Decision-Dependent Uncertainty in Adaptive Real-Options Water Resource Planning

Staged water infrastructure capacity expansion optimization models help create flexible plans under uncertainty. In these models exogenous uncertainty can be incorporated into the optimization using an a priori hydrological and demand scenario ensemble. However some water supply intervention uncertainties cannot be considered in this way, such as demand management or technological options. In these cases the uncertainty is endogenous or ’decision-dependent’, i.e., the optimized timing and selection of interventions determines when and which uncertainties must be considered. We formulate a multistage real-options water supply capacity expansion optimization model incorporating such uncertainty and describe its effect on cost and option selection.