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Establishing a Groundwater Market in Nebraska
The Situation
The March 2016 Groundwater Exchange Pilot Program (“Program”) held in Central Platte, Nebraska, was an original initiative to help farmers increase the profitability of their irrigation operations while improving groundwater conservation. The Program, which established a virtual market for the temporary leasing of rights to irrigate, addressed decades-long issues that had plagued the Central Platte’s groundwater conservation efforts.
The Central Platte Natural Resources District (CPNRD) is one of 23 Natural Resource Districts (NRDs) in Nebraska. The Groundwater Exchange Program was established by the CPNRD in collaboration with the Nebraska Department of Natural Resources (DNR) to simultaneously improve streamflow to the Central Platte while helping producers increase profitability by establishing a market price for water.
The Program allows producers who would like to irrigate additional acres in the upcoming growing season to enter as buyers and benefit from purchasing temporary rights either to use for irrigation or to come back into compliance with current rules and regulations. Producers who do not plan to use as many acres in the upcoming growing season as they possess rights to irrigate can sell their rights through the Program and be paid for not using them. Establishing a market price for water communicates to producers whether they could make more money in a season from selling their right to irrigate at the market value or from the output associated with irrigating. This approach both ensures that irrigation is allocated where it can be used most efficiently throughout the District and that producers are receiving the best possible price for their water rights.
In addition to producers looking to temporarily increase or decrease their number of acres certified for groundwater use, the Groundwater Exchange Program allows for streamflow buyers, defined as nonprofit organizations or governmental entities subject to the same rules as producers, to participate in the Program to temporarily remove groundwater from use on acres in the District for the purpose of increasing streamflow.
NERA's Role
NERA was retained by the CPNRD to design the trading platform for the Groundwater Exchange Program and to conduct the pilot. NERA developed a novel clearing mechanism that determines eligible trades given the market constraints and determines prices based on competition.
For purposes of evaluation, the District was broken out into fourteen “Sectors” identified by an area’s Groundwater Management Area (GWMA) and by the characteristic of the land as allowing transfers in or not.
Bids in the Groundwater Exchange Program were submitted as a price in $/acre and then converted to a price in $/acre-foot using the modelling of river and groundwater flows for purposes of the evaluation. The use of acre feet to evaluate the market internalizes the impact of irrigation on the stream that has been complicating the price of water rights in the District.
Winning bids were selected to yield the highest overall value to both buyers and sellers while respecting the following principles:
- No Adverse Effect on the Stream. At any X-Coordinate on the river, the number of acre feet bought and sold must either leave streamflow the same or improve streamflow to the river.
- No Movement West. In each Sector, the number of acre feet sold in the Sector west of an X-Coordinate must equal to or exceed the number of acre feet bought west of that X-Coordinate.
- No Transfers In. In each GWMA, the number of acre feet sold in the GWMA must be equal to or exceed the number of acre feet bought.
Using acre feet to compare producers’ evaluation of water rights considers how much a producer is willing to pay or receive for a given number of acres and transforms that willingness to pay by the degree to which irrigating that land would affect streamflow. Through this approach, the algorithm selects winning bids to sell and winning bids to buy that yield the highest value to both buyers and sellers while respecting the constraints above. The algorithm determined a clearing price that accounts for competition on both the buy and sell side.
The Result
The Groundwater Exchange Pilot Program was the first of its kind. The Program exhibited an innovative approach to improving efficient irrigation practices without sacrificing the livelihood of farmers who rely on groundwater to irrigate. Both the introduction of a computer-aided algorithm to solve for transactions as well as the concept of a temporary sale for the right to use groundwater are novel ideas in groundwater conservation efforts. The program was extended for the growing season in 2017.
The clearing mechanism NERA has developed for the CPNRD is very flexible and can be adapted to other water markets easily. In particular, the constraints establishing who is allowed to trade with whom can be adapted to a variety of settings.