cost benefit analysis of natural gas transmission projects · pdf filecost benefit analysis of...

Cost Benefit Analysis

of Natural Gas Transmission Projects The EIB approach

Nicola Pochettino

European Investment Bank

entsog. 5th TYNDP Workshop, Brussels, 20th June 2012 1

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


The European Investment Bank Value added and project requirements


Pillar I

Support for EU priority objectives

Pillar II

Assessment of project quality and soundness

Pillar III

Financial benefits of EIB funds

Technical assistance

Value Added of EIB’s lending activities The three pillars as guideline to project investment


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)

Project Requirements


Cost Benefit Analysis A methodology for natural gas transmission, LNG

terminals and underground gas storages


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)

Project identification 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

Feasibility and option analysis 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)

Economic Analysis: benefits 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

…

Economic Analysis: costs and externalities Natural gas grids, terminals and storage


CBA Case Study Underground Gas Storage Project


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 2015.

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.

UGS Project identification 1/2


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 Gm3 with 0.7 Gm3 of working

and 0.3 Gm3 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 Gm3 of working gas over a 4 month period.

The average injection rate is planned to be 5.5 Mm3/day and the average

withdrawal rate is 8.3 Mm3/day. The peak withdrawal rate is 15 Mm3/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/m3

Annual operating costs are estimated at 3% of capex

UGS Project identification 2/2


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.

UGS Economic analysis


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 m3 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%.

UGS Economic rate of return


Security of Supply A key selection criterion for energy infrastructure

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

Evaluating Security of Supply Defining a tool to prioritise and select energy projects


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

Energy Security and Market Failures Features of externality


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.

The right level of security of supply Conceptual steps


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

A methodology To quantify and monetize security of energy supply


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For more information


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