The Cost of Alternative Water Supply and Efficiency Options under Uncertainty: An Application of Modern Portfolio Theory and Chebyshev’s Inequality

Abstract

Sea-level rise, population growth, and changing land-use patterns will further constrain Florida’s already scarce groundwater and surface water supplies in the coming decades. Significant investments in water supply and water demand management are needed to ensure sufficient water availability for human and natural systems. Section 403.928 (1) (b) of the Florida Statutes requires estimating the expenditures needed to meet the future water demand and avoid the adverse effects of competition for water supplies to 2040. This study considers the 2020–2040 planning period and projects (1) future water demand and supplies; and (2) the total expenditures (capital costs) necessary to meet the future water demand in Florida, USA. The uniqueness of this study compared with the previous studies is the introduction of a probabilistic-based approach to quantify the uncertainty of the investment costs to meet future water demand. We compile data from the U.S. Geological Survey, Florida’s Department of Agriculture & Consumer Services, Florida’s Water Management Districts, and the Florida Department of Environmental Protection to project the future water demand and supplies, and the expenditures needed to meet the demand considering uncertainty in the costs of alternative water supply options. The results show that the total annual water demand is projected to increase by 1405 million cubic meters (+15.9%) by 2040, driven primarily by urbanization. Using the median capital costs of alternative water supply projects, cumulative expenditures for the additional water supplies are estimated between USD 1.11–1.87 billion. However, when uncertainty in the project costs is accounted for, the projected expenditure range shifts to USD 1.65 and USD 3.21 billion. In addition, we illustrate how using Modern Portfolio Theory (MPT) can increase the efficacy of investment planning to develop alternative water supply options. The results indicate that using MPT in selecting the share of each project type in developing water supply options can reduce the standard deviation of capital costs per one unit of capacity by 74% compared to the equal share allocation. This study highlights the need for developing more flexible funding strategies on local, regional, and state levels to finance additional water supply infrastructure, and more cost-effective combinations of demand management strategies and alternative water supply options to meet the water needed for the state in the future.