Optimization of water allocation decisions under uncertainty: the case of option contracts

For decades, water managers need to allocate water efficiently to competing users due to growing water demand and shortage. Water option contract is a flexible management tool for water managers. In this study, with consideration of the uncertainties of probability distributions and intervals, an inexact two-stage mixed-integer programming (ITSMIP) model is applied to support the decision making of water allocation when option contracts are proposed. A case study of water allocation with the option contract is presented. Factors which influence the willingness of signing the option contract are analysed and the optimum water allocation plans are also provided. The results demonstrate that water option contracts can help water managers mitigate the impact of water shortage and increase economic benefits largely.