Incorporating real options into flood risk management decision making

Woodward, M. and Gouldby, B.P. and Kapelan, Z. and Khu, S. and Townend, I. (2010) Incorporating real options into flood risk management decision making. In: Real Options - 14th Annual International Conference, 16-19 June 2010, Rome, Italy.

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Abstract

Effective flood risk management involves the quantification of flood risk and the implementation of cost effective, sustainable and environmentally and socially acceptable measures that reduce flood risk. Making decisions regarding the most appropriate long term intervention investments is complex. The complexity of the decisions primarily relates to the evolving nature of flood risk, with particular regard to global climate change but also future socio economic development scenarios. Methods are required that are capable of analysing intervention options in a rational manner, taking account of future uncertainties. Real Options is a recognised approach for facilitating adaptive strategies. It enables the value of flexibility to be explicitly included within the decision making process. In the context of flood risk management, where climate change is influential but uncertain, Real Options offers a practical yet powerful approach that can be used to assist decision makers. In order to provide sustainable management of flood risk over short, medium and long term timescales whilst adapting to and mitigating the effects of climate change a Real Options based decision framework is being developed. This framework enables the evaluation of the most appropriate set of flood risk management intervention measures and the most opportune time to make these interventions. Investment decisions are evaluated across a range of future uncertainties. The framework will enable the valuation of flexibility within the investment process, underpinning the concepts of real options and will employ an optimised decision framework to evaluate potential flood risk management opportunities. The framework has been applied to a small section of the Thames Estuary, and preliminary results show that the method allows suitable inclusion and evaluation of different flood defence options previously deemed uneconomical.

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