Demand Analysis and Forecasting
Demand Analysis and Forecasting
Demand Analysis and Forecasting
CONTENTS
3.1 Effective Water Demand ..........................................................................................................40
3.1.1 Defining Effective Demand for Water.....................................................................40
3.1.2 Increasing Cost of Water Supply ...............................................................................41
3.2 The Demand for Water: Some Concepts ................................................................................42
3.2.1 Incremental vs. Nonincremental Demand for Water.............................................42
3.2.2 The Relation between Price and Quantity................................................................42
3.2.3 The Concept of Price Elasticity of Demand............................................................44
3.2.4 Different Demand Curves for Different Products .................................................45
3.2.5 The Relation between Household Income and the Demand for Water .............46
3.2.6 Other Determinants of the Demand for Water ......................................................48
3.3 The Use of Water Pricing to “Manage” Demand ..................................................................51
3.3.1 Instruments of Demand Management......................................................................51
3.3.2 Cumulative Effects of Water Demand Management
and Conservation Programs .......................................................................................54
3.4 Data Collection ............................................................................................................................55
3.4.1 Cost Effectiveness of Data Collection......................................................................55
3.4.2 Sources for Data Collection ......................................................................................55
3.4.3 Contingency Valuation Method (CVM)....................................................................56
3.5 Demand Forecasting...................................................................................................................56
3.5.1 Forecasting Urban Water Supply: the Case of Thai Nguyen ...............................56
CHAPTER 3: DEMAND ANALYSIS & FORECASTING 39
Figures
Figure 3.1 An Individual’s Water Demand Curve:
Linear and Non-Linear Relationships…………………………………………..…43
Figure 3.2 Demand Curves for Water from Public Taps vs. House Connections…………… 45
Figure 3.3 Relation between Demand and Income: Shift of Demand Curve……………….. 47
Figure 3.4 Demand Management………………………………………………………….. 51
Boxes
Box 3.1 Example of Constrained Water Demand……………………………………………40
Box 3.2 The Future Costs of Water……………………………………………………….. 41
Box 3.3 Relationship between WTP and Income…………………………………………….46
Box 3.4 Increased Water Tariff in Bogor, Indonesia…………………………………………52
Box 3.5 Demand Management and Investment Planning in Australia……………………… 54
Box 3.6 Thai Nguyen Case Study: Description of Service Area…………………………… 57
Box 3.7 Thai Nguyen Case Study:
Assumptions Used, Ability to Pay and Willingness to Pay………………………...…58
Box 3.8 Thai Nguyen Case Study: Number of Persons per Connection…………………… 60
Box 3.9 Thai Nguyen Case Study: Existing Consumption………………………………… 61
Box 3.10 Thai Nguyen Case Study: Indication of the Price Elasticity……………………….. 64
Box 3.11 Thai Nguyen Case Study: Estimating Future Demand…………………………… 65
Box 3.12 Thai Nguyen Total Domestic Demand…………………………………………… 66
Box 3.13 Example of Estimating Industrial Consumption…………………………………… 67
Box 3.14 Example of Estimating Nondomestic Consumption……………………… ……… 68
Box 3.15 Application of Technical Parameters……………………………………………….. 70
Box 3.16 Determination of Nonincremental Water………………………………………… 75
Tables
Table 3.1 Major Determinants of Water Demand…………………………………………… 50
Table 3.2 Demand Forecast and Required……………………………………………………71
Table 3.3 Nonincremental Water from connected users (in lcd)…………………………… 73
Table 3.4 Average Nonincremental Water of nonconnected users (in lcd)……………………74
Table 3.5 Calculation of Nonincremental Demand…………………………………………. 77
40 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
Source: RETA 5608 - Case Study on the Water Supply and Sanitation Project, Rawalpindi, Pakistan
CHAPTER 3: DEMAND ANALYSIS & FORECASTING 41
4. The increase in the cost of water can be seen when the cost per cubic
meter of water used by current water utilities is compared with the cost per cubic meter
of water in new water supply projects (WSPs). This relation is shown in Box 3.2.
Line 3 Line 2
Future Cost Line 1
1.4
Amman
1.2
1.0
Line 1: Current costs
0.8 Mexico City equal future costs
1.00
. 75
.50
D 2D 2
. 25
0 140
115 Quantity (lcd )
12. In this Handbook, a linear demand curve will often be used for
illustrative purposes, as indicated by line D2 D2. However, the nonlinear relationship
between quantity and price is probably a better approximation of the actual behavior of
water users.
44 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
14. The price elasticity of demand for water is normally negative because the
demand curve is downward sloping, which means that an increase (decrease) in price is
expected to lead to a reduction (increase) in demand.
17. For a linear demand curve as can be verified through the formula for ep,
the higher the price, the higher the absolute value of price elasticity. Using a nonlinear
demand curve (Figure 3.1), it can be seen that for the first few liters of water, demand
will be very inelastic, meaning that the consumer is willing to pay a high price for the
given volume of water. As the marginal value of the water gradually declines, the
consumer’s demand will become increasingly elastic, meaning that price fluctuations will
result in larger changes in quantity demanded.
18. In studies carried out by the World Bank (Lovei, 1992), it has been
found that the price elasticity for water typically ranges between -0.2 and -0.8, indicating
CHAPTER 3: DEMAND ANALYSIS & FORECASTING 45
inelastic demand. For example, e = -0.2 means that a 10 percent increase in price would
lead to a reduction in the quantity demanded by only 2 percent.
F i g u r e 3 . 2 D e m a n d C u r v e s f o r W a t e r f r o m P u b lic T a p s v s . H o u s e C o n n e c t i o n s
WTP
(price per m 3 ) P2
HC
P1
PT
O
Q1 Quantity (m3)
46 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
The relationship between willingness to pay and month income has been confirmed in the
case studies. For example, in Jamalpur, Bangladesh, the relationship as illustrated below was
found.
140 3.5%
120 3.0%
Average of WTP
% of Income
1
100 2.5% Log.(Avg. of WTP)
Log. (% of Income)
80 2.0%
Curve 1 explains the relationship between income and WTP in absolute terms. Households
with higher income are willing to pay more for the total quantity of water consumed. Curve 2
illustrates the relation between income and WTP as a percentage of income. When income
increases, a smaller proportion of household income is set aside to pay for water.
Source: RETA 5608 Case Study on the Jamalpur Water Supply and Sanitation Project,
Bangladesh
CHAPTER 3: DEMAND ANALYSIS & FORECASTING 47
22. An increase in income will cause the demand curve for water to shift to
the right (from D1 to D2), as illustrated in Figure 3.4. At price P1 the quantity of water
consumed increases from OQ1 to OQ2. The shift in the demand curve to the right also
indicates a higher willingness to pay (from P1 to P2) for the same quantity of water OQ1.
Figure 3.3 Relation between Demand and Income: Shift of Demand Curve
WTP/m3
P2
P1
D2
D1
23. The relation between water consumption and income can be expressed in
terms of “income elasticity”. The formula for income elasticity is as follows:
dQ/Q dQ I
ei = + -------- = -------- x ------
dI/I dI Q
24. The literature on the relation between income and water consumption is
rather limited, but a value between 0.4 and 0.5 appears to be reasonable (see e.g.
Katzman 1977, Hubbell 1977 and Meroz 1986). A positive income elasticity of 0.4
means that if an individual’s household income increases by 10 percent, consumption is
expected to increase by 4 percent. A value which is less than one shows that the demand
for water is rather inelastic to changes in income.
25. For example: consider the case that income increases from Rp200,000
(I1) to Rp300,000 (I2 ), and water consumption increases from 15 m3/month (Q1) to 18
m3/month (Q2). In this case, income elasticity is calculated as follows:
48 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
ei = (dQ/DI x I/Q)
= ((Q2-Q1)/(I2-I1)) x I1/Q1
= ((18-15)/(300,000-200,000)) x 200,000/15
= 0.4
(a) Size and Type of Industry. Logically, size and the type of industry
will, to a large extent, determine the quantity of future
consumption of water.
27. The demand for water is often analyzed for relatively homogeneous
groups of users. In many cases, a distinction is made between domestic and
nondomestic users. Furthermore, demand from domestic users is often separately
analyzed for :
(ii) those to be connected to the system under the proposed project (new
connections).
50 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
28. The factors which determine domestic demand may differ between the
urban and the rural sector. In the rural sector, special attention needs to be given to
such things as the availability of alternative water sources, the income and ability to pay
for or contribute to the project facilities and their management, the choice of technology
and the use of water for other purposes like agriculture (e.g. livestock or vegetable
growing) and, the ability to operate and maintain facilities. In the rural context, the
assessment of effective demand will have to be carried out in close consultation with the
local population, and attention needs to be given to issues such as community
participation and hygiene education.
29. The factors which determine demand will, to a large extent, define the
need for information. The project analyst will have to determine the key factors which
need to be considered into the analysis and design of the project.
P1 C A
O Q3 Q2 Q1 Quantity (m3)
52 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
32. Assume that present demand is Q1 at price P1. This refers to point A on
demand curve D1. To reduce demand, one can try to:
Source: IWACO-WASECO. 1989(October). Bogor Water Supply Project: The Impact of the Price Increase in June
1988 on the Demand for Water in Bogor.
CHAPTER 3: DEMAND ANALYSIS & FORECASTING 53
(ii) move the demand curve to the left, resulting in a reduction in the
quantity demanded from point A to point C. This means that at the same
price level (P1), the quantity of water demanded will be reduced from
OQ1 to OQ3. This can be achieved through:
(iii) save the use of water or avoid waste of water resources on the supply
side. Such measures could include:
In most cases, water demand management and conservation policies will consist
of a comprehensive set of measures to be carried out over a longer period of
time to achieve the desired results.
54 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
700
2
600
1
500
400
300
200
1981 Trend
100
Current Trend
0
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025
Source: Bhatia, Ramesh; Rita Cestti and James Winpenny. Water Conservation and Reallocation: Best Practice
Cases in Improving Economic Efficiency and Environmental Quality. A World Bank-ODI Joint Study.
CHAPTER 3: DEMAND ANALYSIS & FORECASTING 55
35. The collection of data will require resources in terms of time and money.
The benefit or value of additional data will gradually decrease. The project analyst will
have to decide at which point the benefits of the additional data will no longer justify the
cost made. At minimum, conducting a limited but representative household survey
should provide essential information which could save large sums of money in terms of
reduced investment.
(ii) conducting reconnaissance surveys in the area to observe the actual field
situation; and
(ii) data about the quantity, quality and costs related to the current water
supply (and sanitation) situation; and
56 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
(iii) data about the future use of water supply and sanitation: the preferences
of respondents with regard to the future level of service, type of facility
and what they are willing to pay for the preferred level of service.
40. Estimating a demand curve for a new WSP is difficult in practice and will,
in most cases, require adequate resources and extensive field research. The Handbook
emphasizes the need to undertake a comprehensive analysis of water demand for without-
project and with-project situations for reasons explained earlier. Data on the factors which
determine the demand for water will provide the project analyst with a better
understanding of what is required and will enable him/her to formulate a better project.
41. The techniques and methods used in water demand forecasting will be
explained in this section by making use of a case study. The case study describes the
steps in demand forecasting as it was carried out for Thai Nguyen, Viet Nam, one of the
case studies developed in preparing this Handbook. Some of the data have been slightly
adapted for illustration purposes.
forecasting in Thai Nguyen is described in the boxes. The data needed to carry out the
demand analysis are presented in Table 3.2. A short description of Thai Nguyen is
presented in Box 3.6.
Box 3.6 Thai Nguyen Case Study: Description of the Project Area
Thai Nguyen is located 80 km to the north of Hanoi on the Cau River. At the end of 1995, the
population was 191,600 persons. The existing water supply system had 5,114 metered
connections, which provided approximately 24 percent of the population with water.
The economy of Thai Nguyen is based on state enterprises, mainly heavy industry. There are also
universities in the town. The main source of non-piped water supply is shallow groundwater,
obtained through open wells or with electric pumps. A very small part of the population uses
water from the river.
Source: RETA 5608 Case Study on the Provincial Towns Water Supply and Sanitation Project, Thai
Nguyen, Viet Nam
43. A starting point in demand forecasting is determining the size and future
growth of the population in the project area. This step is explained below, whereas the
application of this step in Thai Nguyen is given in Box 3.7.
(i) The first step is to estimate the size of the existing population. In most
cases, different estimates are available from different secondary sources.
Often, the survey team will have to make its own estimate based on the
different figures obtained.
(ii) The second step is to determine the service or project area (the area which
will be covered by the project) and the number of people living there. The
most important consideration in this respect is the expressed interest from
potential customers. Furthermore, the service area will have to be
determined in consultation with the project engineer, the municipal
authorities and/or the water enterprise. Technical, economic and political
considerations will play a role.
(iii) The third step is to estimate future population growth in the project area.
This estimate will be based on available data about national, provincial or
local population growth. It should also take into account the effects of
urban and/or regional development plans and the effects of migration
from rural to urban areas.
58 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
Box 3.7 Thai Nguyen Case Study: Assumptions Used, Ability to Pay and Willingness to Pay
Assumptions:
In the case of Thai Nguyen, these figures and assumptions have been applied (Table 3.2, lines 1-10):
(i) The annual population growth for Thai Nguyen has been estimated at 3% up to the year
1999 and 2.5% after that (line 1). These figures are lower compared to other Vietnamese
towns because of its location in the mountainous northern part of Viet Nam; this percentage
is applied to the population figures (line 2).
(ii) At present, the service area in Thai Nguyen covers only part of the town area with a 1995
population of 140,442 (line 4). The service area will remain the same in the new project. The
population in the service area is assumed to grow faster compared to the general population
growth because of better infrastructure facilities (line 3). The major expansion in the number
of connections is assumed to take place between 1996 and 2000, then gradually after that,until
75% coverage is achieved (line 5).
(iii) One of the targets of the project was to achieve 75% coverage in the year 2020 (line 10).
This figure was checked with the findings of a household survey, as follows:
First, 93% of the population expressed an interest in connecting to the system by means of a house
connection. Interest for other service levels ( public tap) was very low.
Second, willingness to pay for water in Thai Nguyen amounted to an average of VND3,005 per m3
(VND2,317 per m3 for connected households and VND3,119 per m3 for non-connected households).
WTP for connected households is lower than WTP for non-connected households. This might be
explained by the fact that connected households are most likely influenced by the current average water
tariff of VND900 per month. It can be assumed that willingness to pay will increase when income and
service levels increase. For these reasons, it was concluded that the set target of 75% coverage was
realistic.
Third, with regard to ability to pay for water, a so-called “affordability tariff” was calculated. The
affordability tariff indicates the average tariff at which a certain percentage of the population can afford to
use a minimum amount of water and not spend more than a given percentage of his/her income. An
example of this calculation is given below:
Items Unit 1996 2000
Average Monthly Income VND‘000 1,052 1,184
Lowest Income at 75% Coverage VND‘000 600 675
Min. expenditure on water (5% of income) VND‘000 30 33.8
Minimum consumption Lcd 60 60
Average HH size persons 4.26 4.26
Average monthly consumption m3 7.78 7.78
Affordability tariff VND/m3 3,856 4,344
Estimated costs of water VND/m3 4,000 4,000
In Thai Nguyen, average monthly income in 1996 was VND1,052,000. 75%of the population had an
income higher than VND600.000. Taking 5% as an indicator of the maximum ability to pay, this means a
maximum amount of VND30,000 per month. Assuming a minimum consumption of 60 lcd and an
average household size of 4.26 results in a minimum required monthly consumption of 7.78 m3 per
month. The affordability tariff is calculated as VND30,000/ 7.78 m3 = VND3,856/m3.
This indicates that in the year 1996, 75% of the population can afford to pay an average tariff of
VND3,856 per m3 (based on a minimum consumption of 60 lcd) and not spend more than 5% of
his/her income. Comparing the affordability tariff with the estimated average costs of water to be
provided by the project, indicated that the target of 75% was realistic.
Source: RETA 5608 Case Study on the Provincial Towns Water Supply and Sanitation Project, Thai
Nguyen, Viet Nam
CHAPTER 3: DEMAND ANALYSIS & FORECASTING 59
(iv) Finally the project has to determine which level of coverage it intends to
achieve. Often, project objectives contain statements such as:
In this statement, it is assumed that the town area and service or project
area are the same.
44. It is strongly recommended that such statements are verified in the field
by asking potential customers:
(iii) whether or not they are willing and able to pay for the related costs; and
(i) One figure which is often available is the average size of the household.
This figure may, however, differ from the number of persons making use
of one connection. Other persons may live in or near the house, making
use of the same connection. Sometimes this information is available from
the water enterprise; otherwise, it should be checked in the survey. An
assumption will have to be made whether or not this number will remain
the same over the project period. With increasing coverage in the service
area and decreasing family size over the years, it may be assumed that the
number of persons making use of one connection will gradually decrease.
(ii) Depending on the coverage figures assumed in step 1(iv) and the data
found under step 2(i), the annual increase in the population served and
the annual increase in the number of connection can be calculated.
60 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
Box 3.8 Thai Nguyen Case Study: Number of Persons per Connection
In Thai Nguyen, the number of connections in 1995 was 5,114 ( Table 3.2, line 6). The
average household size was 4.26. In the household survey it was found that the average
number of persons making use of one connection is 6.5. In many cases, private connections
were in fact used as a kind of yard connection. It was assumed that with the increasing
number of connections in town, the number of persons making use of one connection would
gradually decrease from 6.5 in 1995 to the level of 4.26 in year 2010 (line 8). By multiplying
the end of year number of connections by the number of persons per connection and
comparing this to the total population in the service area, the end of year coverage in the
service area is calculated (line 9 and 10).
Source: RETA 5608 Case Study on the Provincial Towns Water Supply & Sanitation,Thai Nguyen, Viet
Nam
46. The starting point for estimating demand for water in the with-project
situation is to estimate demand or consumption before-project. In piped water supply
systems with working watermeters, estimating existing consumption is straightforward.
In some cases, consumption before the project will provide a reasonable indicator of
demand for water at a certain price level. In cases where the current system capacity is
insufficient, consumption may be lower than actual demand. In those cases, data from
other utilities may provide indications of normal consumption patterns.
47. In the case of piped water supply systems without installed watermeters,
it is often difficult to estimate water consumption before-project. In general,
households do not have a clear idea of how much water they consume per day;
therefore, directly asking these households does not provide reliable answers. In the case
studies, the following methods were suggested to address this problem:
(i) measuring the volume of water storage facilities available in the house
and estimating how much of the storage capacity is used on a day-to-day
basis;
(ii) carrying out a small in-depth survey among a selected number of users;
48. The without-project situation is not necessarily the same as the before-
project situation
In the case of Thai Nguyen, existing consumption was found to be 103 lcd. Because the water
pressure was considered sufficient by the large majority of customers and an average supply of
about 23 hours per day could be maintained throughout the year, it was therefore assumed that
the consumption before-project of 103 lcd equals demand at the current price level.
Furthermore, because the project basically aims at an expansion of supply to achieve a higher
coverage, it has been assumed that demand without-project will remain equal to demand “just
before the project”.
Source: RETA 5608 Case Study on the Provincial Towns Water Supply and Sanitation Project, Thai
Nguyen, Viet Nam
49. Future demand for water at the household level will depend on a number
of factors. The most important factors are changes in service level, water tariffs and
income. When extrapolating demand to cover new supply areas, other factors such as
62 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
differences in income, housing, alternative sources, etc. will have to be taken into
account.
(a) new WSPs often generate a better level of service and may,
therefore, cause a shift from one demand curve to a new demand
curve as another product is offered. In this case, price elasticities
pertaining to the old demand curve could only be used as a proxy
for the true price elasticity which is very difficult to determine.
Box 3.10 Thai Nguyen: Relation between WTP and Number of Households
In Thai Nguyen, the willingness-to-pay survey for already connected households provided the results as
given in the Table below. The 1996 tariff is VND900/m3 and therefore, all households are apparently
willing to pay that amount. Subsequently, 83 percent of households is willing to pay a tariff of
VND1,500/m3, 61 percent is willing to pay VND2,000/m3, etc. These figures can be depicted in a graph
shown in the Box. The line connecting the dots could be considered as a “surrogate demand curve”.
Percentage
of
Households WTP/m3
WTP (VND/m3) (Cumulative) 6000
5,500 0
5000
5,000 2
4,500 2 4000
4,000 4 3000 3
3,500 11 WTP/m
3,000 26 2000
2,500 37 1000
2,000 61
1,500 83 0
1,000 96 0 20 40 60 80 100
900 100 Percentage of Households (Cumulative)
Assume that in this case, the new tariff has been fixed at VND1,500/m3. An indication of the relative
change in the number of HH (q) to relative changes in tariff (p) for these values is as follows:
Assuming a constant average consumption per HH, this figure provides an indication of the value of the
point price elasticity for connected households.
(iii) Income Levels. In most cases, it is expected that the real income level of
households will increase over the lifetime of a WSP, which is normally 20
to 30 years. When real income increases, the demand for water is also
expected to increase, depending on the value of income elasticity. A
generally accepted level of income elasticity is between 0.4 and 0.5. An
application of the issues raised above for Thai Nguyen is presented in Box
3.11.
CHAPTER 3: DEMAND ANALYSIS & FORECASTING 65
In Thai Nguyen, the following assumptions were made to estimate future demand:
• Existing per capita consumption equals existing demand: Q = 103 lcd (Table 3.2, line 12);
• The proposed tariff for the year 2010 is VND2,000/m3 and for the year 2020, it is
VND2,500/m3. This results in required annual real price increases (dP/P) of 5.87 percent
during the period 1997-2010 and 2.26 percent in the period 2011-2020 (line 38).
• A price elasticity was estimated at – 0.3 (line 37);
• increases in real income of 4 percent per annum (based on national forecasts) (line 42);
• an income elasticity of + 0.50 was assumed based on literature (line 41).
A sample calculation of the above estimate for the first year (1997) is given below:
The combined effect of changes in price and income on quantity demanded shows a net result
of: 2% - 1.76 % = 0.24% (see line 44 and line 11).
The positive effect of the income increase is slightly larger than the negative effect of the price
increase. Per capita consumption in this case will increase from 1996 to 1997 by 103 x 0.0024 =
0.24 liter.
Source: RETA 5608 Case Study on the Provincial Towns Water Supply and Sanitation Project, Thai
Nguyen, Viet Nam.
50. Based on the projections for population and per capita water
consumption, the domestic demand for water can be calculated by multiplying the
number of persons served with the daily consumption as shown in Box 3.12.
66 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
The total domestic demand for Thai Nguyen for the year 1995 is calculated as follows:
51. In general, future demand for water from the nondomestic sector is
difficult to estimate. Future demand will depend, among others, on the price of water,
reliability of supply, type and size of industries, regional and urban development plans,
legal requirements, etc.
52. In the short run, the nondomestic sector is less likely to quickly
increase/decrease the use of water as a result of changes in prices, meaning that
nondomestic demand for water is more inelastic than domestic water demand. Reasons for
this include:
(i) the users of water are often not the persons who have to pay for it (for
example, in offices, hotels);
(ii) for industries, the costs of water are, in general, very small as compared to
other production costs; and,
(iii) any increase in the price of water is likely to be incorporated in the cost-
price of the product produced and be charged to the consumer.
53. In the medium to long run, however, large nondomestic consumers will
often compare the costs of water from other sources with the costs of water from the
piped system. If they can obtain cheaper water from other sources, they may not be willing
to connect to the piped system, unless there is a legal obligation.
CHAPTER 3: DEMAND ANALYSIS & FORECASTING 67
54. In some cases, the government may wish to encourage industries to apply
water saving technologies and the application of such technologies will be encouraged by
higher water tariffs such as discussed in Box 3.13.
When projecting industrial demand for three cities in China, industrial water consumption
was expected to grow at a rate of 8.7 percent per annum, based on expected industrial
growth rates for the next ten years. At the same time, a survey conducted by the municipal
authorities revealed that water consumption of industries in the cities was two to five times
higher than water use in comparable industries in many other countries. In an effort to
conserve water, the cities now require industries to improve water consumption efficiency
by imposing penalties for excessive use. At the same time, water allocations to new
industries are now based on prudent water use for the concerned industrial sector. Based on
these new policies and their strict enforcement, it is expected that water consumption levels
will be reduced to about 70 percent of existing levels. This would result in an industrial water
consumption growth of 4.7 percent per annum, compared with the initially much higher
growth rate of 8.7 percent.
(i) the application of past growth rates for nondomestic water consumption;
The estimates for nondomestic consumption in Thai Nguyen are given in Table
3.2 and illustrated in Box 3.14.
68 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
In Thai Nguyen, a small survey was conducted among nondomestic users. It appeared that
enterprises were willing to pay up to VND3,500/m3. At higher tariffs, however, they would start
developing alternative water sources.
• government/social sector at 2.5 percent per year based on forecasts for population growth
(Table 3.2, line 16)
• commercial sector growth at 3.0 percent per year (line 21);
• industrial sector growth at 4 percent per year, based on forecasted industrial growth (line 26);
The calculations are presented in Table 3.2 lines 16 - 29. Calculations for the different sectors are
basically the same. The number of connections is first multiplied with the annual growth figure
for the sector. This figure is then multiplied by the average consumption per connection per day
and subsequently with 365 to find the annual figures.
Source: RETA 5608 Case Study on the Provincial Towns Water Supply and Sanitation Project, Thai
Nguyen, Viet Nam
56. After having added domestic and nondomestic demand (see lines 31/32 in
Table 3.2), certain technical parameters need to be incorporated in order to determine the
total demand for water.
Peak Factor
60. The demand for water will very seldom be a constant flow. Demand for
water may vary from one season to another and throughout the day. Daily demand will
show variations and there will be peak hours during the day, depending on local
conditions. These seasonal and daily peak factors will influence the size of the total
installed capacity. These are technical parameters and will be determined by project
engineers.
61. The demand for water is seldom constant. Rather it varies, albeit
seasonally, daily and/or based on other predictable demand characteristics. At different
times of the year the demand for water may be higher than others due to factors such as
heat which may increase the demand for water for hygiene, drinking and other purposes.
At different times of the day the demand for water may be higher than others, based on
people’s and industries needs and patterns of consumption. At other periods, the stock
and flow requirements of the system may be impacted by other predictable events, such
as an industrial activity. These seasonal, daily and other predictable demand factors are
known as peak factors.
63. Data about daily and seasonal water consumption patterns will normally be
available from secondary data or may be collected in the household survey. The
application of technical parameters in Thai Nguyen is given in Box 3.15.
70 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
In the case of Thai Nguyen, the objective was to reduce UFW from its existing level of 39
percent in year 1995 to 25 percent in year 2015 (Table 3.2, line 33). The Peak Factor has
been estimated at 1.1.
(Please note that the figures resulting from the above calculations slightly differ from the figures in Table 3.2,
due to rounding off.)
HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
28 Consumption l/con/d 82,848 83,676 82,203 80,756 79,334 77,937 71,313 65,251 63,072 60,966
29 Total consumption m³/d 1,408 1,479 1,511 1,544 1,578 1,612 1,795 1,998 2,349 2,763
30 Total 000m³/yr 514 541 552 564 576 590 655 729 858 1,011
TOTAL DEMAND
31 No of Connections (end of year) Number 5,372 5,890 7,955 10,772 14,618 19,868 27,830 39,002 46,130 54,562
32 Total Water Demand 000m³/yr 2,519 2,665 3,122 3,730 4,533 5,601 6,680 8,003 9,903 12,284
3. PRODUCTION
33 UFW (%) % 39% 38% 38% 37% 36% 33% 30% 27% 25% 25%
34 UFW 000m³/yr 1,626 1,666 1,890 2,185 2,569 2,759 2,863 2,960 3,301 4,095
35 Peak factor (10%) 000m³/yr 414 433 501 591 710 836 954 1,096 1,320 1,638
36 Required Production('000m³/Year) 000m³/yr 4,559 4,764 5,513 6,506 7,813 9,195 10,497 12,059 14,524 18,016
PER CAPITA DEMAND 1996 1997 1998 1999 2000 2005 2010 2015 2020
(HOUSEHOLDS)
37 Price Elasticity -0.300 -0.300 -0.300 -0.300 -0.300 -0.300 -0.300 -0.300 -0.300
38 Price Increase 5.87% 5.87% 5.87% 5.87% 5.87% 5.87% 2.26% 2.26%
39 Tariff 900 953 1,009 1,068 1,131 1,504 2,000 2,236 2,500
40 Price Effect 0 0 -1.76% -1.76% -1.76% -1.76% -1.76% -1.76% -0.68% -0.68%
41 Income Elasticity 0.500 0.500 0.500 0.500 0.500 0.500 0.500 0.500 0.500
42 Income Increase 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
43 Income Effect 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
44 Combined Effect (Increase lcd) 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% 1.32% 1.32%
45 Liters/Capita/Day 103 103 104 104 104 105 107 114 122
No - number; l/con/d - liters per connection per day; m³/d - cubic meter per day; '000m³/yr - thousand cubic meter per year; m³/mo/conn -
cubic meter per month per connection
CHAPTER 3: DEMAND ANALYSIS & FORECASTING 73
There is also a need to consider the question whether or not the current
demand figures with-project and without-project will change over time.
Estimates of future water consumption with-project have been made in
Box 3.11. In the without-project situation, current consumption figures
may change over time as a result in changes in income, prices or changes
74 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
(ii) Users not yet connected to a piped system. Again, two questions need
to be answered. The first question is: what will be the nonincremental use
of water in the with-project situation? An example is given in Table 3.4.
(i) displace all the water currently used from other sources (non incremental
demand = 65 lcd); and
The second question is: whether or not these figures will change over
time. Box 3.16 provides an example which explains how the quantity of
nonincremental water can be determined. A summary of step 9 is
presented in Table 3.5 showing incremental demand for both connected
and nonconnected households as well as nonincremental demand for
water.
1/ It should be noticed, however, that this simplifying assumption may not hold in practice. As a result
of the lower water price (with the project), the average water consumption of previously nonconnected
households may actually increase more than the average water use of connected households. If empirical
evidence is available, this should then be taken into account in the demand forecast.
76 HANDBOOK FOR THE ECONOMIC ANALYSIS OF WATER SUPPLY
1998 Total Demand without the project 2,519,000 m3/year (line 11)
1998 Total Demand with the project 3,730,000 m3/year (line 12)
(refer to Table 3.2, line 32)
1998 Supply by the Project: 1,211,000 m3/year (line 13)
1998 Incr. demand connected HH 8,750 m3/year (line 14)
1998 Incr. demand non-conn. HH 8,447 m3/year (line 15)
1998 Nonincremental demand 1,193,803 m3/year (line 16)
As can be seen in the case of Thai Nguyen, the incremental water demand with-project is
rather small, which is caused by the fact that the current use of water from other sources by non-
connected households is relatively high and therefore, these households will only marginally increase
their water consumption.
Table 3.5 Calculation of Nonincremental Demand
Unit 1995 1996 1997 1998 1999 2000 2005 2010 2015 2020
Connected Households
1 Current conn HH consumption ‘000m³/yr 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250
1,250
2 Increase per capita consumption % 0.22% 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% 1.32% 1.32%
3 Future conn HH consumption ‘000m³/yr 1,250 1,252 1,255 1,258 1,261 1,264 1,280 1,295 1,383 1,477
4 Incremental Demand ConnHH ‘000m³/yr 0 2 5 8 11 14 30 45 133 227
Nonconnected Households
5 Current no. of connections 5,114 5,114 5,114 5,114 5,114 5,114 5,114 5,114 5,114 5,114
6 Future no. of connections 5,114 5,625 7,683 10,494 14,332 19,574 27,495 38,620 45,695 54,065
7 No. of persons per connection 6.50 6.32 6.14 5.97 5.81 5.65 4.90 4.26 4.26 4.26
8 Current Avg. water use lcd 103 103 103 103 103 103 103 103 103 103
9 Future Avg. Water use lcd 103 103 103 104 104 104 105 107 114 122
10 Incr demand 0 0 3 8 19 36 99 195 693 1,426
Connected+Nonconn HH
11 Total Existing Demand ‘000m³/yr 2,519 2,519 2,519 2,519 2,519 2,519 2,519 2,519 2,519 2,519
12 Total Future Demand ‘000m³/yr 2,519 2,665 3,122 3,730 4,533 5,601 6,680 8,003 9,903 12,284
13 Additional Supply by Project ‘000m³/yr 0 146 603 1,211 2,014 3,082 4,161 5,484 7,384 9,765
14 Incr Demand Conn HH ‘000m³/yr 0 2 5 8 11 14 30 45 133 227
15 Incr Demand Nonconn HH ‘000m³/yr 0 0 3 8 19 36 99 195 693 1,426
16 Nonincr Demand 0 143 595 1,194 1,984 3,031 4,033 5,245 6,558
8,113