A research article was recently published that explores price swings in California’s water market. These price swings are well known by water users, who might see water costs of $100 one year and $2,000 per acre-foot unit in the next year. Basic supply-demand factors driven by California’s variable hydrology are the root cause of these price swings, which can be challenging for water users to plan for financially.
Most of the California water market is comprised of spot-market trades of large surface water project allocations. The research paper points out that prices of groundwater supplies are less variable because of the stability of the underlying resource, and the authors propose expanding the use of groundwater storage as a way to dampen price volatility in the California water market.
This proposal seems to have been accepted, as groundwater banking programs have expanded across California and current policy is pushing for more groundwater storage. Even with broad interest, an ongoing challenge with groundwater banking in California is the spatial separation between where water is available to conduct recharge and where aquifer storage space is available for banking.
A financial impact of California’s hydrologic volatility is price volatility for securing water supplies in the California water market, which places cost risks on water users. Groundwater banking projects are being advanced to provide storage, as surface water storage projects in the state continue to run into obstacles. These investments may smooth out the historical price swings that we have seen in the California spot market by increasing demand for wet-year supplies and dampening supply imbalances in dry years. WestWater has consulted with many municipal and agricultural water users in California to understand options and cost implications for improving water supply resiliency.
Supporting water market research. WestWater contributed California water market data to the research article described above. Over the last ten years, WestWater has helped over 20 academic researchers by providing data on water market activity to explore questions about economic theory, water markets, and public policy. We welcome inquiries from academic institutions to help advance economic, financial, and water resources research.
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“The Water Current” is a monthly news digest that provides brief summaries of interesting and timely news stories related to water economics and water markets in the Western United States. Our team tracks new developments in water policy, management, and conflicts, sharing articles relevant to their work and services.