The impact of assuming perfect foresight for investment analysis in
water resources systems
Abstract
Perfect foresight hydroeconomic optimization models are tools to
evaluate impacts of water infrastructure investments and policies
considering complex system interlinkages. However, when assuming perfect
foresight, management decisions are found assuming perfect knowledge of
climate and runoff, which might bias the economic evaluation of
investments and policies. We investigate the impacts of assuming perfect
foresight by using Model Predictive Control (MPC) as an alternative. We
apply MPC in WHAT-IF, a hydroeconomic optimization model, for two study
cases: a synthetic setup inspired by the Nile River, and a large-scale
investment problem on the Zambezi River Basin considering the
water-energy-food nexus. We validate the MPC framework against
Stochastic Dynamic Programming and observe more realistic modelled
reservoir operation compared to perfect foresight, especially regarding
anticipation of spills and droughts. We find that the impact of perfect
foresight on total system benefits remains small (<2%).
However, when evaluating investments and policies using with-without
analysis, perfect foresight is found to overestimate or underestimate
values of investments by more than 20% in some scenarios. As the
importance of different effects varies between scenarios, it is
difficult to find general, case-independent guidelines predicting
whether perfect foresight is a reasonable assumption. However, we find
that the uncertainty linked to climate change generally has more
significant impacts than the assumption of perfect foresight. Hence, we
recommend MPC to perform the economic evaluation of investments and
policies, however, under high uncertainty of future climate, increased
computational costs of MPC must be traded off against computational
costs of exhaustive scenario exploration.