Irrigation water management in uncertain conditions—Application of Modern Portfolio Theory

With increasing pressure on limited water resources, water managers and policy makers face many challenges to meet various, often conflicting, demands with limited resources and much uncertainty (e.g. climate change and variability) and often lack effective tools to investigate different options under uncertain conditions. Recent studies have highlighted that there will be less water available in the future in many parts of the Murray-Darling Basin, Australia which introduces uncertainty for the future of irrigation in the Basin. However, the water sector needs a robust approach to quantify the risks or setting up management strategies. Adopting the basic idea of spreading the risk from the field of finance, Modern Portfolio Theory is used in the current analysis to quantify the risk associated with a range of irrigation investment strategies (including retiring irrigation land, water savings options, conjunctive use of ground and surface water) to address the issue of water scarcity. The aim of this analytical approach is to increase adaptive capacity of the system by diversifying options and mitigating the associated risk and choosing more robust portfolios or management strategies. In this paper, a risk-based approach to water demand management and planning is formulated and ways of applying “Modern Portfolio Theory” are explored for addressing climate-induced variability and uncertainty in irrigation water supply.

► A risk-based approach to water demand management and planning is formulated.
► Application of the “Modern Portfolio Theory” in irrigation water management is explored.
► The application in Australia shows how it can be incorporated in decision making.
► Opportunities for minimising risk or maximising return, can be identified.