Pricing Water for Power Generation: A Two-Tier Approach

Current arrangements for pricing water for power generation are often deficient in providing signals in which to base investment decisions and in allocating water to its highest valued use. To address these shortcomings, a framework is proposed which relies on a two-tier pricing systern. Firstly, joint fixed costs are allocated in the form of a fixed access charge to the various users, thereby recovering costs and providing an incentive in which to proceed with socially beneficial investment. Secondly, entitlements to water are to be traded at prices and conditions negotiated between the relevant parties to facilitate the efficient allocation of the water resource among competing uses.