Geographical Extension and Cost Benefit Analysis

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Geographical Extension and Cost Benefit Analysis

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Title: Geographical Extension and Cost Benefit Analysis


1
Geographical Extension and Cost Benefit Analysis
SIXTH FRAMEWORK PROGRAMME 6.1
Sustainable Energy Systems
Jan Melichar, CUEC, Prague, Czech Republic Ståle
Navrud, SWECO, Oslo, Norway Brussels, 17 February
2
Scope of the presentation
  • Assessment of external costs as a by-product of
    energy conversion in new geographical areas
  • regions where the external costs have not been
    quantified so far
  • Central and Eastern European countries (CEEC)
  • North African countries (NAC)
  • Social Cost-Benefit Analysis (CBA) in the energy
    sector
  • Cost-Benefit Analysis Guidelines
  • Application to Energy Investment Projects in CEEC
    and NAC

3
Part I Geographical Extension
4
Map of geographical extension
5
Gross electricity production in analyzed regions
in 2006 (TWh)
6
Electricity production in analyzed regions by
fuel in 2006 ()
7
Gross electricity production in analyzed
countries (in 2006, TWh)
8
Electricity production in analyzed countries by
fuel (in 2006, )
9
Energy technologies and fuels covered
  • Externality valuation has been performed on a
    country-specific base in order to fit
  • primary energy used for electricity and heat
    production
  • energy market conditions, energy and environment
    policy
  • Electricity generating systems according to fuel
    used
  • Coal (17)
  • Lignite (20)
  • Natural gas (17)
  • Heavy and light fuels (11)
  • Oil shale (5)
  • Nuclear (6)
  • Biomass (7)
  • Different electricity generating technologies
  • pulverised bed, fluidised bed, combining heat and
    power, integrated gasification combined cycle
  • condensating and combined cycle gas turbine,
  • pressurized water reactors
  • heat power plants
  • Flue gas cleaning and control system
  • wet scrubber, dry sorbent injection
  • low-NOX burners, selective catalytic reduction
    systems

10
Scope and Use of External Cost Assessment
  • Total external cost
  • Unit external cost comparison
  • Costs per unit of energy output kWh of
    electricity and GJ of heat
  • Structure of the assessment according to impact
    categories
  • Spatial distribution of the assessment
  • Impacts on the country where pollutants are
    emitted
  • Sensitivity of results to CO2 social cost
    estimates
  • Comparison of private and external costs
  • Further use of external cost estimates
  • Economic analysis (e.g. CBA)
  • Internalization process (e.g. pollution charges)

11
Sources of Data
  • Energy output
  • Energy Regulatory Offices
  • Annual reports of energy companies
  • Technical data
  • National Hydrometeorological Institutes (Register
    of Emissions and Air Pollution Sources)
  • Expert statements of Integrated Pollution
    Prevention and Control permit
  • Emission data
  • National Hydrometeorological Institute
  • Integrated Pollution Register
  • Publicly available from energy companies

12
Model and calculation assumptions
  • EcoSenseWeb V1.3
  • External costs of operation phase is covered
  • Impact assessment
  • local, regional and hemispheric range analysis
  • Impact categories
  • human health, buildings, crops
  • loss of biodiversity due to acidification and
    eutrophication
  • impacts due to micorpollutants
  • climate change
  • Methodology and assumptions applied
  • human health impacts assessed using Core
    Functions
  • climate change assessment based on Social Cost
  • of Carbon equal to 19 for 1t CO2equiv.
  • Particulate Matters ? recalculation of PM10 and
    PM2.5 according to RAINS methodology

13
Total external costs from fossil fuels and
biomass (in Mio. , 2005)
14
External costs from fossil fuels and biomass
(2005, c/kWh)
15
Structure of external costs according to impact
categories (in )
16
External costs from nuclear power (2006, c/kWh)
17
Sensitivity of results to Social Costs of Carbon
estimates
GHG 19 2000/t CO2 equiv - avoidance costs, the
value do not change with time GHG AC Avoidance
costs, values until 2050, the value changes with
time (according to Kuik) GHG MCD Marginal damage
costs, world average equity weighted, 1 trimmed
average and 1 disounting, values until 2100,
the value changes with time (according to Anthoff)
5.31
5.10
4.04
18
Comparison of private and external costs (2005,
c/kWh)
Note external cost are 2 3 times higher than
private costs
19
Policies for internalization
  • Central and Eastern European countries
  • economic instruments widely used (pollution
    charges, energy taxation etc.), but dominantly
    for revenue rising only
  • Limited knowledge and experience in benefit
    assessment esp. for CBA and RIA
  • lack of interest among decision-makers ? limited
    potential for environmental tax reforms (though,
    some steps already taken in the Czech Republic
    and Estonia)
  • North African countries
  • energy sector often highly subsidized, but do not
    reflect differences in external costs
  • no previous external cost calculations ? need for
    dissemination to decision-makers and public

20
Part II Cost-Benefit Analysis
21
NEEDS CBA Guidelines
  • IT IS NOT
  • A comprehensive publication with advanced
    theoretical foundations and many details
  • A spreadsheet solver of CBA
  • IT IS
  • A step-by-step procedure on how to perform social
    CBA of energy projects and policies i.e.
    including environmental and health impacts -
    external costs
  • A practical easy-to-use guide, which has been
    applied by NEEDS partners in RS 1d (Central and
    Eastern European and North African countries)
  • A simple introduction to CBA accompanied by the
    essential basics the main practical
    difficulties are also pointed out
  • A reference list
  • - References provided to textbooks with more
    practical and theoretical details
  • - References provided to other applications,
    e.g. CBA of CAFE
  • (Clean Air for Europe) and EU directives

22
Aim of CBA guidelines
  • Describe the basic methodological fundamentals
    and principles of Cost-Benefit Analysis
  • Show how to determine the economically most
    efficient energy investment project alternative
    or energy policy, when the project or policy is
    under evaluation (ex ante)
  • Provide a step-by-step procedure on how to
    conduct Cost-Benefit Analysis in a consistent and
    transparent way
  • Show how to account for external costs (impacts
    on human health, building materials, crops,
    ecosystems, and climate change) from energy
    production in CBA

23
What is Cost-Benefit Analysis and how can it help?
  • CBA as a widely accepted economic assessment tool
  • Used extensively as a decision support tool in
    many sectors, many European countries, EC, USA
    (Regulatory Impact Analysis), The World Bank etc.
  • THE AIM OF CBA
  • to compare social costs and benefits induced by
    any project, program or policy, both private and
    public actions
  • to determine whether the entire society will be
    better off if the project is implemented

24
The major steps in CBA
  • Define project objective, and specify project
    alternatives including the reference alternative
    (often status quo)
  • Decide whose benefits and costs count
  • Catalogue the impacts and select measurement
    indicators
  • Predict the impacts over the time horizon
  • Monetize all impacts (social costs and benefits)
  • Discount benefits costs to obtain present
    values
  • Compute the net present value of each
    alternative
  • Perform sensitivity analysis present
    uncertainties
  • Make a policy recommendation

25
STEP 1Define project objective and specify the
main project alternatives
26
STEP 1Reference alternative (Status quo option)
  • Establish the status quo option
  • Represents no change from the current situation
  • Benchmark against which all other options are
    compared
  • NOTE!
  • If status quo option is not a viable alternative
    ? compare the project options relative to the
    specific displaced alternative

27
STEP 1Creating project alternatives/options
  • Feasible and realistic options that will solve
    the problem and meet the proposed objectives and
    targets
  • Screening all available options to create a
    shortlist

Different electricity generating technologies
coal-fired, gas-fired, nuclear, combining heat
and power, biomass etc. Type of generating
system according to fuel used pulverized bed,
fluidized bed, supercritical steam cycle,
integrated gasification combined cycle, combined
cycle gas turbine, water-cooled nuclear power
plants, internal-combustion engines,
etc. Sulphur dioxide control system wet
scrubber, spray dryer systems, dry sorbent
injection and regenerable systems. Nitrogen
oxides control system low-NOX burners, staging
air within the combustion zone, selective
catalytic reduction systems. Control of
particulate matters electrostatic precipitators,
fabric filters.
28
STEP 2Decide whose benefits and costs counts
  • Decide the geographical scope
  • Local, national, regional or global perspective
  • Make a list of interest groups and sub-groups of
    society affected
  • Firms
  • Consumers
  • Government
  • Point out who gets the benefits (beneficiaries)
    and who bears the costs (losers) in order to
  • - determine cost and benefit (effiency)
  • - distributional effects (equity)

29
STEP 3Catalogue the impacts and select
measurement indicators
  • Identify and list the physical impacts and the
    measurement indicator
  • Consider all relevant impacts
  • economic impacts
  • impacts on human health
  • environmental impacts
  • Distinguish between beneficial impacts (benefits)
    and cost impacts (costs) for each project option

30
STEP 3 What is a benefit?
  • Monetary
  • Revenues - direct or indirect revenues
  • Avoided costs - costs if action is taken
  • Cost savings - reduction in existing expenditures
    if the project option proceeds
  • Residual value
  • Non-monetary
  • Quantitative - external costs avoided human
    health and environmental impact
  • Qualitative - other benefits not monetized or
    expressed in the physical terms

31
STEP 3 What is a cost?
  • Monetary
  • Investment costs - the expenditure accumulated
    until the start-up of a power plant
  • Fixed costs - remain constant over different
    volumes of energy production
  • Variable costs - vary according to the volume of
    energy production
  • Non-monetary
  • Quantitative - particularly external costs
    linked to the adverse effects on human health and
    environment
  • Qualitative - other costs not monetized or
    expressed in the physical terms

32
STEP 4Predict the impacts over the project life
  • Determine the time horizon / life time of the
    project considering the physical and economic
    life of the project
  • Determine the extent of the analysis, e.g. full
    life cycle assessment
  • Quantify (in physical units) the impacts (both
    benefits and costs) using appropriate data and
    tools for each project option
  • Estimate the impacts for each year of the life
    time of the project

33
STEP 5Valuing relevant costs and benefits
  • Assign monetary values to each of the relevant
    quantified impacts both benefits and costs.
  • Valuation principles
  • - Costs Opportunity Cost Principle
  • - Benefits Willingness-to-pay
  • Benefits and costs must be valued either in real
    terms (constant prices) or in nominal terms
    (current prices)
  • To obtain real values (e.g. 2000-prices) adjust
    for inflation e.g. Consumer Price Index for
    consumer goods and other price indices for
    investment costs

34
STEP 5Valuation Market price corrections
  • Conversion of market prices to social values in
    order to reflect true economic value ? some
    market price are distorted because of monopoly,
    oligopoly markets, and government interventions
  • Fiscal corrections indirect taxes, subsidies and
    pure transfer payments should be deducted
  • Correction for externalities Costs and benefits
    for which market prices are not available, like
    impacts on human health and environment. Physical
    impacts are monetized using EcoSenseWeb 1.3, and
    Guidelines to Value Transfer for impacts not
    covered by EcoSense (e.g. ecosystem impacts from
    oil spills)

35
STEP 6Discount benefits and costs to obtain
present values
  • Future benefits and cost are discounted relative
    to present benefits and costs
  • To discount the impacts use social discount rate
    ? s 5.5 p.a. as proposed by EU for Cohesion
    countries and 3.5 p.a. for the other countries
  • NAC use national discount rates

36
STEP 7Compute the net present value of each
mutually exclusive alternative
  • DECISION RULE
  • Single alternative adopt the project if its NPV
    is positive
  • More than one alternative select the project
    with the largest NPV

37
STEP 7Benefit-Cost ratio
  • For large number of options may not be enough
    financial resources available to undertake them
    all, even if they all have high net present
    values
  • OPTIONAL
  • Where PV (C) are the restricted costs
  • pick the project with the highest BC ratio

38
STEP 8 Perform sensitivity analysis
  • There may be considerable uncertainty about both
    the predicted impacts and monetary values
  • Uncertainty about the magnitude of the impacts we
    predict and their monetary value
  • Guidelines to Treatment of Uncertainty
  • Three approaches
  • Sensitivity analysis how do NPV change as we
    vary a single variable while others are constant
    (e.g. discount rate, fuel costs, investment
    costs, monetary values of external costs)
  • Scenario analysis propose base-case assumptions
    for each variable that are most representative ?
    calculate for them lower bound and upper bound.
    NPV (lower) will represent pessimistic prediction
    (worst case) and NPV (upper) will cover
    optimistic prediction (best case)
  • Monte Carlo sensitivity analysis Determine and
    combine probabilities of all possible outcomes
    for all variables to estimate the probability
    distribution of NPV.

39
STEP 8 Sensitivity analysis diagram
40
STEP 9 Make a recommendation
  • Summarize the results
  • objective, project options and their NPV
  • all assumptions including discount rate etc.
  • the results of sensitivity analysis
  • report also non-monetized, particularly those
    that could affect the decision
  • Provide appropriate recommendations
  • ? it must be clear whether the decision maker
    should proceed with the project and, if so, which
    option should be approved
  • Generally, the analyst should recommend adoption
    of the project with the largest NPV

41
Conclusions from CBA case studies
42
CBA as Decision Support
  • Including external costs estimates (using NEEDS
    EcosenseWeb 1.3., and value transfer guidelines
    for impacts not covered) makes CBA a much more
    useful tool for decisionmaking with regards to
    - energy investments
  • - renewables versus fossil fuels
  • - different energy technologies
  • - abatement technologies
  • - environmental regulations
  • Research need
  • -External costs of local environmental impacts
    and visual intrusion from renewables (on-shore
    wind, small scale hydro, wave and tidal,
    solar-thermal and PV) Improve ways to
    generalize/transfer values
  • and transmission lines needed for renewable

43
Without Project (Today)
44
With Project
45
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48
Two ways of covering Norways annual electricity
deficit of 6.7 TWh
  • Up-grading old
  • hydropower plants
  • - Renewable energy
  • - Highest cost higher
  • electricity bill
  • - No new environtal
  • impacts
  • Increase number of
  • wind parks
  • - Renewable energy
  • - Electricity bill as today
  • - New environmental impacts
  • - visual impacts
  • - landscape impacts
  • - noise impacts
  • - impacts on birds

49
Contingent Valuation Survey in-person
interviews national sample N1000
  • Willingness-to-pay (WTP) - question
  • Up-grading old hydro power plants is more
    expensive than than wind power. What is the most
    your household is willing to pay annually as an
    additional tax on your electricity bill to avoid
    the environmental impacts of wind power?
  • (A card with amounts from 0 to 1400 euro shown to
    the respondents)
  • 38 WTP0 (but 17 are Protest Zeros)
  • Mean WTP 140 euro/household/year
  • 5 increase in their average annual
    electricity bill

50
Jan MELICHAR jan.melichar_at_czp.cuni.cz Ståle
NAVRUD stale.navrud_at_umb.no
  • ?
  • Jan MELICHAR
  • jan.melichar_at_czp.cuni.cz
  • Ståle NAVRUD
  • stale.navrud_at_umb.no

Research conducted within Research Streams 1d and
3a of NEEDS New Energy Externalities
Developments for Sustainability
Research conducted within Research Streams 1d and
3a of NEEDS New Energy Externalities
Developments for Sustainability
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