Cost Benefit Analysis of Natural Gas Transmission Projects The EIB approach

Transcription

1 Cost Benefit Analysis of Natural Gas Transmission Projects The EIB approach Nicola Pochettino European Investment Bank entsog. 5 th TYNDP Workshop, Brussels, 20 th June

2 Contents The European Investment Bank Value added and project requirements Cost Benefit Analysis A methodology for natural gas transmission, LNG terminals and underground gas storage projects CBA Case Study Underground Gas Storage Project Security of Supply A key selection criterion for energy infrastructure projects entsog. 5 th TYNDP Workshop, Brussels, 20 th June

3 The European Investment Bank Value added and project requirements entsog. 5 th TYNDP Workshop, Brussels, 20 th June

4 Value Added of EIB s lending activities The three pillars as guideline to project investment Pillar I Support for EU priority objectives Pillar II Assessment of project quality and soundness Pillar III Financial benefits of EIB funds Technical assistance entsog. 5 th TYNDP Workshop, Brussels, 20 th June

5 Project Requirements Be consistent with at least one of EIB s objectives Be reasonably mature and with good permitting prospects Be technically sound; Use of proven technologies and setting-out of necessary countermeasures to overcome operational problems of the (new) interconnected system Be financially viable Show an acceptable economic return (benefits offset the costs); Analysis of alternatives, EIB s economic criteria Comply with National, EU and EIB s procurement policy EU Procurement Directive, EIB s Guide to Procurement (also applied to non-eu projects) Comply with National, EU and EIB s environmental and social standards EU Environmental Directives (EIA, Habitats, Birds etc.), EIB s Statement on Environmental Principles and Standards (also applied to non-eu projects) entsog. 5 th TYNDP Workshop, Brussels, 20 th June

6 Cost Benefit Analysis A methodology for natural gas transmission, LNG terminals and underground gas storages entsog. 5 th TYNDP Workshop, Brussels, 20 th June

7 Project identification Natural gas grids, terminals and storage To identify the project is necessary to: state scale and dimension analyse the market where the gas will be placed establish the need for additional infrastructure through a market and/or system study describe the engineering features of the infrastructure: basic functional data physical features other features (in particular gas system structure and building techniques) entsog. 5 th TYNDP Workshop, Brussels, 20 th June

8 Feasibility and option analysis Natural gas grids, terminals and storage Key information required: energy demand (average and peak); seasonal and long-term trends and demand curve for a typical day; for UGS, typical injection-withdrawal cycle (seasonal, daily, etc.). time horizon: networks 25 years; LNG/UGS 20 years price forecast The option analysis should consider possible alternatives: within the same infrastructure possible realistic alternatives for producing the energy required entsog. 5 th TYNDP Workshop, Brussels, 20 th June

9 Economic Analysis: benefits Natural gas grids, terminals and storage Generally quantified as the revenue from the sale of energy and evaluated by estimating the community s willingness to pay for energy: quantifying the costs the user must incur to acquire energy taking into account the project s load factor / utilisation rates In case of UGS/LNG, the economic analysis quantifies the main roles for storage and their associated benefits (or avoided costs): Seasonal storage, valued at the difference between the price of summer and winter gas (value of swing); Peak shaving, estimated by costing the alternative fuels; Security of supply, calculated on the same basis used for the peak shaving issue System technical benefits, valued at the avoided cost of additional facilities (e.g. compressor stations) entsog. 5 th TYNDP Workshop, Brussels, 20 th June

10 Economic Analysis: costs and externalities Natural gas grids, terminals and storage Costs Capital expenditures Operating expenditures Externalities Environmental Security of supply Sensitivity and risk analysis Capex, opex Mix and dynamics of critical inputs: demand dynamics (i.e. forecasts of: growth rates, demand elasticity, load factors, etc.); the dynamics of the prices of gas and of the substitute fuels For UGS, the length of the working gas cycle entsog. 5 th TYNDP Workshop, Brussels, 20 th June

11 CBA Case Study Underground Gas Storage Project entsog. 5 th TYNDP Workshop, Brussels, 20 th June

12 UGS Project identification 1/2 The underground gas storage (UGS) project consists of the conversion of an onshore depleted gas field into an UGS. The reservoir is situated 2500 m subsurface. The project involves the drilling and completion of 10 new wells (6 for injection/withdrawal, 3 for observation and 1 for liquids reinjection), a compression and processing plant and a 10 km pipeline between the plant and the national grid. The core elements of project implementation are scheduled to be undertaken from 2012 until The project is important and urgent for the Country s energy sector. UGS facilities in the Country, which are considered part of the gas transportation system, are regulated. It will mainly be used to cope with seasonal variations in gas demand and will also reinforce the capacity of the Country s gas system to meet peak demand requirements as well as managing potential supply shortfalls. entsog. 5 th TYNDP Workshop, Brussels, 20 th June

13 UGS Project identification 2/2 The project is planned to operate at reduced injection volumes first two years in order to monitor reservoir conditions, before stepping up to full capacity in the third year of operations (2018). The planned total gas storage volume of 1.0 Gm 3 with 0.7 Gm 3 of working and 0.3 Gm 3 of cushion gas is technically feasible. The operating regime at full capacity envisages injection over a 5 to 6 month period and withdrawal of the 1.0 Gm 3 of working gas over a 4 month period. The average injection rate is planned to be 5.5 Mm 3 /day and the average withdrawal rate is 8.3 Mm 3 /day. The peak withdrawal rate is 15 Mm 3 /day, which represents ca. 10% of the Country s peak daily gas demand. This rate, could in principle supply gas for 65 days starting from a full reservoir. The storage s investment cost is EUR 700/m 3 Annual operating costs are estimated at 3% of capex entsog. 5 th TYNDP Workshop, Brussels, 20 th June

14 UGS Economic analysis The economic analysis of the storage facility has identified and quantified three main roles for storage and their associated benefits (or avoided costs) as discussed briefly below: seasonal storage, valued at the difference between the value of summer and winter gas (value of swing), which averaged 0.7 EUR/GJ over the last decade. value of peak shaving, estimated by costing the alternative fuels, which have been assumed to be gasoil (for residential) and fuel oil for power/industry. The number of peak shaving days has been estimated in 30 days per annum. security of supply, estimated as the value of gas of the avoided interruption, multiplied by probability weighted expected volume of interrupted supply covered by the storage. The number of days possibly concerned by supply disruption issues (= total 120 winter days x 1% probability of event) is 1.2 per annum. entsog. 5 th TYNDP Workshop, Brussels, 20 th June

15 UGS Economic rate of return The economic rate of return (ERR) of the project is calculated at 7.5%. In the event that the facility can not be used at full capacity due to reservoir limitations, sensitivity analysis shows that the ERR reduces by 1%-point for each 10% reduction in working gas capacity. Another approach to the assessment of the economic profitability of the project would be to evaluate the best alternative to the project. Closest option is deemed to be an LNG regasification plant. If the UGS were not built, seven150,000 m 3 LNG tanks would need to be constructed and operated. In this case, the economic cash flow is the difference in costs (capex + opex + externalities) between the LNG facility and the UGS, which also leads to an economic rate of return of about 7.5%. entsog. 5 th TYNDP Workshop, Brussels, 20 th June

16 Security of Supply A key selection criterion for energy infrastructure projects entsog. 5 th TYNDP Workshop, Brussels, 20 th June

17 Evaluating Security of Supply Defining a tool to prioritise and select energy projects Security of supply is a fundamental pillar of energy policy, particularly for countries heavily dependent on foreign supplies Difficult task is to translate this goal into economically sound decisions The value of energy security is relevant in the assessment of the economic viability of energy projects Market-centric definition of energy security: the availability of a regular supply of energy at an affordable price (IEA, 2001) Availability physical element Affordability pricing element Broader definitions of energy security include: Accessibility geopolitical element Acceptability environmental element entsog. 5 th TYNDP Workshop, Brussels, 20 th June

18 Energy Security and Market Failures Features of externality Energy security possesses public good characteristics and relates to problems of market failures: Incomplete markets for security of supply Incomplete and asymmetric information Grid externalities (spill-over effects on others not priced in the market) This means that: the market is not able to provide the right level of security in all circumstances public intervention could be justified externalities or, alternatively, the willingness-to-pay for security non satisfied through the market should be evaluated entsog. 5 th TYNDP Workshop, Brussels, 20 th June

19 The right level of security of supply Conceptual steps External costs need to be identified, quantified, and translated in monetary terms (i.e. convert externality in a unit value, e.g. /MWh) Quantifying the level of the externality is the most useful approach with respect to providing policy guidance It represents a useful tool to internalize the externality and correct this market failure. To determine the optimal security level, the following tasks should be performed: 1. Evaluating the likelihood of events (such as supply disruptions, price shocks, price volatility ) leading to negative consequences; 2. Assessing the damage incurred by society because of these events; 3. Identifying tools to limit the likelihood of these events and/or to restrict the damage they provoke; 4. Calculating the costs of implementing each of these tools for mitigation and adaptation. entsog. 5 th TYNDP Workshop, Brussels, 20 th June

20 A methodology To quantify and monetize security of energy supply In line with the definition of energy security, a methodology evaluates the two constituent components separately: Energy Security = Physical availability component + Pricing component The physical availability component relates to the infrastructure under consideration taking into account the costs associated with compliance with the N-1 rule and equals: total discounted costs to comply with the N-1 standard total discounted energy supplied by the project The pricing component depends on the country s exposure to price volatility and equals the cost to hedge the such volatility The methodology can help: evaluate and compare different energy projects establish energy policies entsog. 5 th TYNDP Workshop, Brussels, 20 th June

21 For more information Tel: (+352) entsog. 5 th TYNDP Workshop, Brussels, 20 th June