Relations between information, time, and value of water

Abstract:

This research uses with stochastic dynamic programming (SDP) as a tool to reveal economic information about managed water resources. An application to the operation of an example hydropower reservoir is presented. SDP explicitly balances the marginal value of water for immediate use and its expected opportunity cost of not having more water available for future use. The result of an SDP analysis is a steady state policy, which gives the optimal decision as a function of the state. A commonly applied form gives the optimal release as a function of the month, current reservoir level and current inflow to the reservoir. The steady state policy can be complemented with a real-time management strategy, that can depend on more real-time information. An information-theoretical perspective is given on how this information influences the value of water, and how to deal with that influence in hydropower reservoir optimization. This results in some conjectures about how the information gain from real-time operation could affect the optimal long term policy. Another issue is the sharing of increased benefits that result from this information gain in a multi-objective setting. It is argued that this should be accounted for in negotiations about an operation policy.