Reviewing and Approving Investments and Network Development Plans. Casestudy: Lithuania

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1 Reviewing and Approving Investments and Network Development Plans. Casestudy: Lithuania Ignas Kazakevičius Chief Specialist of Gas and Electricity Department 05/22/2018, Vilnius

2 Importedgasquantities(TWh) , , , , , , ,7 Total: , , ,3 Source: AB Amber Grid

3 Conceptofregulatedcost The costs of regulated services (products) must be economically justified and necessary for the company to provide regulated activities. Economically justified (necessary) costs are understood as costs, without which company would be unable to carry out a regulated activity. That is, to ensure implementation of legislative obligations related to the energy supply reliability, security and infrastructure development 3

4 Conceptofregulatedcost Same justified cost principle is appliedtotheinvestments The regulated prices include only investmentsapprovedbythencc 4

5 Investmenttypes Investment projects Projects of the Common interest TSO 10 year national development plan (NDP) Yearly investment plans Connectionto the Grid 5

6 Nationallegislation(1) LawonEnergyArt.15(3) Energy undertakings carrying out an regulated activity have to present their planned investments for the NCC for an approval. Investments which are not approved by the NCC are not justified and cannot be in included into the state regulated energy prices Note: Investments can be approved at any stage of project implementation (before, during or after the construction or implementation). Also, project promoters provide investments reports

7 Nationallegislation(2) Other requiremens for investments are depicted in: Law on Natural Gas Art. 31 transpose Gas Directive Art. 22 provisions regarding TSO Ten Year Network development plan(ndp) Law on Natural Gas Art sets requirement for largedsostopresentndpaswell Procedure for the evaluation and approval of investment projects of energy undertakings in NCC TEN-E regulation regarding the approval of Projects of Common interest(pcis)

8 10 year national development plan(ndp) Strategic document which covers main investment projects for the following 10 years Transperancy for the current and future marketparticipants NRA approval of the plan does not mean theapprovaloftheconcreteprojects.thus, projectshavetobeapprovedindividually

9 10 yearnationaldevelopmentplan(ndp) Where the TSO does not execute an investment, NCC shall: Require the TSO to execute the investments; Oblige the TSO to accept a capital increase to finance the necessary investments and allow independent investors to participate in the capital. NRA approves whether national NDP is consistent with the non-binding ENTSO-G TYNDP 9

10 10 yearnationaldevelopmentplan(ndp) Source: AB Amber Grid

11 Investmentprojects Investmentprojectisconsideredasan investmentwhichvalue exceedsthe certain value: 5%of company s yearly investments (but not lower then 0,15 mln. Eur) 2 mln.eur

12 Net benefit calculation 0 B n financial, social-economical cash flows (costs and benefits) during the payback period k discount rate n payback period, half of the depreciation period but 20 years

13 Criteria for the assessment of investment projects(1) No. Investment type / purpose 1. Investments depicted in the national energy strategy (approved by Parliament) or national development plan (approved by Government) which purpose is SoS, renewal/reconstruction, other investment depicted in the national legislation FNPV Not assessed Financial justification FIRR Not assessed Fin. capabili ty Positive Net benefits Positive for electricity and gas (except for renewal/reconstruc tion) Economical justification Impact to the price cap Provided for informational purposes Other aspects (social, SoS) Described social and SoS benefits 2. Electricity and gas investments to smart-meters, PCIs Calculated FNPV and included into net benefit calculation Calculated FIRR and included into net benefit calculation Positive Positive Provided for informational purposes Described social benefits

14 Criteria for the assessment of investment projects(2) Financial justification Economical justification No. Investment type / purpose FNPV FIRR Company s financial capability assessment Net benefits Impact to the price cap Other aspects (social, SoS) 3. Investments for system development to the new areas, connection to the grid FNPV 0* FIRR WACC * Positive Positive Can t increase the price cap 4. Investments for existing infrastructure energy effciency / modernisation FNPV 0* FIRR WACC * Positive Positive Can t increase the price cap Describe d social and SoS benefits

15 Financial capabilityevaluation(1) Companies must have a sufficient financial capability in order to beabletocarryoutinvestments: 1) Equityandsharecapitalratio 0,5 2) No overdue debts 3) According to NCC methodology, NCC annually sets company s general financial strength indicator which have to be higher then the lower limit of financial strength indicator of infrastructure activity(tso, DSO, LNG) and sector(electricity, gas) Lower limit of financial strength indicator = average financial strength indicator of the activity* 0,6 Indicatorsareconvertedtothescoresrangingfrom1to5.

16 Financial capabilityevaluation(2) Financial indicators Calculated values Calculated scores values Indicator The calculation formula Income protection indicators Net profit margin (R1) (net profit / sales income) x 100 Financial leverage indicators Indebtedness ratio (R2) (total liabilities / asset) x 100 Liquidity ratio (R3) (current assets / current liabilities) Commercial activity indicators Customer debt ratio ((365 d.) (R4)) (trade receivables / sales income) x 365 Company general indicator Company general financial strength indicator (BR) Arithmetic average of R1-R4

17 Financial capabilityevaluation(3) Indicator Conversion matrix Net profit margin (R1) R R1<15 5 R1<10 0 R1<5 R1<0 scores values (K1) Indebtedness ratio (R2) R R2<70 50 R2<60 40 R2<50 40>R2 0 Scores values (K2) Liquidity ratio (R3) R3 1,5 1,2 R3<1,51,1 R3<1,21,0 R3<1,1 1,0>R3 0 Scores values (K3) Customer debt ratio (365 d.) (R4) R R4<90 45 R4<60 30 R4<45 R4<30 Scores values (K4)

18 ProposedMethodologyamendmends Payback period = depreciation period but 25 years StrResidual value of the investment project is evaluated in FNPV only in that case when the project have FNPV>0 by itself, without residual value Stricter technical justification provisions with administrative help from the State Energy inspectorate

19 Installing the control and start-up chambers andoperational control of the gas transmission system pipeline reconstruction Technical justification Replacement ofworn out / depreciated taps, installation of a control and start-up chambers and SCADA system 2 examined alternatives Benefits SoS, lowered OPEX level, etc. EU funded Consistent with TSO s NDP Source: AB Amber Grid

20 Investmentapprovalcriteria 1 st criteria Technical justification Impact to the price cap +X Eur/MWh (indicative) FNPV andfirr not assessed Net benefits> 0

21 Vilnius-Panevėžys-Riga pipeline reconstruction(1) 1 st criteria Non-depreciated project Technical justification 2 examined alternatives Benefits SoS, lowered OPEX level, etc. EU funded. Consistent with TSO s NDP

22 Vilnius-Panevėžys-Riga pipeline reconstruction(2) Source: AB Amber Grid

23 Vilnius-Panevėžys-Riga pipeline reconstruction(3) Source: AB Amber Grid

24 1 st criteria Investmentapprovalcriteria Technical justification Impact to the price cap +X Eur/MWh (indicative) FNPV andfirr not assessed Net benefits> 0 Residual value is excluded from allowed revenues

25 Examples ofdso investment projects Same approval principles are in place Corrosion protection systems Prevention of new investments Reduced OPEX Looping of natural gas distribution system in some of the major towns Improved SoS, supplyqualityindicators(saidi, SAIFI) Smart meters

26 Yearly investment plans Composedof a list of investments which value is lower than a investment project Simplified assessment compared to the investment projects Technical/economical justification Report of the previous yearlyinvestmentplanhasto be provided. All changes of the investments values compared to the approved plan have to be justified NCC can oblige a company to exclude particular investment from yearly plan and present it as an investment project

27 Connectionto thegrid Connectionto thegridmustbe calculatedbyncc methodology Fixed fee for household users are set Companies apply individual fee for non-household users calculated according to the NCC methodology(considered as approved investments) In a gas sector consumers cover only non-economical investmentpartwhichcurrentlycorespondsto about30 % of investment. Connection can t increase the price cap thus the fee is adjusted Paybackperiod 15 years, forhouseholdusers 20 years

ProjectsofCommonInterest Gas Interconnection PolandLithuania (GIPL): Diversification Integration to the EU market SoS Competition Further utilization of

28 ProjectsofCommonInterest Gas Interconnection PolandLithuania (GIPL): Diversification Integration to the EU market SoS Competition Further utilization of LNG terminal Plannedbytheend of 2021 Enhancement oflv LV-LT LT interconnection capacity SoS; FurtherintergrationandutilizationoftheInčukalnsUGS in Latvia

29 PCI risk management Risk ofcostoverrun expostreassessment Risk oftimeoverrun implementation plan has to be reassessed Volumerisk adjustmentofthepricecap Risk of costs that are not considered as being efficiently incurred ex post reassessment (up to 10 %) Risk of liquidity financial capability assessment 29

30 Thank you! 30

Reviewing and approving capital investment plans: The Lithuanian experience

Reviewing and approving capital investment plans: The Lithuanian experience Ignas Kazakevičius National Commission for Energy Control and Prices (NCC), Lithuania www. erranet.org Content of the presentation