Geographical Extension and Cost Benefit Analysis

1. SIXTH FRAMEWORK PROGRAMME [6.1] [ Sustainable Energy Systems] Geographical Extension and Cost Benefit Analysis 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 • electrostatic precipitators, fabric filters

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 costsfrom 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 CO2equiv- 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. 10.84 10.42 7.96 8.07 8.60 Household price 6.56 Industry price 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. 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 What is Cost-Benefit Analysis and how can it help?

24. 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 measurementindicators 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 The major steps in CBA

25. STEP 1Define project objective and specify the main project alternatives

26. 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 STEP 1Reference alternative (Status quo option)

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. 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) STEP 2Decide whose benefits and costs counts

29. 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 STEP 3Catalogue the impacts and select measurement indicators

30. 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 STEP 3 What is a benefit?

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. 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 STEP 4Predict the impacts over the project life

33. 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 STEP 5Valuing relevant costs and benefits

34. 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 healthand 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) STEP 5Valuation – Market price corrections

35. 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 STEP 6Discount benefits and costs to obtain present values

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

37. 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 STEP 7Benefit-Cost ratio

38. 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. STEP 8 Perform sensitivity analysis

39. STEP 8 Sensitivity analysis diagram

40. 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 STEP 9 Make a recommendation

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

48. 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 Two ways of covering Norway’s annual electricity deficit of 6.7 TWh

49. Contingent Valuation Survey in-person interviews national sample; N=1000 • 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 % WTP=0 (but 17 % are ”Protest Zeros”) • Mean WTP = 140 euro/household/year = 5% increase in their average annual electricity bill

50. Jan MELICHAR jan.melichar@czp.cuni.cz Ståle NAVRUD stale.navrud@umb.no ☺ Jan MELICHAR jan.melichar@czp.cuni.cz Ståle NAVRUD stale.navrud@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”