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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 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 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
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
3
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
4
OF
www.florence-school.eu 5
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
www.florence-school.eu
Cost Benefit Analysis 1. Scope of the analysis
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EXTERNALITIES
MACROECONOMIC EFFECTS
POWER SYSTEM
www.florence-school.eu 7
Cost Benefit Analysis 1. Scope of the analysis
www.florence-school.eu 8
• (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
www.florence-school.eu 9
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
10
OF
www.florence-school.eu 11
• 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
www.florence-school.eu 12
• 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
www.florence-school.eu
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