Water scarcity: Can virtual water operators help?

The changing climate is likely to have an effect on water and sewerage sectors. To deal with this challenge regulators need consider ways to better signal the value of water, that is, such that water is more expensive where it is scarce. This paper shows that virtual water operators (VWO) could result in entrants internalising this value and provide regulators with an estimate of it. With water scarcity, entrants will face higher cost of entry as they will need to acquire expensive, if available, abstraction licences. Given these higher prices they will also be willing to pay higher prices to become a VWO in those areas with scarcity. This means that VWOs can help to reveal the real value of water. Further, by introducing these considerations into part of the incumbent’s capacity, VWO also help to introduce this cost into the supply of the incumbent.