Having assessed the benefits and costs of a programme, a utility planner will be able to identify beneficial measures for implementation. Comparing economic impacts of different implementation strategies for the same measure will also help determine an economically feasible course of action when delivering these measures to customers. A benefit-cost analysis provides a direct comparison of the value of the water demand reduction from specific measures with that of the additional water supplies that would otherwise be needed (such as building a new water storage reservoir, increasing the existing system supply capacity, etc.) either to accommodate increases in demand or successfully manage long-term water supply shortages.
7.2.1 Responsibility of the efficiency programme manager
The duty of an efficiency programme manager is to focus the evaluation on the following key objectives or outcomes:
(a) Provide detailed documentation and defensible, referenced data for costs and benefits This is a critical objective, as it will enable an efficiency programme manager to justify measures when questioned on the projected outcomes by policy/decision makers and the public. Some information may not be available or assumptions may have to be made about data; these should be noted and openly discussed with decision makers. These data gaps may possibly be filled with research from pilot programmes as the water efficiency programmes begin.
(b) Ensure clarity and consistency in accounting perspective
Benefits that are specific to the audience being evaluated need to be explained carefully and accurately (subject to data availability). Benefits to the water supply utility are compared only to the costs to that utility.
Benefits to the customers are compared only to the costs to those customers. Full societal costs are accounted for as costs accrued to the utility or customers, as appropriate.
If a financial incentive is to be given to customers, this is viewed as a benefit from the customer perspective. However, a subsidy provided to customers is a cost from the utility perspective. All details on what is considered a cost or benefit should be well documented.
(c) Verify that customers have an interest in voluntary programmes or can have mandated participation in programmes being proposed
One mistake can be copying a practice from another community and assuming that it will be equally or more successful in a different community without consideration of local demographics, community patterns of water use, or local laws and regulations that may need to be added or changed. If time permits a survey can be done or a small pilot program run to verify that the measure will work in the community. A ten step guide to creating a successful pilot project is provided in Chapter 9.
(d) Establish a baseline water demand and a tracking mechanism for water efficiency activities that should be put in place prior to beginning the programme
Reviewing what water demand reductions have occurred can be challenging, especially when a lack of records for the type of measure, number of installations or events, and dates are unavailable. This missing information leads to a lack of documented water savings and credibility of programme successes, and ultimately may lead to a curtailment in funding. In addition, if adjustments to the
programme are needed, analysis of this data will prove useful to making suggestions for improving the programme.
(e) Provide adequate staffing for implementation, tracking and follow-on analysis for individual water efficiency measures
Programmes with a mismatch between scope (number of measures) and the labor and resources required may be a key reason for any lack of success. Providing details (such as staff hours and costs of materials) concerning each measure will enable planners to determine whether measures will be highly successful in achieving anticipated water savings, or whether they will be underperforming (e.g., requiring more staff support or funding) or discontinuation.
7.2.2 Benefit-cost analysis methodology
The primary reason for undertaking an efficiency programme is to avoid, defer and/or downsize any future capital water supply project in addition to lowering a water supply utility’s current operating (labour, energy, chemical) costs. Any of these cost savings will translate into a benefit from a utility perspective. Planners should be consistent in using conventions and assigning data to benefit or cost columns based on how they accrue to the water utility (cost or benefit). Estimated costs are based on the projected costs of implementing individual measures in the programme, including staff time. A detailed example of how to set up a benefit-cost evaluation is provided in Appendix 4.
Box 7.1 provides some suggestions for small and medium sized communities on how to approach benefit-cost analysis.
BOX 7.1 SIMPLE APPROACH TO ESTIMATING COST EFFECTIVENESS FOR SMALL COMMUNITIES
For very small to medium-sized water supply utilities (less than 10,000 connections to as many as 100,000 connections), a straightforward and basic approach to benefit-cost analysis may be adequate. A full-scale benefit-cost analysis will not be necessary for a successful programme.
However, it is recommended that planners pursue a more detailed evaluation to enable better-informed decision-making, especially when significant levels of funding support are being requested.
A more informal comparison by a utility of the benefits and costs may be appropriate to making decisions. This streamlined evaluation may simply involve comparing a planned programme to another utility’s programme with similar goals and objectives. This simple approach can help in formulating a budget by using the cost per person from the other utility multiplied by the population to be served. In other words, take the annual budget of a successful water efficiency programme and divide it by the corresponding service area population; then multiply the cost per person for the same planned efficiency measures by the service area population in order to determine an estimate for an annual budget request. For example, if a neighbouring utility has 50,000 connections and a successful school education programme for US$ 5,000 per year, a planner may make an estimate based on his water utility’s connections of, say, 15,000 (15,000/50,000)×US$ 5,000=US$ 1,500.
This simplified approach works well when the number and types of connections are similar. For example, if a neighbouring utility has several large industrial customers and many commercial connections, the focus of their programme may be on non-domestic efficiency measures. Therefore, it would not be good practice to compare that utility’s efforts in domestic water efficiency measures to the service area of the utility making the evaluation, if the customers of the latter utility are domestic users.
Source:For more information, planners may review Water Conservation for Small and Medium Sized Utilities by Green and Maddaus (2010).
Many water utilities around the world use benefit-cost analyses to evaluate and select an efficiency programme best suited to meet local community needs and the water supply utility situation. A benefit-cost analysis requires local-specific data about water use and demographics. Figure 7.1 illustrates the basic methodology for benefit-cost analysis.
Figure 7.2 can be explained by the following steps (which are further defined with formulas for actual calculations in Appendix 4:
(a) Collect the projected population growth from local, regional and provincial planning agencies, as this can be useful in forecasting water account growth (see Chapter 3);
(b) Develop a baseline projection of total water demand without taking into account efficiency.
(Total demand may be estimated by multiplying the number of connections by type by the average domestic account usage and average business account usage etc.) Surveys may be conducted in order to estimate this information for the ‘typical’ customer’s end uses if no other sources of information exist (common for utilities with non-metered connections) (see Chapter 4);
(c) Based on the categories of water use in a‘typical’account (also called a‘water use profile’), identify applicable water efficiency measures. For example, if small increases in demand are recorded in the dry season, this illustrates that minimal landscape irrigation occurs. A planner may then elect to focus measures on indoor water-efficient plumbing fixtures and appliances (see Chapter 6);
(d) For each measure, estimate the number of events (e.g., the number of fixtures or appliances replaced) that are projected to occur (can be expressed as the percentage of accounts that will implement the measure);
Figure 7.1 Benefit-cost analysis methodology.Source:Maddaus and Maddaus (2006).
(e) Estimate the average day and peak day (high irrigation) water savings by multiplying the affected number of accounts by the measure’s unit water savings (see Chapter 6);
(f) Estimate the costs of the measure by multiplying the number of accounts implementing the measure by the unit cost(s);
(g) Identify the different categories of benefits to be gained by the utility;
(h) Identify planned water supply or wastewater treatment capital projects that might be delayed or downsized by reduced water use and/or wastewater flow;
(1) Determine the avoided costs (deferred or downsized expenditures) associated with the planned water supply or wastewater treatment projects;
(2) Determine the operation and maintenance cost savings (energy, chemicals and labour) associated with reduced water use and wastewater flows;
(i) Combine the capital cost savings with the operation and maintenance cost savings (cost per unit volume; e.g., local currency per m3);
(j) Compare total avoided costs to the marginal costs (cost per unit volume) of the next available water supply project;
(k) Use the water savings multiplied by marginal costs to compute the measure benefits (i.e., total cost savings);
(l) Compute the current value of timeframe of benefits and costs for each measure (see Appendix 4);
(m) Divide the benefits by the costs and express the result as a ratio from the utility’s perspective;
(n) Identify the other benefits (cost savings to the utility) and costs of, for example, water, wastewater and energy to customers;
(o) Divide the benefits and costs, and express the result as a ratio for customers;
(p) Accept the measure if the benefit-cost ratio is greater than 1.0. Also, consider the benefit-cost ratio for customers together with non-quantified environmental, socio-economic and customer service relations factors;
(q) Make a final selection of the measures and combine them into one programme. Assess the overall programme benefits (the sum of water savings from all measures multiplied by the marginal cost of the next source of supply, the capital savings and operation and maintenance costs) divided by the total efficiency programme costs. Review to ensure that total water savings are in line with targeted goals. If the overall benefit cost ratio is above 1.0 and the defined water savings targets are met, the programme is most likely well designed.