Valuation of Water Resources Infrastructure Planning from Climate Change Adaptation Perspective using Real Option Analysis

For adaptation to the changing climate, planning of new water infrastructures should be carefully evaluated by either “robust” or “adaptive” decision making methods. For this purpose, a new economic feasibility analysis framework has been developed using real option analysis that can reflect “robust” and “adaptive” perspectives in decision making. To reflect uncertainty in climate (“robust”), the probabilities of drought occurrences are estimated by the results of dam storage simulation. To provide flexibility in decision making (“adaptive”), three different types of real options are used as a form of a decision tree. By re-evaluating economic feasibility of the Boryeong Dam conduit project, it is found that the “abort” option can be the best choice for minimal economic loss on the project. Further, more conditions for maximizing economic feasibility on the project are addressed from the sensitivity analysis. It is found that the “invest” option would be more economically feasible than “abort” option, when the probability of severe drought increases by approximately 20%. Thus, though the Boryeong Dam conduit project is not economically feasible for now, it might be an appropriate infrastructure if it is constructed in the future, when the probability of drought occurrence increases.