Hydro-economic models combine principles and knowledge drawn from multiple disciplines such as hydrology, economics, engineering, ecology and the social sciences to address and better understand the functioning of complex water resources systems.

When the system is a river basin, the model must include all its natural, infrastructural, economical and institutional components. Natural components are river reaches, lakes, wetlands, aquifers, deltas, etc.  Infrastructural components typically include existing and planned infrastructure that influence the amount, quality and distribution of water within the basin and over time: dams, levees, water and wastewater treatment facilities, water distribution and wastewater collection networks, pumps, etc.  Economical components are, for instance, agricultural, industrial and domestic demand sites.  Institutional components encompass policies and regulations regarding the use (or non-use) of water, the operation of hydraulic infrastructure, etc.

By applying a systems approach, we can focus on the performance of the system as a whole, however defined, rather than on the performance of each of its components separately. What is included in the system and its level of detail or resolution, and what is considered exogenous to it, are among the many assumptions a hydro-economic modeler must make.  

Conceptually, let the system – a basin and all its existing and potential infrastructure features and inputs – be denoted as S. Let D be the set of decision variables whose values are to be determined.  Let f(S,D) be the hydroeconomic model that describes the system, S, and its associated decisions D.  In other words, the function f(S,D) represents the hydroeconomic model used to generate values (or probability distributions or other statistical measures) of different indicators I of system performance. One can think of these indicators as goals or objectives whose values are to be maximized or minimized through the proper selection of the values of the decision variables D.

Several softwares are available, each having its pros and cons. We have experience with WEAP and HEC-ResSim. Over the past 15 years, we have also developed AQUAPLAN-SDDP, an optimization-based hydro-economic model that

• Can handle a (very) large system (with a large numbers of demand sites, reservoirs, etc.)
• Considers the hydrologic uncertainty and its impact on water allocation decisions, such that benefits (costs) are not over(under)estimated
• Considers offstream and instream uses and their economic demand functions
• is easily adaptable to new systems (river basins)

AQUAPLAN-SDDP provides decision makers with

• Optimal flow allocation between competing uses, including reservoir operating policies
• Statistical distribution of economic information (shadow prices, marginal values, costs, consumer surplus, etc.)