Cost Benefit Analysis in the context of the Energy Infrastructure - - PowerPoint PPT Presentation

Cost Benefit Analysis

in the context of the Energy Infrastructure Package The Institute of International and European Affairs February 26, 2013, Dublin Leonardo Meeus

www.florence-school.eu

Cost Benefit Analysis

Introduction

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• €200 billion needs to be invested in electricity and gas infrastructure in
• rder to achieve the 2020 energy and climate objectives
• Risk that almost half of this investment will be too late or not at all

WHY A PACKAGE?

• Projects of Common Interest
• Cost allocation, investment incentives

WHY CBA IN THIS PACKAGE?

• Single CBA method will be developed for electricity infrastructure projects
• ENTSO-E proposed a draft CBA method at the end of 2012

WHY A THINK REPORT ON THIS TOPIC?

• Conclusion: this proposal is an important step in the right direction, but

improvements could still be made, as proposed in our report

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Cost Benefit Analysis

Report outline

• 1. Scope of the analysis

– Project definition – Baseline definition – Effect mapping – Distributional effects

• 2. Calculation of net benefit

– Monetization – Inter-temporal discounting of costs and benefits – Uncertainty

• 3. Ranking projects

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OF

www.florence-school.eu

Cost Benefit Analysis

Report outline

• 1. Scope of the analysis

– Project definition – Baseline definition – Effect mapping – Distributional effects

• 2. Calculation of net benefit

– Monetization – Inter-temporal discounting of costs and benefits – Uncertainty

• 3. Ranking projects

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OF

www.florence-school.eu

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Distinguishes between effects to be

• Monetized: “total project expenditures”, “social-economic welfare” and “variation in losses”
• Quantified as additional indicators: “Social and environmental sensibility”, “security of

supply”, “RES integration”, “variation in CO2 emissions”, technical resilience” and “robustness”

ENTSO-E draft proposal

Ranking projects based on these effects

• Implies an implicit monetization of effects that have not been monetized explicitly
• Which is less transparent than monetizing all relevant effects

Comments

• CBA should concentrate on a reduced list of effects and those should be

monetized

• Ranking should be primarily based on the monetized net benefit

Recommendations

Cost Benefit Analysis

• 1. Scope of the analysis

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Cost Benefit Analysis

• 1. Scope of the analysis

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EXTERNALITIES MACROECONOMIC EFFECTS POWER SYSTEM

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Cost Benefit Analysis

• 1. Scope of the analysis

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• (1) Macroeconomic effects are relatively similar for most projects
• (2) CO2 effect is internalized in the production cost savings by the carbon price
• (3) Renewable energy effect is also internalized by the renewable energy target

Effects we can disregard

• (1) Local environmental and social costs are partly internalized in the

infrastructure costs by EU Environmental Impact Regulations (except for visual impact)

• (2) Early deployment benefits are partly covered by EU innovation support (except

for exceptionally innovative projects)

• (3) Other market benefits are usually relatively small (except for isolated areas)

Effects we can disregard for most, but not all, projects

Cost Benefit Analysis

• 1. Scope of the analysis

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Cost Benefit Analysis

• 1. Scope of the analysis

www.florence-school.eu

Cost Benefit Analysis

Report outline

• 1. Scope of the analysis

– Project definition – Baseline definition – Effect mapping – Distributional effects

• 2. Calculation of net benefit

– Monetization (includes which model to use) – Inter-temporal discounting of costs and benefits – Uncertainty

• 3. Ranking projects

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OF

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• The draft ENTSO-E proposal leaves certain modeling choices to the

Regional Groups, while also providing some model specifications

ENTSO-E draft proposal

• It will be important to coordinate modeling choices by Regional Groups

with the data validation process of the baseline

• Value of lost load should be established to allow for the monetization of

consumer surplus

Comments

• The model used to monetize the production cost savings and gross

consumer surplus needs to be explicitly stated

• Value of lost load should be established following CEER guidelines, or an

intermediate solution could be that a value is agreed upon as part of the data validation process for the baseline

Recommendations

Cost Benefit Analysis

• 2. Calculation of net benefit

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• The proposal already refers to the use of multiple scenarios and the use of

sensitivity analysis to deal with uncertainty, but not yet a stochastic approach

ENTSO-E draft proposal

• Stochastic approach has already been implemented by several TSOs in

Europe for electricity infrastructure projects (including Eirgrid)

Comments

• Stochastic approach consistent with the Energy Roadmap 2050 should be

used to address uncertainty

• Ranking should then be based on the mean value of the resulting net

benefit distribution, with adjustments for projects that have a significantly different risk profile

Recommendations

Cost Benefit Analysis

• 2. Calculation of net benefit

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Cost Benefit Analysis

Recommendations

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• (1) project interaction must be taken into account in the project and baseline definition
• (2) data consistency and quality should be ensured
• (3) the conventional time horizon is 20-25 years
• (4) CBA should concentrate on a reduced list of effects and those should be monetized
• (5) distributional concerns should not be addressed in the calculation of net benefits

Scope of the analysis

• (6) infrastructure costs need to be disaggregated
• (7) the model used to monetize the production cost savings and gross consumer surplus

needs to be explicitly stated

• (8) a common discount factor should be used for all projects
• (9) a stochastic approach consistent with the Energy Roadmap 2050 should be used to

address uncertainty

Calculation net benefit

• (10) the ranking should be primarily based on the monetized net benefit

Ranking projects

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Thanks for your attention

http://think.eui.eu; leonardo.meeus@eui.eu