Using Real Options in the Optimal Design of Water Distribution Networks

The authors acknowledge the publisher in granting permission for making post-print version available in open access institutional repositoryWater supply systems have to satisfy water needs in terms of quantity and quality. The constant changes in urban areas require the regular adaptation of the water supply infrastructure to meet new circumstances. However, decisions to design and operate water networks have to be taken under uncertainty. Flexibility is thus the key to more robust and confident decisions. An approach called real options (ROs) can be used in these situations. This approach makes it possible to use adaptive strategies in the decision process. Some decisions can be delayed pending future conditions. Water distribution systems are very costly and complex infrastructures. Once built, their operating structure cannot be changed significantly. This work presents an innovative ROs approach to define an objective function to cope with some future scenarios in a specific case study. The objective of our proposed model is to find a minimum cost solution for the first period of a planning horizon, while considering various possible future conditions that the network could have to cope with. The results of this work show that building flexibility into the decision strategy makes it possible to take an adaptive approach that can avert future lack of network capacity. In the case study, an adaptive design of the network incurs an extra initial cost, but this cost can easily be lower than the cost of reinforcing the network in a longer planning horizon. The real value of ROs is their ability to adapt systems to different possible future scenarios