Understanding Your Return on Investment: The Importance of Avoided Costs in Water Efficiency Program Evaluation
Every water provider faces a unique set of circumstances that determine whether or not water efficiency programs will be cost-effective. What works for one water utility may or may not work for another. This is particularly true in regard to current and future costs of providing water service that can potentially be reduced, deferred, or avoided by actively reducing water demand.
If avoided costs are not properly factored into an analysis of water efficiency programs, then the true benefits will not be revealed. While this blog post focuses on avoided costs, it is critically important to consider all of the factors at play when planning water efficiency programs.
What are examples of avoided costs? Two examples of avoided costs are (1) variable costs such as wholesale water purchase or treatment costs that fluctuate if more or less water is treated and delivered, and (2) capital improvement costs such as capacity expansion projects that can be avoided, delayed, and/or downsized due to decreases in demand. The chart below from AWWA illustrates a scenario in which future capacity expansion requirements can change and become less expensive as a result of water efficiency programs.
Incorporating avoided costs into planning analysis is fundamentally important when weighing the associated water efficiency program costs and benefits. Examples of water efficiency costs and benefits are listed below.
Cost of Water Efficiency Programs
- Incentives (e.g., rebates)
- Staff
- Marketing materials
- Other overhead
Benefits of Water Efficiency Programs
Utility Side
- Reduced short run avoided costs
- Avoided, delayed, and/or downsized capacity expansion
- Reduced energy consumption
- Reduced GHG emissions
Customer Side
- Lower utility bills in the short term (water, sewer, electric, and gas)
- Lower rate increases over the long term
The Alliance for Water Efficiency’s Water Conservation Tracking Tool provides a comprehensive method to evaluate the water savings, costs, and benefits of water efficiency programs. The model outputs contain estimates of the impact demand reductions resulting from water efficiency programs will have on a water provider’s revenue requirement, volumetric rate, and average customer bill.
An argument that is sometimes used to criticize water efficiency programs is that water demand reductions will cause a decrease in revenue and require rate increases. As time goes on, the retail price of water will likely continue to increase no matter what action is taken. However, what is often overlooked is how water efficiency programs can play a key role in mitigating rate increases. Westminster, Colorado, responding to customer complaints about conservation being responsible for rate increases, conducted an analysis that revealed that reductions in water demand actually resulted in lower rate increases. Specifically, a 21 percent reduction in average per capita water demand experienced over 30 years helped lessen water rate increases by 99 percent and wastewater rate increases by 18 percent. New customers in Westminster have also avoided an 80 percent increase in water and sewer tap fees. This is documented in AWE’s report, Conservation Limits Rate Increases for a Colorado Utility.