EVALUATION

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AN INDEPENDENT <strong>EVALUATION</strong> OF THE LCNF Figure 25 – Net benefits with counterfactual sensitivity 3,000 2,500 Range of Estimated Net Benefits Current Benefits 2,000 £ million 1,500 1,000 500 0 Counterfactual at 20% Counterfactual at 10% Counterfactual at 30% Source: GB DNOs and Pöyry / Ricardo analysis The reduction in the counterfactual to 10% will lead to an increase in the estimated benefits, with a range of £1.3bn to £2bn. A counterfactual of 30% will result in a decrease in the estimated net benefits, with a range of £0.9bn to £1.4bn. 5.3.4.2 Sensitivity on the impact of discounting Our central evaluation does not attempt to discount the estimated future financial benefits associated with LCNF projects. The reason for this is explained in Section 5.2.2. However, to give a sense of the impact discounting could have, we have undertaken sensitivity analysis on the ‘Estimated Future Net Benefits’. This analysis is presented below. To show the potential magnitude of the impact of discounting the estimated future net benefits, we have presented, for illustrative purposes, the present value of the estimated future financial benefits. Although we do not know the precise profile for when, during the assessment period, these estimated future net benefits will occur, it is clear that they will most likely occur over a multi-year period. Therefore, for this sensitivity analysis we have assumed a linear distribution of the benefits over the assessment period. To test the sensitivity of the estimated future financial benefits to the discount rate we have presented the results using two different discount rates. In Figure 26 we have discounted the estimated future net benefits at a discount rate of 3.5% - this is the recommended HM Treasury rate for discounting as set out in the HM Treasury Green Book 55 . In Figure 27, we have applied a discount rate of 4%. This is broadly equivalent to 55 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/220541/ green_book_complete.pdf PÖYRY MANAGEMENT CONSULTING October 2016 713_Poyry_Report_Evaluation_of_the_LCNF_FINAL_Oct_2016_v700.docx 80
AN INDEPENDENT <strong>EVALUATION</strong> OF THE LCNF the average allowed pre-tax Weighted Average Cost of Capital (WACC) assumed for RIIO-ED1 fast tracked and slow tracked companies. Figure 26 – Present value of the net benefit associated with the LCNF (3.5%) 3,000 2,500 Range of Estimated Net Benefits Current Benefits 2,000 £ million 1,500 1,000 500 0 Counterfactual at 20% Counterfactual at 10% Counterfactual at 30% Source: GB DNOs and Pöyry / Ricardo analysis Figure 27 – Present value of the net benefit associated with the LCNF (4%) 3,000 2,500 Range of Estimated Net Benefits Current Benefits 2,000 £ million 1,500 1,000 500 0 Counterfactual at 20% Counterfactual at 10% Counterfactual at 30% Source: GB DNOs and Pöyry / Ricardo analysis PÖYRY MANAGEMENT CONSULTING October 2016 713_Poyry_Report_Evaluation_of_the_LCNF_FINAL_Oct_2016_v700.docx 81
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EVALUATION

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