*2.3. Micro-Trading in Water Markets and Smart Technologies*

Economists have argued that scarce water can be allocated more efficiently through water markets, rather than through centralized control [40]. Large-scale water rights markets have been operating for decades among utilities and agricultural users [41], and new markets that trade conserved water are emerging as a strategy for demand-side management to create value and new incentives around conservation activities [42,43]. Decentralization of water services is seen as an approach to support a sustainable future for urban water management [44,45], where water can be supplied or treated at small-scale plants, rather than at centralized locations. Efficiencies may be gained through decentralized systems because water or wastewater does not need to be transported over long distances, and resources can be re-used to meet demands on-site. A few studies explore decentralized markets for water supply that allow for trading among households. Haddad [46] proposed a cap-and-trade water program among residential end-users, where a cap is used to grant each customer with use-rights to available water. Water conservationists could sell or rent unused use-rights, and customers would

be heavily penalized for using water in excess of their use-rights. Water customers would call a toll free number to execute transfers through a specially-trained broker. Haddad's micro-trading system was criticized based on the complexities of making initial allocation of use-rights to users; expected sizeable transaction costs; lack of household expertise and willingness to engage in a market; impact of a water-use market on economic development in the area [47,48]. More recently, a decentralized water supply system was developed in Western Australia, in which consumers contribute recycled water, including stormwater and greywater, to a groundwater resource through garden bores [49]. By contributing recycled water, consumers become prosumers and gain credits in their water use accounts. The program is enabled through smart meters, which record water consumption and contributions at 10-minute intervals, and the shallow aquifer provides a pathway in the urban water cycle among households and utility.

The viability of micro-trading has been enabled by the emergence of blockchain technology in water markets. Blockchain technology is an information and communications technology (ICT) capable of addressing some of the challenges in implementing peer-to-peer markets [50]. A blockchain is a distributed ledger that provides a platform for digital transactions without a trusted third-party organization [51,52]. Data structures are both immutable and cryptographically verifiable, promising security, accuracy, authentication and traceability of transactions [53]. Blockchain can also reduce transaction costs associated with third-party brokers, though some fees may be necessary to maintain a critical centralized infrastructure [8]. Smart contracts can be used with blockchain, where smart contracts work as simple scripts encoded on the blockchain that contain predefined directions for automating workflows on recorded data and finalizing the settlement of financial transactions between buyers and sellers [54]. Smart contracts automate micro-trading to allow for rapid reconciliation between consumers and prosumers and reduce the time and associated cost of trading, which may increase participation. As an emerging technology, blockchain has applications in water resources management, supporting data sharing among utilities with assurances of confidentiality and commercial sensitivity; linking flowmeter sensor data with water resources mapping, billing, and operations; facilitating trading and tracking of water credits among large-scale users; allowing households to buy water in a market of competitive water providers; serving as a stable currency to enhance security of water supply [55–57]. Blockchain provides a ledger system that can support peer-to-peer markets for micro-trading water, and a few examples exist to date. Melbourne, Australia, has proposed a rainwater micro-trading program that would be under-girded by blockchain technologies [55]. The program would assign apartments with a quota of free rainwater from a communal tank, and excess rainwater would be conveyed to a large water recycling plant to supply treated water for non-drinking uses [58,59]. In another example, a proof-of-concept model was developed to simulate blockchain-enabled trading of virtual water among homes, where water could be sold by low-consuming households to households that want to exceed a daily limit on water consumption [60]. Similar to Haddad's cap-and-trade system [46], customers would trade water rights. Whereas Haddad's program would allow customers to trade water on a monthly or seasonal basis, the market proposed by Alcarria et al. [60] relies on smart meters, blockchain, and smart contracts, and the functionality of these technologies would allow customers to make daily decisions about trading water.

The smart water grid proposed in this research would rely on smart connected technologies, similar to the systems described above. Smart water meters are needed to record the exact flow rate and time of consumed and produced water. Water that is available during times of peak demands is inherently of higher value than water that is available at times of low demand. Prosumers can invest in large tanks to store water and release it during periods of high consumption, and precise meters are needed to record high resolution of trades. Automated infrastructure components, such as digitally operated pumps and valves, are needed to update flows into the network from prosumers when a trade is negotiated. Blockchain and smart contract technologies are needed to support micro-trading. Unlike other micro-trading systems described above, however, the smart water grid relies on a centralized pipe

network to convey traded rainwater among households, and the focus of this research in on a feasibility analysis to explore how the hydraulics of the pipe network would be affected by decentralized buying and selling of rainwater. The feasibility of a smart water grid will also be affected by the availability and functionality of smart technologies, including blockchain and smart contracts, and the effects of benefits and costs of infrastructure, new technologies, and water and energy savings on market efficiency. While market efficiency and smart technologies are not included in the modeling framework that is described in this research, they should be explored in future research to further test the feasibility of the smart water grid.
