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MID2030 Customer Consultation

October 2011

Mike BudahazyMID2030 Project Director

Clinton RoddaManaging Director

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Why are we here?

• SRW will ask the state government to consider a bid for the 2012/13 for 8 years of MID 2030 works● based on government and irrigators funding 50% each; and

● irrigators keeping the water savings

• SRW needs to decide how much to bid for and what modernisation works to include by the beginning of December 2011.

• We need customers input on:● The proposed physical works for that money; and

● The affordability of that work for their (50%) share of the project costs

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Agenda

• Background

• Work done since strategy

• Developments in project funding

• Proposed works● Overall project plan

● Zone plan

● MID2030 Leading Works Program

• Use of water savings

• Pricing and affordability

• Next Steps

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MID2030 Background

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5

MID2030 Strategy background

• The largest strategic review undertaken by SRW

• Significant consultation● MID2030 Atlas

● Discussion Paper

● Draft Strategy

● Strategy

• General customer support

• Strong stakeholder support

• Strategy completed in 2007

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MID2030 Strategy background

SRW

upgrades

supply

Water savings

Improved service

More production

Regional economic growth

Improved environment

Accelerates

on-farm

investment

Improved

irrigation

More production

Less runoff

Less nutrients

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District wide modernisation

Mainly piping with main carriers as open channels

Channel automation

1 Northern-Macalister

2 Northern-Avon3Southern-Tinamba

4Southern-Cowwarr5 Eastern

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MID2030 Strategy outcomes

● Water Savings● 37,000 ML

● Project Cost ● Original (2006) Estimate - $120 million

● Service Levels● Increased flow rates

● Reduced order lead time

● Facilitates high flow flood or spray irrigation

● Opens opportunity for even greater water savings on farm

● Significant regional economic and social benefits

● Environment● Water used on farm stays on farm

● Drainage wetlands reducing impact of key drains

● Reduced nutrients in Gippsland lakes

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Work since 2007

• Detailed planning project ($500,000 Fed’s funding)● Design and cost study for the Southern-Tinamba pipeline

● Southern-Cowwarr balancing storage design

● MID LIDAR survey (high resolution digital imagery and 3D model)

• Detailed cost estimate - verified by an independent cost estimator

• Detailed assessment of water savings - externally reviewed

• Discussions with MCCC and MICI on scoping and affordability

• Government discussions

• Planned MID2030 “Leading Works”

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Current cost estimate

• 2009 estimate - $280m validated by Evans and Peck

• 2011 estimate - $310m

• Changes since 2006● Detailed project scope

● Completed channel automation projects

● Southern-Tinamba Conceptual Pipeline design

● GMW/NVIRP cost structures

• Overall Changes (to 2011)● $60m construction cost changes

● $60m change in cost estimates > escalation

● $60m change in contingency allowance

● $10m to address capacity constraints

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Developments in Project Funding

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Gaining government funding…

• Customer and Stakeholder support

• Minister’s support

• Meet Treasury investment guidelines● Engage with Department of Treasury and Finance (DTF)

● Prepare business case in accordance with DTF guidelines

• Rank well against competing projects across the whole of Government portfolio

● Transport

● Energy

● Hospitals

● Schools

● Housing

● Other water sector

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Feedback from the Minister for Water, Agriculture and Food Security…

• Met with SRW and MCCC reps three times

• Minister strongly supports the principle of projects that create regional economic development

• SRW to submit bid late 2011 to early in 2012●government and irrigators pay 50% of costs each

● irrigators keep 100% of water savings

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SRW’s strategy to gain funding…

• Break MID 2030 into at least two phases

• Maximise early water savings

• Projects ready to go

• Keep price change affordable for customers

• Maximise project benefits• Regional growth

• Irrigator production

• Service improvement

• Resilience to climate change

• Environmental impact

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Revised MID2030 Project

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MID2030 Project Phase 1

• $140.5 million (2011$) investment : 28,300 ML of water savings

• Pipelining of entire Southern-Tinamba supply zone• Elimination of 147 regulators

• Addressing 384 outlets

• Channel automation (regulators) in:• Nambrok-Denison 204 regulators

• Heyfield 32 regulators

• Eastern 122 regulators

• Construction of Southern-Cowwarr Balancing Storage

• Some outlet modernisation and rationalisation

• At least one end of drain wetland

• Preparation for phase 2● Planning study for Newry Pipeline

● Meter market analysis

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MID2030 Project Phase 1

Existing Channel Automation

Proposed Phase 1 Channel Automation

Existing Pipeline

Proposed Phase 1 Pipeline (Preliminary)

Balancing Storage

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MID2030 Project Phase 1

CUSTOMERS RECEIVING SERVICE BENEFITS

0%

20%

40%

60%

80%

100%

Zone 1Northern-Macalister

Zone 2Northern-

Avon

Zone 3Southern-Tinamba

Zone 4Southern-Cowwarr

Zone 5Eastern

MID

Per

cen

tag

e o

f se

rvic

e p

oin

ts

0%

10%

20%

30%

40%

50%

Per

cen

tag

e o

f w

ater

del

iver

ed i

n z

on

e

Service Benefits Pre Phase 1 Implementation

Service Benefits Post Phase 1 Implementation

Percentatage of water delivered in zone

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MID2030 Project Phase 1 (after gov’t investment)

COST PER MEGALITRE OF WATER SAVINGS

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Zone 1Northern-Macalister

Zone 2Northern-

Avon

Zone 3Southern-Tinamba

Zone 4Southern-Cowwarr

Zone 5Eastern

MID

Wat

er S

avin

gs

(201

1$ p

er M

L)

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Cost Breakdown, Timelines and Water Savings

DeliveryDate

Zone 3 - Southern-Tinamba Pipeline $92.5 13,500 end 2020 mid 2022

Zone 3 - Heyfield Regulator Retrofit $2.5 1,200 end 2013 mid 2015

Zone 4 - Southern-Cowwarr Regulator Retrofit $17.6 5,200 end 2017 mid 2019

Zone 4 - Southern-Cowwarr Balancing Storage $9.2 1,800 end 2016 mid 2018

Zone 5 - Eastern Regulator Retrofit $10.7 5,300 end 2018 mid 2020

Rationalisation $5.0 1,300 end 2015 mid 2017

Wetlands $3.0 - end 2020

Total $140.5 28,300

Supply ZoneWater

Savings Available

Water Savings

(ML)

Total Cost (2011$

millions)

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MID2030 Project Phase 1 - Outcomes

Results

Cost of project (2011$) $ 140.5 million

Water savings 28,300 ML

Cost to customers per ML with 50/50 funding $ 2,480 per ML

Construction period 8 years

Deliveries through modern meters 40%

Customers receiving service benefits 86%

Regulators replaced with pipelines or retrofitted 70%

Estimated regional economic benefit $80 million per annum

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MID2030 Project Phase 2

• $169.5 million (2011$) investment generating 8,700 ML of water savings

• Zone 1 - Pipelining of entire Northern-Macalister supply zone

• Newry Pipeline Project

• Based on planning study from Phase 1

• Zone 2 - Balancing storages and various modernisation works

• Valencia Creek balancing storage

• Main Sale balancing storage

• Channel automation and pipelining to address system constraints

• Wide scale meter modernisation program

• Defer decisions on major metering program until meter market more competitive and funding may be available

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MID2030 Project Phase 2

Cost Breakdown and Water Savings

Zone 1 - Newry River Pipeline $52.6 3,500

Zone 1 - Compliant Metering Program $3.5 -

Zone 2 - Balancing Storages $6.8 -

Zone 2 - Various Modernisation Works $44.8 2,000

Zone 4 - Compliant Metering Program $37.2 2,000

Zone 5 - Compliant Metering Program $24.6 1,200

Total $169.5 8,700

Supply ZoneTotal Cost

(2011$ millions)

Water Savings

(ML)

1

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MID2030 Leading Works Program

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MID2030 Leading Works Program

Infrastructure

• Detailed design of Southern-Cowwarr balancing storage

• Smaller scale regulator retrofit program for:• Eastern supply zone

• Nambrok-Denison supply zone

• Heyfield channels

Rationalisation

• Start of a rationalisation program to address demand for customer initiated rationalisation projects – e.g. customer outlets

On-farm Productivity Program

• On-farm productivity program (coordinated program with DPI)

Contribution from SRW – auction funds

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Eastern RegulatorRetrofit (36 No.)

Heyfield RegulatorRetrofit (32 No.)

Balancing Storage Design (min 150 ML)

Nambrok-Denison Regulator Retrofit (27 No.)

MID2030 Leading Works Program

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MID2030 Leading Works Program

Nambrok-Denison Regulator Retrofit $ 2.4 M 820 ML

Eastern Regulator Retrofit $ 3.0 M 980 ML

Heyfield Regulator Retrofit $ 2.3 M 1200 ML

Southern-Cowwarr Balancing Storage Design $ 0.8 M - ML

Rationalisation Program Stage 1 $ 4.6 M 1280 ML

On Farm Productivity Program $ 0.5 M - ML

Total $ 13.6 M 4280 ML

Outlets replaced 80

Regulators retrofitted 95

Project completion 2014

• SRW has contributed $1m for this from auction proceeds – with more planned to reduce project costs

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How do we deal with Water Savings?

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How do we deal with water savings?

• Sale via auction

• Sale via “shelf price”

• Allocate water at zero capital cost

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Auctions…

• Water goes to auction with reserve price

• Advantages● Water goes to people who value it most

● Keeps prices lower

● Develops water market

● Generally supported by Treasury

• Disadvantages● Capital cost of water may hinder other on farm investment

● How big is the auction market?● Demand for water?

● Seasonal conditions

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Shelf Price…

• Water available for purchase at a pre-determined price either by allocation or afterwards

• Advantages● Water goes to people who value it

● Keeps prices lower

• Disadvantages● Capital cost of water may hinder other on farm investment

● Sets water market price

● How big is the market?● Demand for water?

● Seasonal conditions

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Allocate Water…

• Water savings offered to customers proportional to entitlement at no capital cost. A second round offer would be made for remaining water

• Advantages● Water goes to people who want it

● Use it or sell it

● Capital money could be used for on farm investment

● Likely that all water would be allocated

• Disadvantages● Higher water prices

● Permanent water market impacted – could you sell it?

● Some water may not be used

● Would need strong justification to Treasury

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Pricing

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Pricing

• A detailed financial model has been built • A number of factors influence future water prices

● Business As Usual costs● Corporate cost changes

● Business cost changes

● Asset renewal and maintenance costs

● Project costs● Capital works● Changes to operations and maintenance costs● Whether we allocate or auction water savings● Interest rates

● Essential Services Commission rules and “determinations”

• Estimates have been provided to provide a guide• Current “re-bundled” price assumed at $68 per ML

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Estimated MID2030 project cost impact

PRICE INCREASE $/ML FOR EACH 5 YEAR WATER PLAN PERIOD (REAL 2011$)

-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

2014

- 20

18

2019

- 20

23

2024

- 20

28

2029

- 20

33

2034

- 203

8

2039

- 20

43

2044

- 20

48

2049

- 20

53

2054

- 20

58

2059

- 20

63

2064

- 20

68

2069

- 20

73

2074

- 207

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Water Plan Period

Eff

ecti

ve D

oll

ars

per

ML

(20

11$/

ML

)

$/ML - real

Average

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Net price impact over timeRENEWALS

MID2030 COMPARISON TO BUSINESS AS USUAL (BAU)

60

70

80

90

100

110

120

2008-2013 2013-2018 2018-2023 2023-2028 2028-2033

Water Plan Period

Eff

ecti

ve D

olla

rs p

er M

L (

2011

$/M

L) MID2030

BAU

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Estimated Price as at 2023 (no auction)

Current Price (Estimated) $68 NA

Business As Usual (BAU) Price $84 23%

BAU + MID2030 Price $10840%

(19% BAU + 21% MID2030)

Scenario2011$ per ML

Percentage Change

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Affordability

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Water costs for Dairy

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Case studies

• Understanding impacts of extra water and increased prices

• 6 case-studies: selected to cover● Sectors dairy/grazing/horticultural

● Scale 40ha - 447ha

● Soils Low - Moderate - High Permeability

● Delivery Reliable - Very unreliable

● Water Use Adequate - Undersupplied

• Marginal cost of water worked out● How much extra water is available?

● What will the extra cost be?

● Marginal cost approx $141 and $171 per ML depending on assumptions

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Marginal price example..

• Customer has existing entitlement 100 ML• Current price $68 per ML• Current water cost $6,800

• New allocation as a result of works (5%) 5 ML

• New entitlement (100 ML + 5 ML) 105 ML• New cost of entitlement $ 7,505• New average cost $ 71.50 per ML

• Additional cost = ($7,505 - $6,800) $ 705

• Marginal cost = Additional Cost $705 = $ 141 per MLAdditional Entitlement 5 ML

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Case studies

BusinessNew Water Allocation

Other Benefit / Opportunity

Marginal Net Benefit $/ML Water End use

Large Dairy A RequiredNew High Flow outlet on 41ha 250 offset feed supplement

Grazier RequiredChannel Deliv Serv completed 96* increase stocking rate

Horticulture Sell Nil. 160 offset interest (8%)

SM Dairy A Sell Nil. 120*off farm investment (6%)

SM Dairy B RequiredImp Channel Delivery Serv. 180 offset feed supplement

Large Dairy B Required Nil. 314 increase stocking rate

Additional Water Cost $141/ML to $171 per ML

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Case study outcomes

BusinessMarginal Net Benefit $/ML

Marginal Cost $/ML (M Benefit – M Cost) x ML = Net

Large Dairy A 250 141 $250 - $141 x 227ML = $24,743

Grazier 96* 141 $96 - $141 x 64ML = - $2,880

Horticulture 160 141 $160 - $141 x 22ML = $418

SM Dairy A 120* 141 $120 - $141 x 71ML = - $1,491

SM Dairy B(Imp Delivery) 180 @ 40ML 0 $180 - $0 x 40ML = $7,200

SM Dairy B 180 141 $180 - $141 x 48ML = $1,872 ($9,072)

Large Dairy B 314 141 $314 - $141 x 377ML = $65,221

Additional Water Cost of $141/ML used as basis of comparison.

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Greater benefits apply when…

• Poor levels of service now● Allows improved watering systems

● Promotes greater productivity

• Permeable soils● Gains benefits from improved watering

● Look at sprinkler V’s flood cost:benefits

• Water constrained● Expanding production

● Replacing high cost feeds

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Next Steps?

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Next Steps for Business Case…

• Review questions and feedback from these sessions

• Review and discuss with MCCC (early November)

• Potential further feedback session with customers (Mid November?)

• Business case finalised and reviewed by Board (December)

• Submission to DSE / Treasury (December / January)

• Advice on outcome – mid year

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Processes should we get funding…

• Governance Committee● Government departments

● SRW

● MCCC

• Individual Business Cases● Consultation with SRW staff and affected customers

● Review value for money

● Validate costs estimates and water savings

● Project approval

• Project review● Regular cost, scope, quality, time reviews

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An opportunity to maximise the full potential of the MID