Dynamic reservoir management with real-option risk hedging as a robust adaptation to nonstationary climate

摘要

The implications of climate change and the potential nonstationarity of the hydrologic record necessitate innovative approaches to water management. This study presents a novel adaptation strategy for water reservoir management under nonstationary hydrologic conditions. Seasonal hydrologic forecasts and a real-option instrument allow reservoir operations that dynamically adapt to an evolving hydrologic record. System operating policies are conditioned on seasonal hydrologic forecasts to account for year-to-year variability and climate change and a real option is established to hedge against the risk associated with operational forecasts and unexpected climate outcomes. This scheme is implemented over an ensemble of climate futures based on general circulation model (GCM) simulations. Two alternative management strategies are considered, one in which system operations are optimized for the GCM-based ensemble mean projection of the future and a baseline strategy in which assumptions of stationarity are maintained and operations are left unchanged from historic norms. The approach is evaluated for a water supply-hydropower facility on the Westfield River in the northeast United States. Results suggest that seasonal hydrologic forecasts are a promising adaptation to nonstationary hydrology, even without the support of a risk hedging option. Surprisingly, the option approach enabled even a stationary assumption to perform well in the future, suggesting that option instruments alone can act as a robust adaptation mechanism.