In a recent post on 'The wisdom of water restrictions in Cape Town' the point was made that certain response options are more costly then others. Sydneysiders are starting to feel the pinch of an expensive desalination plant.
The alternative to building a desalination plant is to price water flexibly so that when water storages are low households pay more, and when water storages are high households pay less. In other words - just like we do with items such as bananas - we should pay more when it is in short supply. The extra revenue from charging higher prices when there is less water in the dams could be used to decrease fixed water charges and/or provide assistance to low-income households independent of their water consumption.
At current dam levels, flexible pricing would mean a water price for consumers of $1.30 per thousand litres. Postponing this investment generates very big savings for water consumers and avoids environmental losses that may occur from operating the plant. Provided that water is priced flexibly, we show that the desalination plant would only need to be built when water storage in the dams was at 21 per cent capacity. This has a less than one in three chance of occurring over the next 15 years.