Geographical Extension and Cost Benefit Analysis

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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
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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

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Part I Geographical Extension
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Map of geographical extension
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Gross electricity production in analyzed regions
in 2006 (TWh)
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Electricity production in analyzed regions by
fuel in 2006 ()
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Gross electricity production in analyzed
countries (in 2006, TWh)
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Electricity production in analyzed countries by
fuel (in 2006, )
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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

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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)
  

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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

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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

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Total external costs from fossil fuels and
biomass (in Mio. , 2005)
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External costs from fossil fuels and biomass
(2005, c/kWh)
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Structure of external costs according to impact
categories (in )
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External costs from nuclear power (2006, c/kWh)
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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
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Comparison of private and external costs (2005,
c/kWh)
Note external cost are 2 3 times higher than
private costs
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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

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Part II Cost-Benefit Analysis
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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

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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

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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

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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

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STEP 1Define project objective and specify the
main project alternatives
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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

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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.
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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)

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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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.

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STEP 8 Sensitivity analysis diagram
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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

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Conclusions from CBA case studies
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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

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Without Project (Today)
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With Project
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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

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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

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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