Cost Benefit Analysis in the context of the Energy Infrastructure Package The Institute of International and European Affairs February 26, 2013, Dublin Leonardo Meeus
Cost Benefit Analysis Introduction WHY A PACKAGE? • € 200 billion needs to be invested in electricity and gas infrastructure in order to achieve the 2020 energy and climate objectives • Risk that almost half of this investment will be too late or not at all WHY CBA IN THIS PACKAGE? • Projects of Common Interest • Cost allocation, investment incentives WHY A THINK REPORT ON THIS TOPIC? • Single CBA method will be developed for electricity infrastructure projects • ENTSO-E proposed a draft CBA method at the end of 2012 • Conclusion : this proposal is an important step in the right direction, but improvements could still be made, as proposed in our report 2 www.florence-school.eu
Cost Benefit Analysis Report outline 1. Scope of the analysis – Project definition – Baseline definition – Effect mapping – Distributional effects OF 2. Calculation of net benefit – Monetization – Inter-temporal discounting of costs and benefits – Uncertainty 3. Ranking projects 3 www.florence-school.eu
Cost Benefit Analysis Report outline 1. Scope of the analysis – Project definition – Baseline definition – Effect mapping – Distributional effects OF 2. Calculation of net benefit – Monetization – Inter-temporal discounting of costs and benefits – Uncertainty 3. Ranking projects 4 www.florence-school.eu
Cost Benefit Analysis 1. Scope of the analysis ENTSO-E draft proposal 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” Comments 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 Recommendations • CBA should concentrate on a reduced list of effects and those should be monetized • Ranking should be primarily based on the monetized net benefit 5 www.florence-school.eu
Cost Benefit Analysis 1. Scope of the analysis MACROECONOMIC EFFECTS EXTERNALITIES POWER SYSTEM 6 www.florence-school.eu
Cost Benefit Analysis 1. Scope of the analysis 7 www.florence-school.eu
Cost Benefit Analysis 1. Scope of the analysis Effects we can disregard • (1) Macroeconomic effects are relatively similar for most projects • (2) CO 2 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 for most, but not all, projects • (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) 8 www.florence-school.eu
Cost Benefit Analysis 1. Scope of the analysis 9 www.florence-school.eu
Cost Benefit Analysis Report outline 1. Scope of the analysis – Project definition – Baseline definition – Effect mapping – Distributional effects OF 2. Calculation of net benefit – Monetization (includes which model to use) – Inter-temporal discounting of costs and benefits – Uncertainty 3. Ranking projects 10 www.florence-school.eu
Cost Benefit Analysis 2. Calculation of net benefit ENTSO-E draft proposal • The draft ENTSO-E proposal leaves certain modeling choices to the Regional Groups, while also providing some model specifications Comments • 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 Recommendations • 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 11 www.florence-school.eu
Cost Benefit Analysis 2. Calculation of net benefit ENTSO-E draft proposal • 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 Comments • Stochastic approach has already been implemented by several TSOs in Europe for electricity infrastructure projects (including Eirgrid) Recommendations • 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 12 www.florence-school.eu
Cost Benefit Analysis Recommendations Scope of the analysis • (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 Calculation net benefit • (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 Ranking projects • (10) the ranking should be primarily based on the monetized net benefit 13 www.florence-school.eu
Thanks for your attention http://think.eui.eu; leonardo.meeus@eui.eu 14 www.florence-school.eu
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