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2017-02-27 | project

Impacts on water consumption and welfare effects from appliances selection & pricing policies under an increasing block pricing structure in the residential sector

This study analyzes residential water demand by modeling both the effects of water prices and appliance portfolios selection on households’ water demands and welfare in the cities of San Jose and Addis Ababa. The results will be relevant inputs for the design of demand side water management policies.

Management initiatives for water provision no longer solely focus on new supply projects. Due to high costs of water supply, challenges of costs recovery and issues of water availability, water utility companies have started to rely also on demand-side management policies. Price and non-price mechanisms for water consumption have been implemented in the last years in many countries and urban areas. However, the literature on residential water demand has studied and modeled price elasticity of water consumption and water technology adoption mostly separately.

The goal of this project is to contribute to the design of water demand management strategies related to water price and technology adoption for residential water consumption in urban areas with rapid population growth. This is divided into three specific topics:

  1. We evaluate how water price changes and price perceptions impact households’ choices of water use appliances, based on appliances’ characteristics, households’ socio-economic characteristics and other variables related to price and price perception.
  2. Estimation of a demand function under an increasing block pricing (IBP) structure and based on technology portfolios. We evaluate how households with different technology portfolios and under the IBP structure respond to water price changes.
  3. We analyze if welfare effects differ among households that consume in different price blocks, households that use different technology portfolios and households from different socio-economic stratums.

We have selected two cases of rapidly growing urban areas in developing countries: San Jose, Costa Rica and Addis Ababa, Ethiopia. As we model simultaneously water consumption given an IBP structure and households’ choices on technology portfolio, we will deal with a discrete continuous choice (DCC) with two types of discontinuities: selection of appliances and selection of the tier, and then a continuous decision on how much water to consume. We take advantage of key data already available on residential consumers’ billing records from the utility companies, and of exceptional changes in water tariffs in both cities. This will be combined with household survey data. It is important to do a baseline study, because in Addis the water tariff structure is being re-evaluated and in San Jose a sequence of tariff increases has started this year and will continue over the next three years due to a new subsidy system.