Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

The financial inflow comes from selling the energy (gas, electricity, heat). The income quantification has totake into account different components of revenue, if any. If, for example, policies to support theproduction of energy from renewable sources exist, when performing the financial analysis on profitabilityof the equity capital (FNPV(K), FRR(K)), the financial inflows arise not only from the sale of theelectricity at the current prices charged by the (national or regional) grid operator, but also from otheradditional financial incentives 51 , that are set out differently in the different Member States 52 .In the case of investments for energy savings, the financial analysis should cover the entire system affectedby the intervention. In this way, the financial flows resulting from reduced costs for the purchase ofenergy (energy saved = less energy consumed) can be properly taken into account.In any case, the financial analysis should carefully assess the extent to which the investment and equityreturns depend upon the public sector incentives. Otherwise, the incentives for energy produced fromrenewable sources should not be taken into account when calculating revenue in the financial analysis ofthe profitability of the investment (FNPV(C), FRR(C)).Forecasts are required for:- the dynamics of energy tariffs;- price dynamics;- development scenarios for the other sectors (trends in energy demand are strongly related to thedynamics in other sectors).3.3.3.5 Economic analysisBenefitsCosts- The monetary value of benefits. They should be quantified, first, as the revenue from the sale of energy (atappropriate shadow prices). The latter can be proxied, wherever possible, by estimating the willingness-topayfor energy, for example, by quantifying the marginal costs the user should incur to acquire energy (e.g.installing and using private generators)- The aforementioned estimated accounting price does not, however, include the additional social economicbenefit deriving from the implementation of projects that use renewable energy or from energy-savinginterventions. These are general and broad benefits, resulting from a reduction in greenhouse gases thataffect the global climate of the earth, but also in the production of polluting gases, liquids and solids ofvarious kinds, which have the potential to adversely affect the environment and human health. In addition,the amount of fossil fuels or of other non-renewable energy sources saved can be used for other purposesor kept in situ for the future. To give a value to this benefit, a suggestion is to use a standard shadow price,e.g. for the carbon dioxide emissions avoided (see the discussion in Annex F on the valuation ofenvironmental impacts). The shadow price should be attributed to the quantities of energy, produced orsaved. As a shortcut alternative, if the data for the former approach are not available, the financial value ofthe incentives for the production of energy from renewable sources (such as the exchange value of greencertificates), can be taken as a proxy of the willingness-to-pay of the whole society for the environmentalbenefits from the renewable sources- The aforementioned shadow price could be applied as well to the amount of the saved energy (orconsumption avoided) in the energy saving projects- The value attributed to a greater or lesser dependence on energy from abroad. The evaluation should beconducted by applying appropriate shadow prices53 to the substituted imported energy- The cost of the measures necessary to neutralise possible negative effects on air, water and land, both dueto the construction and the operation of the plant- The cost of other negative externalities that cannot be avoided such as loss of land, spoiling of scenery- The identification of the opportunity cost of the various inputs. The economic costs of raw materialsshould be evaluated by considering the loss to society by the diversion of them from the best alternativeuse. Use suitable conversion factors (CF’s)51A widespread type of RCS incentive is the so-called green certificate. Green Certificate also known as Renewable Energy Certificates (RECs),or Green Tags, Renewable Energy Credits, or Tradable Renewable Certificates (TRCs) is a tradable commodity proving that certain electricity isgenerated using renewable energy sources. Typically one certificate represents generation of 1 Megawatthour (or 1,000 kWh) of electricity. Thecertificates can be traded separately from the energy produced. The financial value of the green certificate varies over time from country tocountry.52According to the energy regulation of certain Member States, incentives for renewable energy are disbursed by the state in the form of rebateson taxes. In this case, the financial analysis should calculate the performance indices (FNPV(C), FRR(C), FNPV(K), FRR(K)) after taxes, in orderto take into account the global effects of real cash flows.53If, as often happens, there are strong distortions in the energy market (duties, internal taxes, prices levied, incentives, etc.) it would be wrongto assess the value of import substitution using these distorted prices.114