Cost Benefit Analysis in the context of the Energy Infrastructure Package

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


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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2. Calculation of net benefit – Monetization – Inter-temporal discounting of


3. Ranking projects

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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



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EXTERNALITIES

MACROECONOMIC EFFECTS

POWER SYSTEM


• (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





2. Calculation of net benefit – Monetization (includes which

model to use) – Inter-temporal discounting of


3. Ranking projects

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• The draft ENTSO-E proposal leaves certain modeling choices to the Regional Groups, while also providing some model specifications


• 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


• 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


• 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


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


Thanks for your attention http://think.eui.eu; [email protected]

Cost Benefit Analysis in the context of the Energy Infrastructure Package

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