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Policy Brief / Gas

Cost Benefit Analysis for Gas Infrastructure Projects

Author(s): KEYAERTS Nico, GLACHANT Jean-Michel

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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.