Cost-benefit analysis for gas infrastructure projects

Abstract

• To reinvigorate the building of new gas infrastructure in Europe, the Euro­pean Union has introduced ‘projects of common interest’ (PCI) in its Energy Infrastructure Package. These PCIs will be evaluated and selected on the basis of systematic cost-benefit analysis (CBA), a method that is novel for the Euro­pean gas industry. A consistent gas-CBA method has to be designed by ENT­SOG, who published a preliminary draft method for public consultation on 25 July 2013, followed by a formal draft CBA method on 15 November 2013. • This Florence School brief summarizes our findings and recommendations for improvement of the CBA method. • The time horizon of the CBA can be controversial. Projects can be evaluated against different time horizons and these horizon options affect the relative ranking of the projects. A single reference point for 20-25 years is best prac­tice for the time horizon for infrastructure projects and should be used for gas CBA. • Project interaction affects the net economic benefits of projects that are com­plementary or competing with other proposed infrastructure projects. Iden­tification of interaction can be treated within the gas-CBA method, providing important information for ranking individual or clustered projects. • The monetization model can and must be internally consistent with regard to physical and commercial relations that govern the European gas system. The model output needs to be aligned with a reduced list of significant effects and the model input needs to be monitored. • Ranking should be primarily based on the monetization with transparent ad­justments where justified; ENTSOG should provide guidance to the Regional Groups on how the CBA method has been conceived for selecting projects.