Flexibility in Flood Management Design: Proactive Planning Under Climate Change Uncertainty

Abstract:

This paper presents an innovative, value-enhancing procedure for effective planning and design of long-lived flood management infrastructure given uncertain future flooding threats due to climate change. Designing infrastructure that can be adapted over time is a method to safeguard the efficacy of current design decisions given uncertainty about rates and future impacts of climate change. This paper explores the value of embedding “options” in a physical structure, where an option is the right but not the obligation to do something at a later date (e.g. over-dimensioning a floodwall foundation now facilitates a future height addition in response to observed increases in sea level; building of extra pump bays in a pumping station now enables the addition of pumping capacity whenever increased precipitation warrants an expansion.) The proposed procedure couples a simulation model that captures future climate induced changes to the hydrologic operating environment of a structure, with an economic model that estimates the lifetime economic performance of alternative investments. The economic model uses Real “In” Options analysis, a type of cash flow analysis that quantifies the implicit value of options and the flexibility they provide. This procedure is demonstrated using replacement planning for the multi-functional pumping station IJmuiden on the North Sea Canal in the Netherlands. Flexibility in design decisions is modelled, varying the size and specific options included in the new structure. Results indicate that the incorporation of options within the structural design has the potential to improve its economic performance, as compared to more traditional, “build it once and build it big” designs where flexibility is not an explicit design criterion. The added value resulting from the incorporation of flexibility varies with the range of future conditions considered, as well as the options examined. This procedure could be applied more broadly to explore investment strategies for the design of other flood management structures.