The costs of uncertainty

Influence of uncertainties on the costs of urban water infrastructure

Planning of urban water and wastewater infrastructure systems is based on assumptions about the future (e.g. population growth, legal requirements, interest rates). Such assumptions are always uncertain and typically lead to additional costs that are not explicitly considered in the planning process. As an example, uncertainty about the population growth often leads to wastewater treatment plants with either a larger capacity than ever needed or such that have to be extended before the end of their life-span. Consequently, the uncertainty about the future leads to increased costs. On the other hand, planners and decision makers have managerial flexibilities to deal with such uncertainties. They can invest money into studies to reduce the uncertainty. The planning for different strategies can be initiated while the decision for the final project is postponed to a time when more information about the future is available. Moreover, a possibility to flexibly react to changing conditions in the future is to build a plant in stages, in a modular design, or even as several independent decentralized systems. Such flexibilities are not for free but as they reduce the influence of the uncertainties they may lead to more appropriate and cost-effective solutions. Consequently, there is a value in flexibility that has to be balanced with the costs of the uncertainty.

In the frame of this project, methods based on engineering economics are developed to quantify the costs of the uncertainty and the value of flexibility in urban water and wastewater infrastructure projects. These methods shall allow the direct comparison between fundamentally different systems such as centralized and decentralized wastewater treatment and be used as decision support tools towards more functional and cost-effective urban water infrastructure systems.