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

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1 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

2 Overview The policy context Cost Benefit Analysis basics The ENSTO-E methodology Discussion 2

3 The policy context EU internal electricity market integration components Market rules (3rd package 2009 and follow up grid codes) Market integration (especially with large share of intermittent RES-E) calls for abundant (cross-border) transmission capacity Problems with infrastructure (missing; counter-incentives) Better utilizing existing infrastructure (addressed by DA market coupling) Missing infrastructure: weak incentives due to cost-based remuneration and lengthy licensing; strategic underinvestment EU response Regulation 347/2013 to develop trans-european energy infrastructure ENTSOE 10 years network development plans (TYNDP) Connecting Europe Facility (Bn 5.35 EUR for ) 3

4 EU priority energy corridors Priorities beyond 2020 Electric highways CO2 transmission system 4

TYNDP_2014_Projects_of_European_relevance_MT_2014-2018.

5 TYNDPs TYNDP_2014_Projects_of_European_relevance_MT_ pdf TYNDP_2014_Projects_of_European_relevance_LT_ pdf 5

6 Main characteristics of Regulation 347/2013 Project of Common Interest (PCI): a project contributing to creating priority energy corridors or to end energy islands Project promoter(s) put forward a proposal for a PCI (electricity, gas, oil, CO2) Regional groups review proposals, Commission decides about the PCI list Project valuation is based on a social Cost-Benefit Analysis PCI rewards : Simplified and fast licensing (one-stop shop with max 3 years duration); priority status at MS level; part of TYNDP Financial incentives: Connecting Europe Facility (studies; limited contribution to work) Bn 5.35 EUR ( ) Structural funds (smart grids) Costs acknowledged by national regulators in transmission tariffs 6

7 Criteria for electricity PCIs General necessary for at least one of the energy infrastructure priority corridors potential overall benefits outweight costs significant cross border impact Specific for electricity projects: significantly contribute to market integration (lifting isolation, reducing congestion, improving competition) sustainability (RES-E integration) security of supply 7

8 PCI lists and CEF decisions to date First PCI list published in 2013; updated biannually 195 PCIs on the present (2015) list CEF funding: ~ 100 projects to date 2014: EUR 647m, 34 proposals. Addressing security issues in Baltics 2015: EUR 366m, 35 PCIs (15 electricity). Bulk of support for CSEE 2016: EUR 707m, 27 PCIs (11 electricity). 8

9 Monitoring scheme for PCI project implementation REGIONAL GROUPS E&G: MS, NRAs, TSOs, project promoters, Commission,, ACER, ENTSO Oil&CO2: MS, project promoters, Commission + other invited stakeholders Kérheti a megvalósulást segítő intézkedést ACER Decesion right over PCI cost allocation and remuneration through national tariffs (Cross Border Cost Allocation) Project promoters prepare application (including CBA) Annual Report on implementation In case of significant delay EU inspector might be nominated 9

10 Overview The policy context Cost Benefit Analysis basics The ENSTO-E methodology Discussion 10

reference and discounted to present by a social discount rate

11 CBA: principal idea Monetary assessment of project impacts over a pre-defined project timeline and compared to a pre-defined reference and discounted to present by a social discount rate Alternative decision criteria: Social NPV (> 0) B/C ratio (> 1) 11

12 Scope of CBA (THINK report) Advantages: Consistent assessment of costs and benefits Possibility of ranking by monetary results Challenge: Monetization of some benefits might be challenging 12

13 Key issues to address Project definition clustering? Baseline / reference definition Quantifying the impacts of new infrastructures on several policy related measures compared to reference market and network modelling Calculation of net social benefits - consider full monetization! discounting Understanding distributional impacts of projects by stakeholders; by member states Uncertainty representation scenario analyses Ranking 13

14 Overview The policy context Cost Benefit Analysis basics The ENSTO-E methodology Discussion 14

15 ENTSO-E approach to the CBA methodology EU Regulation 347/2013 requests ENTSO-E to establish a methodology, including on network and market modelling, for a harmonised energy system-wide cost-benefit analysis at Union-wide level for projects of common interest (Art. 11) CBA is applied in the framework of Regional planning and in the EU-wide TYNDP process as well as in evaluating proposed PCIs The goal of project assessment is to characterise the impact of transmission projects, both in terms of added value for society (increase of capacity for trading of energy and balancing services between bidding areas, RES integration, increased security of supply, ) as well as in terms of costs ENTSO-E has been using a combination of CBA methodology with multi-criteria assessment in the recent TYNDPs 15

Project valuation in the context of future scenarios based on 4 visions Projects with significant cross border impact Top-down Reference and

16 Project valuation in the context of future scenarios based on 4 visions Projects with significant cross border impact Top-down Reference and Sensitivity Scenarios Compares the contribution of a project to different indicators on a consistent basis / reference ENTSO-E electricity sector future visions 16

17 CBA issues - project identification Project identification Projects vs clusters Independent separate evaluation Complementary to consider as a single project Competitive individual benefits with comparison to benefits if both are built Regulation requires individual evaluation Minimum capacity requirements as eligibility criteria Incentive to present groups of projects as a single one: eligibility check Grouping of investments should only be allowed when strong synergies are present 17

18 CBA issues assessment is combined cost benefit and multi-criteria framework Not all monetized, but some measured in physical units! No weighting scheme of the various items no final ranking of projects 18

19 CBA - Main benefit categories (1) B1:Security of Supply: DEF: provision of secure supply of electricity in normal conditions Method: Expected Energy Not Supplied (EENS) or Loss of Load Expectancy (LOLE) calculation by network/market models Monetization: Only EENS (VOLL - Value of Lost Load calculation is difficult) B2: Socio-Economic Welfare DEF: Increase trading opportunity by increased GTC and reduced total system cost Method: Calculating consumer and producer surplus and congestion rents by market models; alternative: generation cost approach Monetization: Market models already provide monetary values 19

20 The concepts of VOLL, LOLP and EENS Major variables to define the economic value of improved system security (e.g. by a new transmission line): Loss of Load Probability (LOLP) System load at t Economic value of lost load (VOLL) The economic value of lost load (VOLL); Loss in value to the customer resulting from a sudden interruption of electricity supply. Measured in /kwh Which of them can be affected by new infrastructure? The expected unit cost of a disruption: LOLP * VOLL ( /MWh) EENS: LOLP*system load (MWh) Economic value of improved system security: dlolp*system load *VOLL ( ) 20

21 Estimating VOLL Since there is no market for load shedding (1st best method), we can estimate it by different methods. Proxy methods GDP/consumed electricity Price of electricity (typical: VOLL >> price) Wage Revealed preference methods Interruptible consumer contracts Balancing market prices Stated preference methods Direct costing Contingent valuation surveys Case studies 21

22 Socio-economic welfare components How these components change due to a wholesale price change induced by the implementation of a new infrastructure? 22

23 CBA - Main benefit categories (2) B3. RES Integration: DEF: measures reduction in RES curtailment and increased RES generation connectability Method: avoided curtailment and network modelling on possible increase in RES generation connection monetization: not monetized, savings in avoided curtailment included in generation cost saving (B2) B4. Variation in Losses (Energy Efficiency) DEF: savings arising from reduced thermal losses Method: network and market simulation tools estimate saving in losses that reduces production requirements Monetization: market study gives value of loss (e.g. market value/price) 23

24 CBA - Main benefit categories (3) B5. variation in CO2 emissions DEF: changing in CO2 emissions due to the changing trade and production patterns Method: using market and network models and accounting for standard emission rates socioeconomic welfare category (B2) includes it already B6. Technical Resilience/System Safety Margin DEF: Contribution to system security during extreme situations Method: scoring key performance indicators (e.g. Steady state, voltage collapse criteria) Monetization: No 24

25 CBA - Main benefit categories (4) B7. Robustness/Flexibility DEF: ability of the system to meet future scenarios that are different form present projections Method: probabilistic approach of future scenarios and scoring key performance indicators Monetization: No 25

26 CBA Costs, Social Impacts, GTC C1: Total Project Expenditure DEF: Total investment cost + maintenance costs Method: accounting for the entire lifetime of equipments Social impacts S1. Environmental impacts: assessment of local impacts, e.g. length of line run through environmentally sensitive areas S2. Social impacts: assessment of local impacts, e.g. length of line run through socially sensitive areas GTC assessment Network modelling 26

27 Additional valuation issues Geographic scope: EU Time frame: analysis period starts with commissioning date; combine mid-term and long-term analyses Discount rate: 4% real for 25 years lifetime and no residual value Benefit analysis options: Take Out One at the Time (TOOT) Put IN one at the Time (PINT) 27

28 Summary table Serves to highlight all benefits, costs and social assessment according to the multi-criteria framework applied But: no weighting scheme is applied presently No ultimate ranking of projects! Source: ENTSO-E

29 or summary figure 29

30 CBA and Cross Border Cost Allocation GR-BG interconnection: project cost: 160 m; annual net welfare impact: 190m Net consumer surplus Producer (incl. LNG) surplus Storage operation profit Net profit from long-term contracts TSO auction revenues Total social welfare GR -76, ,9 114,9 122,9 BG 60,3-8,2 0-46,7 103,8 109,2 RO 94,8-98,8 0-24,5-7,5-35,9 HU 1,7-0,4 0-1,2-7,6-7,5 MK 3, ,6 0 0,6 SI ,1-0,1 AT ,1-0,1 HR 0,6-0,4 0-0,2-0,1 0 SB 0,3-0,1 0-0,2 0 0 BA 0, Total 84,2-66,9 0-31,5 203,3 189,1 Benefit distribution unequal How to share the cost of building PCI projects? Cross Border Cost Allocation scheme What cost allocation rule would you propose? Role of ACER 30

31 ENTSO-E CBA 2.0 consultation ongoing Combined multi-criteria and CBA method kept No full monetization Maturity if the projects considered (eligibility, clustering) SoS criteria re-defined: B1, B6 and B7 combined into B1 and B2: adequacy and system stability Adequacy: value of transmission is related to avoided investment into generation Other benefit and social impact criteria kept largely unchanged TOOT and PINT in GTC calculation 31

32 Overview The policy context Cost Benefit Analysis basics The ENSTO-E methodology Discussion 32

33 Discussion Monetization vs multi-criteria approach Ranking Transparency of applied market and network models ENTSO-E will carry out regional and EU-wide resource adequacy assessment (winter package) CBCA sufficient to generate financing?? 33

34 THANK YOU FOR YOUR ATTENTION! 34

2 nd ENTSO-E Guideline for Cost-Benefit analysis of Grid Development Projects

2 nd ENTSO-E Guideline for Cost-Benefit analysis of Grid Development Projects Irina Minciuna Martti van Blijswijk Nils Schindzielorz Cross-RG meeting electricity Brussels, 5 April 2017 @ENTSO-E All rights