2 nd Technical Workshop: Gas Market Design and Natural Gas Transmission Grid Codes

Size: px

Start display at page:

Download "2 nd Technical Workshop: Gas Market Design and Natural Gas Transmission Grid Codes"

Elmer White
5 years ago
Views:

1 2 nd Technical Workshop: Gas Market Design and Natural Gas Transmission Grid Codes Reviewing and Approving TYNDP A Regulatory Perspective Evangelos Penglis Partner, VIS Economic & Energy Consultants 08/12/2017

2 Gas infrastructure appraisal in the EU Process for regulatory review & approval of gas TYNDPs and constituent projects Review of TYNDP system-wide assumptions Review of TYNDP specific projects definition and categorization Review of project-specific assumptions Specific projects financial analysis Specific projects cost-benefit analysis Sensitivity and risk analysis Multi-criteria analysis for prioritization of specific projects 2

3 Gas infrastructure appraisal in the EU ENTSO-G has established a methodology for evaluating projects of potential impact at EU wide level: Energy System-Wide Cost-Benefit Analysis (ESW- CBA) ESW-CBA is a Cost Benefit Analysis methodology that relies upon ENTSO-G s EU wide simulation model and is used for developing ENTSO-G s TYNDP and for evaluating whether specific projects gain the PCI status There is no common methodological framework for investment planning by TSOs or for regulatory review of network development plans. Each NRA establishes its own regulation setting the criteria and the process by which it evaluates network development plans. ENTSO-G s ESW-CBA can provide direction and elements for use at a national level by TSOs, but cannot be applied as a whole 3

4 Gas infrastructure appraisal in the EU ENTSO-G CBA Methodology 4

5 Gas infrastructure appraisal in the EU The standardized European cost benefit analysis for all types on infrastructure projects is specified and detailed in the Guide to Cost-Benefit Analysis of Investment Projects, known as EC CBA Guide, drafted by EC DG Regio This is a guide that is at the base of ENTSO-G approach and is also supported by the European Investment Bank (EIB) It is the official blueprint methodology that EU infrastructure project promoters have to complete if: They want to receive grants from structural or other national (EU subsidized) funds, They want to get clearance from DG Competition over state aid exemption rules, They want to apply for infrastructure loans from EIB 5

6 Gas infrastructure appraisal in the EU Graphical representation of ENTSO-G CBA Methodology EC Guide to Cost-Benefit Analysis of investment projects (the EC CBA guide, December 2014) Source: ENTSO-G, 2nd ENTSOG methodology for cost-benefit analysis of gas infrastructure projects, 24 July

7 Gas infrastructure appraisal in the EU Process for regulatory review & approval of gas TYNDPs and constituent projects Review of TYNDP system-wide assumptions Review of TYNDP specific projects definition and categorization Review of project-specific assumptions Specific projects financial analysis Specific projects cost-benefit analysis Sensitivity and risk analysis Prioritization of specific projects 7

and categorization Review of project-specific assumptions Specific projects

8 Process for regulatory review & approval of gas TYNDPs and constituent projects Review of TYNDP system-wide assumptions Review of TYNDP specific projects definition and categorization Review of project-specific assumptions Specific projects financial analysis Specific projects cost-benefit analysis Prioritization of specific projects 8

9 Gas infrastructure appraisal in the EU Process for regulatory review & approval of gas TYNDPs and constituent projects Review of TYNDP system-wide assumptions Review of TYNDP specific projects definition and categorization Review of project-specific assumptions Specific projects financial analysis Specific projects cost-benefit analysis Sensitivity and risk analysis Prioritization of specific projects 9

10 Review of TYNDP system-wide assumptions 1b 1a 1 Regulator should assess the reasonableness of TYNDP system-wide input data assumptions concerning: Gas demand scenarios (including gas volumes detailed by sector and key customers, peak demand and seasonal profiles) Gas supply scenarios (include assumptions for flexibility of supply within the seasons of the year and under high demand situations) Overall context in terms of gas infrastructure development ( reference grid should include existing and FID projects) 10

Review of TYNDP system-wide assumptions 1b 1a Network capacities, alternative fuel prices, different fuels efficiency factors of electricity production, gas & alternative fuels CO2 emissions, CO2

11 Review of TYNDP system-wide assumptions 1b 1a Network capacities, alternative fuel prices, different fuels efficiency factors of electricity production, gas & alternative fuels CO2 emissions, CO2 emission prices If assumptions are assessed to be reasonable then the Regulator may proceed to TYNDP investment project appraisal review. 1a If assumptions are assessed to be not reasonable then the Regulator may request TSO to revise assumptions & scenario leading to revisions in TYNDP and its constituent projects. Following this, step 1 is repeated. 1b 11

12 Gas infrastructure appraisal in the EU Process for regulatory review & approval of gas TYNDPs and constituent projects Review of TYNDP system-wide assumptions Review of TYNDP specific projects definition and categorization Review of project-specific assumptions Specific projects financial analysis Specific projects cost-benefit analysis Sensitivity and risk analysis Prioritization of specific projects 12

13 Review of TYNDP specific projects definition and categorization 2 2a 2b 2 To enable assessment Regulator should ensure that each project is clearly defined meaning that: for each project the following information is properly included in the TYNDP: project description & rationale, technical information (e.g. length, diameter for a pipeline), capacity from the implementation of the project at new or existing points, investment costs, commissioning date & implementation schedule, current status of preparation (e.g. feasibility) etc.) 13

14 Review of TYNDP specific projects definition and categorization 2 2a 2b each project is a self-sufficient unit of analysis (no essential feature of the project is left outside of the appraisal and at the same time not essential components are avoided) 2a If projects are assessed not to be clearly defined then the Regulator may request the TSO to provide required information 14

Review of TYNDP specific projects definition and categorization 2 2a 2b Projects should be assigned to one of the following categories based on each 2b project s rationale and objectives (projects in

15 Review of TYNDP specific projects definition and categorization 2 2a 2b Projects should be assigned to one of the following categories based on each 2b project s rationale and objectives (projects in each category are appraised under a different process and are prioritized based on their category): Category 1: Projects concerning system integrity and continuity of supply Category 2: Projects concerning system security of supply Category 3: Projects concerning system development and extension/expansion 15

16 Gas infrastructure appraisal in the EU Process for regulatory review & approval of gas TYNDPs and constituent projects Review of TYNDP system-wide assumptions Review of TYNDP specific projects definition and categorization Review of project-specific assumptions Specific projects financial analysis Specific projects cost-benefit analysis Sensitivity and risk analysis Prioritization of specific projects 16

17 Review of project-specific assumptions 3a 3b 3c 3a 3b 3c 3b 3c The Regulator should request the TSO to include legal/regulatory obligations that 3a support inclusion of Category 1 projects, and (if applicable) of Category 2 projects. The Regulator should review technical justification (at least pre-feasibility) for the 3b proposed project. For larger projects more detailed feasibility and environmental studies should be provided (also used as data source for CBA). Option analysis is also required (assessing the technical, economic, environmental aspects and risks of a project under a range of options to identify the most optimal solution) 17

comparing with international and/or national benchmarks-benchmarking) CAPEX (initial investment for fixed

18 Review of project-specific assumptions 3a 3b 3c 3a 3b 3c 3b 3c 3c The regulator to ensure that the following cost information for each project are justified and rational, allowing effective review and appraisal (by comparing with international and/or national benchmarks-benchmarking) CAPEX (initial investment for fixed and non-fixed assets, replacement costs) OPEX (O&M costs of new or upgraded equipment/service of the project) 18

19 Gas infrastructure appraisal in the EU Process for regulatory review & approval of gas TYNDPs and constituent projects Review of TYNDP system-wide assumptions Review of TYNDP specific projects definition and categorization Review of project-specific assumptions Specific projects financial analysis Specific projects cost-benefit analysis Sensitivity and risk analysis Prioritization of specific projects 19

estimate its impact on the TSO s allowed revenues. Financial analysis is focused on categories 2 and 3.

20 Specific projects financial analysis Financial analysis identifies the projects that are financially viable and attractive for the TSO by assessing the net financial cash flows attributable to a project to estimate its impact on the TSO s allowed revenues. Financial analysis is focused on categories 2 and 3. It is not meaningful for projects of category 1, since they do not imply incremental revenue for the TSO. 20

21 Specific projects financial analysis Financial Analysis principles: The financial period should reflect the economic life of the investments (15-25 years according to EC CBA Guide), to effectively assess economic impact of underlying infrastructure projects. Analysis of the amount and breakdown of the total investment costs and operating costs of a project over the years and how these are included in the project cashflows, following verification of their accuracy and reasonableness. The direct benefits that are eligible to be included in the analysis are those that result in either an incremental increase in TSO revenues, through the project or to a reduction in operating costs e.g. increase in volumes of gas transmitted and/ or reduction in maintenance costs etc. The discount rate reflects the opportunity cost of capital to the TSO. A proxy to this cost is the WACC, which is a weighted average cost of TSO s equity and loans (as per its capital structure). 21

22 Specific projects financial analysis The FNPV of a project is defined as the sum that results when the project s discounted financial costs (in the form of incremental cash outflows) are deducted from the discounted financial revenues (in the form of incremental cash inflows) The FRR of a project is defined as the discount rate that produces a zero FNPV. 22

Specific projects financial analysis 4 4b 4a 4 Financial analysis assesses the net (positive less negative) financial cashflows attributable to a project, so as to derive FNPV and FRR.

23 Specific projects financial analysis 4 4b 4a 4 Financial analysis assesses the net (positive less negative) financial cashflows attributable to a project, so as to derive FNPV and FRR. 4a If FRR is higher than the TSO s WACC or in other words if FNPV is positive then the project is financially attractive and its implementation leads to a reduction in average use-of-system tariffs (include NPV, FRR & impact on tariff in Investment Plan). If project s FNPV is estimated to be negative: If the project is considered to be of significant size and with significant economic benefits, then a cost-benefit analysis should be performed. otherwise, it should be postponed. 4b 23

24 Gas infrastructure appraisal in the EU Process for regulatory review & approval of gas TYNDPs and constituent projects Review of TYNDP system-wide assumptions Review of TYNDP specific projects definition and categorization Review of project-specific assumptions Specific projects financial analysis Specific projects cost-benefit analysis Sensitivity and risk analysis Prioritization of specific projects 24

25 Specific projects cost-benefit analysis Cost-benefit analysis elements: CBA is based on the assessment of monetary values for the positive (benefits) and negative (costs) welfare effects of a project. These values are discounted and then totaled to calculate a net total benefit. The economic benefits associated with gas infrastructure projects are: - Supply source diversification - Supply route diversification - Improved security of supply (reducing probability of disruption) - Reduction in gas supply costs (gas to gas competition) - Reduction in energy costs (substitution of other fuels by gas) - Improved energy efficiency (reduced system losses) - Reduction in CHG emissions 25

26 Specific projects cost-benefit analysis Microeconomic approach to monetization: monetizing the economic benefits to allow the review and appraisal of the CBA results. Benchmarks/shadow prices should be used for the calculation of these benefits. The discount rate used is the Social discount rate (SDR), a reflection of the society s relative valuation on today's welfare versus the future welfare driven by a project. (3 7% for developed countries, 8 15% for developing countries, EC has adopted 4%) The project overall performance is measured by economic indicators, ENPV and ERR, allowing comparability and ranking of competing projects. 26

27 Specific projects cost-benefit analysis ENPV of a project is defined as the sum that results when the project s discounted economic net costs (in the form of incremental cash outflows) are deducted from the discounted economic revenues (in the form of incremental cash inflows). The ERR of a project is defined as the discount rate that produces a zero ENPV. Additionally, there is the B/C ratio, which is the ratio of discounted economic benefits over discounted economic costs. 27

28 Specific projects cost-benefit analysis a 5b 5a 5b 5 Cost-benefit analysis may be required from the TSO for projects of categories 2,3 that are financially non-attractive but are deemed to have significant economic benefits. CBA may also be required for larger projects of Category 1, as their implementation would have a significant impact on the tariff. If ENPV is concluded to be positive then for each category the following applies: 5b Category 2 projects are included in the TYNDP and grants should be sought 28

Specific projects cost-benefit analysis 5 5 5 5a 5b 5a 5b Category 3 that do not achieve to attract grant financing through Government funds, IPA

29 Specific projects cost-benefit analysis a 5b 5a 5b Category 3 that do not achieve to attract grant financing through Government funds, IPA or other means, they should not be included in the TYNDP. If ENPV is concluded to be negative then the projects are postponed for the future. 5a 29

30 Gas infrastructure appraisal in the EU Process for regulatory review & approval of gas TYNDPs and constituent projects Review of TYNDP system-wide assumptions Review of TYNDP specific projects definition and categorization Review of project-specific assumptions Specific projects financial analysis Specific projects cost-benefit analysis Sensitivity and risk analysis Prioritization of specific projects 30

31 Sensitivity and risk analysis Sensitivity analysis is important to assess a project s sensitivity and robustness to potential positive and negative changes. Additionally, risk analysis should also be performed, to enable to assess the risks a project is exposed to, as well as any actions to remove/mitigate risks and their impact. Sensitivity analysis - identification of the critical variables of the project, variations in which have the largest impact on the project s financial and/or economic performance (change on the FRR, FNPV) Risk analysis - assessment of risk levels (probability of adverse events to occur times severity of their impact on the project), and identification of potential mitigation/prevention measures 31

32 Gas infrastructure appraisal in the EU Process for regulatory review & approval of gas TYNDPs and constituent projects Review of TYNDP system-wide assumptions Review of TYNDP specific projects definition and categorization Review of project-specific assumptions Specific projects financial analysis Specific projects cost-benefit analysis Sensitivity and risk analysis Prioritization of specific projects 32

multiple appraisal indicators, with weights attached to each indicator, and subsequent scoring of projects

33 Multi-criteria analysis for prioritization of specific projects Prioritization of projects within each of 3 categories Multi-criteria analysis (MCA) approach to project prioritization - comparison of projects against multiple appraisal indicators, with weights attached to each indicator, and subsequent scoring of projects Criteria include financial and economic performance indicators and qualitative indicator(s) reflecting project preparedness/maturity 33

34 Multi-criteria analysis for prioritization of specific projects Additional quantitative indicators can be included in MCA for Regional projects e.g. for cross-border projects or national projects that impact cross border capacity and/or flows Such capacity based quantitative indicators include Import Route Diversification (IRD) and N-1 indicator IRD measures diversification of paths that gas can flow through countries, as a proxy for counterparty diversification and market integration. This indicator measures the impact an additional entry point capacity has (new interconnection points (IPs), LNGs etc) on the % shares of each entry point in the total entry point capacity of a country. The N-1 indicator measures the resilience of a country in case of disruption of its largest infrastructure under high demand condition, with and without the new investment. 34

Introduction to transmission network assessment methodology: the ENTSO-E CBA methodology and the PCI selection process.

Introduction to transmission network assessment methodology: the ENTSO-E CBA methodology and the PCI selection process Péter Kaderják SEERMAP training March 7, 2017 Athens, Greece Overview The policy context