Water conservation cost-benefit analysis guidelines

Analysing the costs and benefits of water conservation measures

Water conservation is a key element of the NSW Government’s integrated approach to looking after the state’s water resources.

We’re committed to supporting water conservation investment across all sectors. We want water utilities to have the necessary capabilities and processes required to evaluate water conservation measures. This includes using standard cost-benefit frameworks.

Water-conservation initiatives are one part of the portfolio of options a utility can use to manage water security. It is critical that sound evidence and an adaptive analytical framework guides decision-making and identifies water-conservation measures that provide value for money.

Cost-benefit analysis is an economic tool that identifies where and when water conservation measures can deliver additional or incremental value or net benefits to the community. This analysis compares the economic, social, and environmental costs and benefits of different options and converts it to a single monetary (dollar) metric. Utilities can readily apply cost-benefit analysis to water conservation and broader integrated water cycle management decision-making, including water security.

Cost-benefit analysis requires proponents to be clear about the objective, the potential options for achieving the objective, and the transparent evaluation process comparing these options. Our guidelines are an accessible and user-friendly set of “instructions” for conducting a cost-benefit analysis to demonstrate the value of water conservation. We designed the guidelines to accommodate a range of audiences.

Utilities can apply the guidelines to governance or investment decisions covering water efficiency, leakage management, or small-scale water reuse. The guideline complements other measures to manage water security and meet community objectives, or it replaces those measures. We suggest using the guidelines in conjunction with our supporting catalogue of values. Utilities should seek professional advice before making final decisions about options arising from any cost benefit analysis.

More information

• Download About the guidelines PDF, 2020.18 KB

Performing cost-benefit analysis doesn’t have to be complex, detailed, or expensive. Even a simple analysis can be informative and cost-effectively support decision-making. We know this because a cost-benefit analysis “framework” is primarily a process for organising the available information in a logical and methodical way.

There are 6 broad steps to cost-benefit analysis.

Key steps

• Step 1 - Define the problem or business need – the objective.
• Step 2 - Define a base case and range of alternative options. In most cases, the base case and options should achieve the objective.
• Step 3 - Identify and value, where appropriate, the incremental economic, social, and environmental costs and benefits of the options. This is relative to the base case.
• Step 4 - Compare the costs and benefits of the options to the base case to identify the expected net present value (NPV) and benefit-cost ratio (BCR).
• Step 5 - Account for key risks and uncertainties that could impact the economic, environmental, and social costs and benefits of the options.
• Step 6 - Undertake distributional analysis to identify the options’ beneficiaries and cost-bearers.

More information

• Download the Steps required to undertake a cost-benefit analysis PDF, 4448.15 KB

How to value water conservation’s economic and social costs

Water-conservation measures should consider all costs associated with the testing, planning, development, delivery, operation and, where relevant, disposal of assets over the modelling period.

We’ve described a methodology for valuing key economic and social costs and benefits of water-conservation measures and approaches.

Costs and benenfits

Economic costs and benefits include:

• the upfront and ongoing costs of the water conservation measure
• the value of avoided costs to meet growth in water demand
• the avoided costs of responding to drought, including under any local water utility’s drought-response plan
• the value of avoided capital and operating costs related to a wastewater network
• the value of avoided capital and operating costs related to stormwater management
• the avoided cost of managing degraded water quality/managing a water quality event
• the avoided input costs of water-intensive appliances.

Social costs and benefits include:

• the avoided cost of water restrictions on the community
• the avoided cost of a shortfall (insufficient water supply) on the community
• the avoided infrastructure footprint
• amenity and recreation benefits arising from greater availability of irrigated open space
• health benefits resulting from reduced inactivity in the form of reduced mortality and morbidity
• urban heat-related benefits from providing irrigation
• urban cooling-related benefits
• impact on utility reputation and goodwill (qualitative)
• impact on sense of community (qualitative)
• impact on mental health outcomes (qualitative).

Overview of commonly identified costs and benefits trimmed

More information

• Download the Valuation methodologies PDF, 1260.4 KB
• Download the Template catalogue XLSX, 178.96 KB
  The template provides a catalogue of generic values of costs and benefits for water conservation. Use this catalogue to determine values that apply to your community when you conduct a water conservation cost-benefit analysis. You may also include additional values which are specific to your community.

Applying the cost-benefit analysis guidelines

We’ve developed 3 case studies as examples to help water utilities understand how to apply cost-benefit analysis in real-world contexts. These illustrative case studies consider geographically different communities with small, mid-size or large populations.

In each community, all water conservation options must balance supply and demand over time to provide an acceptable level of water security as demand grows and as periods of water scarcity potentially become more severe.

To support the case studies, we’ve developed a set of generic assumptions about water use, population growth rates, water conservation measures, water restrictions and drought responses. However, water utilities considering specific water-conservation measures should develop assumptions specific to their needs, rather than use these generic assumptions and results to support their evaluation.

Case study A: Large population, coastal NSW

A coastal metropolitan water utility considers how to deliver water security to about 750,000 customers. Its options are:

• Base case, “business as usual” approach to managing supply and demand including construction of dam to manage growth in demand and use of water restrictions with potential for investment in climate-independent supply (such as desalination) as storages fall.
• Option 1: Base case plus additional leakage management,  on utility and customer side of the meter.
• Option 2: Base case plus additional demand management, water efficiency, and rainwater tanks.

Download case study A PDF, 968.98 KB

Case study B: Small population, inland NSW

An inland local water utility considers how to deliver water security to 2,500 customers. Its options are:

Base case, “business as usual” approach to managing supply and demand including construction of large-scale recycling to manage growth. This may include additional groundwater extraction, trucking, and water restriction measures as storages fall.

Option 1: Base case plus additional leakage management, on utility and customer side of the meter.

Option 2: Base case plus additional leakage management, demand management, and water efficiency.

Download case study B PDF, 951.22 KB

Case study C: Mid-size population, inland NSW

An inland local water utility considers how to deliver long-term water security to 15,000 customers. Its options are:

Base case, “business as usual” approach to managing supply and demand including construction of a pipeline to extract additional supply yield from existing water supplies, for example, joining existing dams.

Option 1: Base case plus additional small-scale on-lot supply and reuse. Rainwater tanks and on-lot recycling, including greywater.

Option 2: Base case plus additional small-scale supply and reuse, demand management, and water efficiency.

Download case study C PDF, 890.8 KB