Investment in irrigation technology: an application of real options analysis

Investment in irrigation infrastructure and technologies, particularly those that reduce on-farm water use have become a major focus of government programs both at a State and Commonwealth level. Particular attention has been given to increasing the uptake of water “saving” technologies among irrigators. The design of programs capable of achieving government objectives at least cost requires an understanding of farm level investment decisions. In this context, the influence of uncertainty on decisions to invest in irrigation technology and infrastructure is examined. The potential for uncertainty to influence investment decisions via strategies to manage risk is demonstrated using the method of real options valuation. The approach is applied to case studies of investment in evaporation mitigation technologies. It is shown that there are circumstances where uncertainty surrounding the value of water savings is significant enough to influence the decision to invest in water saving technologies. The results also demonstrate that where uncertainty exists, rates of subsidy to encourage faster uptake of these technologies need to be higher than those indicated by traditional NPV analysis. This is further exacerbated when irrigators are required to relinquish water entitlements in return for the subsidy.

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 Record created 2017-04-01, last modified 2020-10-28

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