements to infrastructure result in greater water efficiency so that less water need be applied for the equivalent crop production.

For example, in the Department of the Environment (2014) discussion about Up-water / ‘Efficiency measures’

‘Efficiency measures’ are projects that recover additional water for the environment with neutral or beneficial social and economic impacts, such as through improved on-farm water use efficiency projects. Efficiency measures projects would be used to recover any water above the 2750 gigalitres needed to meet an adjusted SDL. These projects must do so without causing additional social and economic impacts from the overall decrease in the volume of water available for consumptive use. Some examples of efficiency measures include:

• replacing or upgrading less efficient methods of on-farm irrigation; and

• lining channels to reduce water losses within an irrigation network.

Similarly, reporting of water recovery generally reports on ‘buyback’ and ‘infrastructure projects’, where the latter is the sum of delivery system infrastructure projects and on-farm infrastructure projects.

However, this appendix suggests that there are complexities that need to be considered and that each of the three water recovery have subtly different effect on the ‘consumptive pool’ and on water markets. Each is discussed below (in the context of irrigation).

Ultimately, we conclude that on-farm water savings have effects similar to delivery system water savings in wet-to-average years, but the effects of on-farm water savings projects are closer to buyback when conditions are drier.

14.1Buyback

Buyback involves the transfer of a water entitlement from an irrigation farm enterprise to the CEWH.

This means there are fewer water entitlements available for consumption.

The seller is compensated for the sale, at the price offered under the tender. Subsequent to the sale the irrigation farm enterprise may seek to continue water use as previously (via reliance on water allocation purchases or the purchase of replacement water entitlements). Alternatively, they may adjust the farm water demands (i.e. reduced water demands, or more opportunistic irrigation) or exit. The funds from the buyback will assist with water market purchases or farm adjustment.

If the irrigation farm enterprise seeks to continue water use as before through reliance on the allocation market, at every price level it would increase the farms demand for volumes from the market (or reduce supply to market sales).

The expected effect of this would be to increase water allocation prices under all conditions (such as dry conditions when available supply is reduced form S_D1 to S_D2.

If the irrigation farm enterprise adjusts to more opportunistic water use this will lead to smaller changes (compared to above) at higher prices.

The change in individual water demand will slightly alter aggregate demand. This leads to smaller price impacts in drier years (with higher prices) than in wetter years, as compared to the situation where buyback occurs and the seller does not alter farm water demands.

If the irrigation farm enterprise purchases replacement entitlements, then the subsequent seller may react in the above ways.

14.2Delivery system water savings

Delivery system water savings projects involves the conversion of a bulk entitlement conveyance volume into a water entitlement that is then transferred to the CEWH.

This does not change the number of water entitlements available for consumption.

This means the expected supply and demand for water are unchanged and prices would not be affected.

In application, there are more complex changes caused by delivery system water savings projects that cannot be represented in the simplified diagrams above, such as earlier season access to allocations and carryover.