Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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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
3.3.3.6 Risk AnalysisCritical factors- Investment costs and length of the cycle- Demand dynamics- Dynamics of the incentive regimesMainvariablesto consider- Cost of the research phase (meaning the prospecting phase for new depositsor research into new technological processes)- Cost of the project realisation phase (site costs)- Forecasts of growth rates- Elasticity of electricity consumption- Sales price dynamics for energy produced (or energy products)- Financial values for the energy generated by RES- Mix and dynamics of critical input costs (fuels, etc.)3.3.3.7 Other project evaluation approachesThis section refers to:- evaluation of the impact on the environment (visual, noise, pollution, and refuse) which, according tothe laws of Member States, must be a part of the approval procedures.- evaluation of the indirect economic costs, for example those deriving from the use of exhaustibleresources, not previously included in the estimates. They can be measured as standard physicalindicators for incorporation into a multi-criteria analysis of the project.- similar approaches may be suggested with the aim of assessing the indirect economic benefits resultingfrom the use of renewable resources in those cases where it is not possible to quantify the benefitsdirectly using the methods suggested in the previous paragraph. Also, these economic values can bemeasured as standard physical indicators for inclusion in a multi-criteria analysis.3.3.4 Telecommunications infrastructures3.3.4.1 Project objectivesProject objectives differ according to the nature of the project. It is possible to distinguish between twomain types of telecommunications infrastructures according to their local or non-local scale.Local scale projects:- local cabling or relay systems to extend services to areas not covered,- cabling a city, metropolitan or industrial area, etc. to provide faster, more powerful networks,- construction or modernisation of units for band switching with wider networks,- the laying of cables and construction of relay or satellite stations to link isolated areas.Broader scale projects:- the development of international communications systems, to increase the capacity, power and speed(e.g. launching telecommunications satellites, building satellite radio stations, etc.),- increasing the capacity, power and speed of inter-regional communications networks,- the technological updating of the network to enable connection with new services (e.g. multi-mediaservices, portable telephones, cable television, etc.).115
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ACRONYMS AND ABBREVIATIONSBAUB/CCBA
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TABLESTable 2.1 Financial analysis
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FIGURESFigure 1.1 Project cost spre
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Cohesion Fund, and through the leve
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or the plant will not reveal excess
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CHAPTER ONEPROJECT APPRAISAL IN THE
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Some specifications for financial t
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FOCUS: INFORMATION REQUIREDGeneral
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In particular, CBA results should p
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CHAPTER TWOAN AGENDA FOR THE PROJEC
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objectives, are, as far as possible
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considered the appropriate shadow p
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2.3.2 Feasibility analysisFeasibili
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This approach will be presented in
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Current assets include:- receivable
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The following items are usually not
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Mainly, the examiner uses the FRR(C
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The dynamics of the incoming flows
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eturn on their own capital (Kp). Th
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While the approach presented in thi
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2.5.1 Conversion of market to accou
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Table 2.9 Electricity price dispers
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2.5.1.2 Fiscal correctionsSome item
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previously estimated in projects wi
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FOCUS: ENPV VS. FNPVThe difference
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2.6 Risk assessmentProject appraisa
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Table 2.14 Impact analysis of criti
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Figure 2.6 Probability distribution
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Page 68 and 69: PROJECT APPRAISAL CHECK-LISTCONTEXT
Page 70 and 71: - reduction of congestion by elimin
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Page 78 and 79: The following tables show some refe
Page 80 and 81: 3.1.1.6 Risk assessmentDue to their
Page 82 and 83: As shown in Figure 3.1, only under
Page 84 and 85: 3.1.3.7 Other project evaluation ap
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Page 89 and 90: The time horizon for a project anal
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Page 95 and 96: Territorial reference frameworkIf t
Page 97 and 98: Cycle and phases of the projectGrea
Page 99 and 100: One of the most important aims of t
Page 101 and 102: projects, as in other sectors in wh
Page 103 and 104: 3.2.3.2 Project identificationBasic
Page 107 and 108: In order to evaluate the overall im
Page 109 and 110: for regassification plants, number
Page 111 and 112: Examples of objectives are:- change
Page 113: decontamination if any;- the techni
Page 117 and 118: 3.3.4.6 Risk assessmentCritical fac
Page 119 and 120: 3.4.1.5 Economic analysisThe follow
Page 121 and 122: Financial inflows• Admission fees
Page 123 and 124: expectancy suitably adjusted by the
Page 125 and 126: The time horizon for project analys
Page 127 and 128: A Cost-Benefit Analysis should cons
Page 129 and 130: CHAPTER FOURCASE STUDIESOverviewThi
Page 131 and 132: - finally, there is the traffic tha
Page 134 and 135: c) Road users producer’s surplus:
Page 136 and 137: 4.1.5 Scenario analysisTwo scenario
Page 138 and 139: The financial performance indicator
Page 140 and 141: Table 4.10 Economic analysis (Milli
Page 142 and 143: Table 4.12 Financial return on capi
Page 144 and 145: 4.2 Case Study: investment in a rai
Page 146 and 147: 4.2.4 Economic analysisThe benefits
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Page 150 and 151: Figure 4.6 Results of the risk anal
Page 152 and 153: Table 4.22 Economic analysis (Milli
Page 154 and 155: Table 4.24 Financial return on capi
Page 156 and 157: 4.3 Case Study: investment in an in
Page 158 and 159: ate of 0.6% per year is assumed for
Page 160 and 161: The shadow price of the CO 2 avoide
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Table 4.36 Financial return on capi
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16 17 18 19 20 21 22 23 24 25 26 27
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4.4 Case Study: investment in a was
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4.4.2 Financial analysisAlthough in
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THE CALCULATION OF REVENUESReferrin
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0.15 m 3 /m 2 a depreciation of 20%
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As result, the probability distribu
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Figure 4.13 Probability distributio
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Table 4.48 Financial return on nati
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Table 4.50 Financial return on priv
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16 17 18 19 20 21 22 23 24 25 26 27
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4.5 Case Study: industrial investme
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4.5.4.1 Investment costsThe total i
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Finally, a residual value was estim
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This analysis shows the need to pay
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Table 4.62 Financial return on inve
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Table 4.64 Return on private equity
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Table 4.66 Economic analysis (thous
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ANNEX ADEMAND ANALYSISDemand foreca
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The method applied for the forecast
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Furthermore, travel demand depends
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This Guide supports a unique refere
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A higher discount rate for countrie
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Figure C.1 Project ranking by NPV v
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The main problems with this indicat
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EXAMPLE OF SHADOW WAGE IN DUAL MARK
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Another exhaustive way to include d
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Figure E.2 Percentage of low income
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ANNEX FEVALUATION OF HEALTH &ENVIRO
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Figure F.1 Main evaluation methodsS
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- expenditure on capital equipment
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due to air pollution or water conta
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BENEFIT TRANSFER - SELECTED REFEREN
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ANNEX GEVALUATION OF PPP PROJECTSIt
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adjustments for Competitive Neutral
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ANNEX HRISK ASSESSMENTIn ex-ante pr
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Reference ForecastingThe question o
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Figure H.5 Levels of risks in diffe
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ANNEX IDETERMINATION OF THE EU GRAN
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A.4. Technological Alternatives and
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GLOSSARYAccounting period: the inte
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Market price: the price at which a
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BIBLIOGRAPHY1. ReferencesBelli, P.,
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Ray, A. 1984, Cost-benefit analysis
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EnvironmentGeneralAtkinson, G., 200
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European Commission, DG Tren, 2003,
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Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

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