Ref. Ares(2020)2890088 - 04/06/2020
2nd ENTSOG Methodology for Cost-Benefit
Analysis of Gas Infrastructure Projects
Compliance of
2nd CBA Methodology
with Regulation 347
2018
ENTSOG – A FAIR
PARTNER TO ALL !
Accompanying document to ENTSOG 2nd CBA Methodology
Compliance with Regulation 347/2013
INV0292-18
22 October 2018
For European Commission approval
Compliance of 2nd CBA Methodology with Regulation (EU)
347/2013
ENTSOG AISBL; Av. de Cortenbergh 100, 1000-Brussels; Tel: +32 2 894 5100; Fax: +32 2 894 5101; xxxx@xxxxxx.xx
www.entsog.eu, VAT No. BE0822 653 040
Accompanying document to 2nd ENTSOG CBA Methodology
Compliance with Regulation 347/2013
For European Commission approval
1. Introduction
The 2nd CBA methodology has been developed under Regulation (EU) 347/2013 on “guidelines
for trans-European energy infrastructure” (hereinafter “the Regulation”), which sets forth the
process for the development and update of the CBA methodology, and indicates the different
fields of its application.
The present document describes how ENTSOG took into account the different requirements
of the Regulation in the 2nd CBA methodology, as set forth by the following articles:
Article 4 – “Criteria for projects of common interest”
Article 11 – “Energy system wide cost-benefit analysis”
Article 12 – “Enabling investments with cross-border impacts”
Article 14 – “Eligibility of projects for Union financial assistance”
Annex III – “Regional list of projects of common interest”
Annex IV – “Rules and indicators concerning criteria for projects of common interest”
Annex V – “Energy system-wide cost-benefit analysis”
2. Process and role of ENTSOG in developing the CBA Methodology
Article 11.1 of the Regulation entrusts both ENTSOs with the task to develop and publish a
Cost-Benefit Analysis methodology and sets forth the scope of its application and the process
of its development. More precisely, it defines that the CBA Methodology shall be “
on network
and market modelling, for a harmonised energy system-wide cost-benefit analysis at Union
level for projects of common interest falling under the categories set out in Annex II.1(a) to (d)
and Annex II.2” and
“shall be applied for the preparation of each subsequent 10-year network
development plan developed by the ENTSO for Electricity or the ENTSO for Gas pursuant to
Article 8 of Regulation (EC) No 714/2009 and Article 8 of Regulation (EC) No 715/2009. The
methodologies shall be drawn up in line with the principles laid down in Annex V and be
consistent with the rules and indicators set out in Annex IV”.
In accordance with the Regulation the CBA Methodology shall be used for the preparation of
each subsequent Ten-Year Development Plan (TYNDP), which represents the primary filed of
application of the CBA Methodology, as well as for the selection of projects of common
interest
.
The following analysis indicates how the 2nd CBA Methodology takes account of the
abovementioned rules on its scope and fields of its application, the principles, rules and
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Accompanying document to 2nd ENTSOG CBA Methodology
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indicators as laid down by Annexes IV and V as well as the criteria set by the Regulation on the
selection of PCI projects.
Article 11.1 states that
“Prior to submitting [its] methodolog[y], […] the ENTSO for Gas shall
conduct an extensive consultation process […]”. Following
article 11.1, in early 2017 ENTSOG
organised meetings with “Prime Movers” (composed by relevant stakeholders and
institutions) to identify what were the most expected improvements for ENTSOG CBA
methodology. Following the feedback received from “Prime Movers” ENTSOG took these
proposals into consideration in the preparation of an extensive public consultation held from
19 May to 16 June 2017. In the public consultation stakeholders were asked to provide their
views on the main elements the update of the CBA methodology should take into account.
The feedback received was published on the ENTSOG website. The public consultation was
also complemented by a webinar, held on the31st of May 2017.
Consistently with
article 11.2-4, ENTSOG published the draft 2nd CBA Methodology and
submitted it to ACER and the Commission for their opinions, on the 24th of July 2017. The draft
2nd CBA Methodology also took into account the recommendations stemming from the Gas
CBA study1 carried out for the Commission by FSR and Deloitte published on 10 March 2017.
In the second part of 2017 and beginning of 2018, ENTSOG worked further in view of the
preparation of the Adapted version of the CBA Methodology, based in particular on ACER’s
opinion received on the 24th of October 2017, and Commission opinion received on 17th
October 2018.
3. Compliance of the CBA Methodology with the Regulation
3.1 The CBA Methodology is developed within the scope set by the Regulation
Article 11.1 sets that the methodology should be
“including on network and market
modelling”. Following this article, chapter 1.2 of the CBA Methodology lists the elements
required to build a comprehensive network and market modelling. This chapter includes a
detailed indication of the network and market assumptions (e.g. infrastructure tariffs) that
should be considered for the system and project assessment.
The same article sets that the cost-benefit analysis should be applied
“for projects of common
interest falling under the categories set out in […] Annex II.2”. In this respect chapter 3 of the
1 The draft recommendations are available here
: http://fsr.eui.eu/event/gas-cba-2-0-online-consultation/
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CBA Methodology indicates that project-specific CBA should be performed as part of the
TYNDP process for the projects having signalled their intention to participate in the upcoming
PCI selection process and grouped in accordance with the project grouping guidelines defined
in chapter 3.1. To do so the CBA Methodology describes common metrics for the analysis of
socio-economic benefits to be used in the TYNDP for both system and project assessment
(chapter 3.2).
Furthermore, to ensure as much transparency as possible towards all concerned stakeholders,
the Methodology recommends that the cost-benefit analysis of projects would be presented
in the form of a standard template and published as part of the TYNDP Report.
3.2 Compliance with provisions of the Regulation setting the fields of application
The Regulation defines the different fields of application of the CBA Methodology.
Application to the TYNDP
As indicated by Article 11.1, the TYNDP has to be applied to TYNDP. The 2nd CBA Methodology
therefore provides clear guidelines in terms of its application to TYNDP and more precisely in
terms of input requirement as well as system assessment, including infrastructure gaps
identification, and project assessment.
This also includes the main process to be followed when the CBA is to be used at project level
(project-specific CBA) for PCI candidates, in accordance with
Annex III.2 (1). The CBA
Methodology describes common metrics to be used in the TYNDP, and the output to be
published in the TYNDP Report.
Application in the PCI process
Annex III.2 (1) indicates that projects “
wanting to obtain the status of project of common
interest” and
“having reached a sufficient degree of maturity” shall provide
“a project-specific
cost-benefit analysis […]based on the methodolog[y] developed by […] the ENTSOG for gas
pursuant to Article 11”. Furthermore,
Annex III.2 (4) defines that all projects intending to apply
for the PCI label
“shall be part of the latest available 10-Year Network Development Plan”.
The CBA methodology proposes a project assessment scope as part of the TYNDP that covers
all projects intending to apply in the upcoming PCI selection process, whatever their degree
of maturity. This goes beyond the actual regulatory requirements with regard to PS-CBA as
part of the PCI selection process, which only refer to sufficiently mature projects.
The proposed approach is intended to provide a relevant contribution to the PCI process, for
all projects able to provide the necessary project data, in line with the practice of the 2nd and
3rd PCI processes.
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Regarding the assessed projects, the CBA Methodology ensures transparency and
comparability by recommending to present the CBA results in a uniform way (in terms of a
project fiche) and based on the same common elements (including the information on project
cost).
Additionally, the Methodology also proposes to assess the European gas system under the
prevailing PCI list (PCI Infrastructure Level) which provides a feedback loop on what the
projects which are part of the list overall achieve in term of market integration, competition,
security of supply and sustainability.
Application in investment requests and requests for grants
Article 122 states that project promoters whose PCI projects have
“reached sufficient
maturity” shall
“submit an investment request [which] shall include a request for cross-border
cost allocation [and shall] be accompanied by […]a project-specific cost-benefit analysis
consistent with the methodology drawn up pursuant to Article 11”.
According to
article 143
this project-specific CBA is also required for mature enough projects
that
“[have] received a cross-border cot allocation decision pursuant to Article 12” and that
are willing to apply
“for Union financial assistance in the form of grants for works”.
The CBA methodology, and its application in the TYNDP, will support projects selected as PCI
and intending to perform a CBA for investment request:
By providing a publicly available input data set (in terms of scenarios on demand and
supply, infrastructure data, etc.) that could be completed with additional data if duly
reasoned;
By providing, as part of TYNDP, a PS-CBA with country-level outputs focusing on the socio-
economic assessment and indicating the possible cross-border impact of the projects in
terms of benefits;
With regard to the business plan and the proposal for cross-border cost allocation that
promoters are also expected to submit with the investment request, the CBA Methodology
does not provide guidelines as they are entirely under the responsibility of the concerned
promoters.
3.3 Compliance of the CBA Methodology with Annex V of the Regulation
Annex V of the Regulation defines the principles that the Energy-System wide cost-benefit
analysis for projects of common interest shall satisfy. The relevant sections (for gas projects)
2 Article 12 on “Enabling investments with cross-border impacts”.
3 Article 14 on “Eligibility of projects for Union financial assistance”.
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of the Annex are listed below with the description of how they are reflected in the ENTSOG
CBA Methodology.
Annex V.1 (b) states that
“the methodology shall be based on a common input data set
representing the Union’s electricity and gas systems in the years n+5, n+10, n+15, and
n+20, where n is the year in which the analysis is performed [and that] this data set shall
comprise at least in gas:
scenarios for demand, imports, fuel prices (including coal, gas and
oil), carbon dioxide prices, the composition of the transmission network and its evolution4”.
The 2nd CBA Methodology recommends considering an assessment framework (chapter 1 and
relative sub-chapters) based on a time horizon covering years n+5, n+10, n+15, and n+20. The
Methodology furthermore recommends to define the input data set and to perform the CBA
assessment for 5-year-rounded years, in line with the recent TYNDP and PCI process practice
and with ACER opinion, as this supports assessing the system and projects against the targets
set by the European policies. Additionally, in line with
Annex V.1 (b), the Methodology
indicates that the data to be considered in the assessment framework should be at least the
following: commodity and CO2 prices, demand scenarios, imports and indigenous production
represented through supply potentials and a network topology comprising the existing
infrastructures and projects. With regard to the latter, the Methodology recommends
considering as reference grid a credible minimum set of infrastructures (chapter 2), composed
of the existing infrastructure and projects having already obtained the FID status. The
Methodology defines this reference grid as the basis for assessing the infrastructure gaps and
subsequently as the main counterfactual situation against which to perform project-specific
assessment.
Annex V.2 states that
“the data sets used for electricity and gas respectively shall be
compatible, notably with regard to assumptions on prices and volumes in each market. The
data set shall be elaborated after formally consulting Member States and the organisations
representing all relevant stakeholders. The Commission and the Agency shall ensure access
to the required commercial data from third parties when applicable”.
Still in chapter 1 the CBA Methodology indicates that the demand and supply scenarios and
underlying assumptions should be defined subject to a regular update process for each TYNDP
edition that should ensure extensive stakeholder involvement and consultation. Additionally,
the draft version of the ENTSOs
“consistent and interlinked model” (the Interlinked Model),
applied since TYNDP 2018 already sets the scenario development process as a joint electricity
4
“[…] taking into account all new projects for which a final investment decision has been taken and that are due
to be commissioned by the end of year n+5”.
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and gas process that ensures consistency among the assumptions used. The adapted version
of the Interlinked Model will form part of the CBA Methodology in force once approved by the
Commission.
Annex V.3 states that the Methodology shall give guidance for the development and use
of network and market modelling necessary for the cost-benefit analysis.
Consistently with this Annex, the Methodology gives clear indication in chapter 1.2 on the
network and market modelling assumptions that can be considered when applying the CBA
Methodology (e.g. infrastructure tariffs). The chapter also indicates the type of infrastructures
to be taken into account to define the network topology.
Annex V.4 states that
“the cost-benefit analysis shall be based on a harmonised evaluation
of costs and benefits for the different categories of projects analysed and cover at least the
period of time referred to in point (1)”.
In chapter 3, the CBA Methodology defines the frame for the project-specific assessment,
including metrics (indicators) to evaluate project costs (chapter 3.3) and benefits (chapter 3.2).
Chapter 3.4 recommends considering a 25-year economic life for calculating the economic
performance indicators for all projects assessed, in line with ACER and the Commission
opinions.
Annex V.5 states that
“the cost-benefit analysis shall at least take into account the
following costs: capital expenditure, operational and maintenance expenditure over the
technical lifecycle of the project and decommissioning and waste management costs,
where relevant. The methodology shall give guidance on discount rates to be used for the
calculations”.
In chapter 3.3 the CBA Methodology details all the project costs to be considered. Chapter 3.4
provides guidance on the social discount rate and recommends to use a harmonised rate in
order to ensure consistency in the project assessment.
Annex V.10 states that
“the methodology shall define the analysis to be carried out, based
on the relevant input data set, by determining the impacts with and without each project.
The area for the analysis of an individual project shall cover all Member States and third
countries, on whose territory the project shall be built, all directly neighbouring Member
States and all other Member States significantly impacted by the project”.
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In chapter 3.1, the CBA Methodology provides guidelines for the implementation of the
incremental approach, which is based on a counterfactual situation, and evaluates the
benefits of a project by comparing the situation with and without the project. The chapter
describes the methods to be used (PINT and TOOT) depending on the level of advancement
of the project in regard to the counterfactual situation.
Additionally, chapter 1.2 provides general guidelines on the geographical perimeter. Further
details on the geographical perimeter are left to each ENTSOG TYNDP Practical
Implementation Document5, developed in support to Annex III.2(5).
Annex V.11 states that
“the analysis shall identify the Member States on which the project
has net positive impacts (beneficiaries) and those Member States on which the project has
a net negative impact (cost bearers). Each cost-benefit analysis shall include sensitivity
analyses concerning the input data set, the commissioning date of different projects in the
same area of analysis and other relevant parameters”.
The indicators defined in the CBA Methodology are calculated at country-level (except in very
specific cases). The CBA analysis therefore allows to identify the Member States on which the
project has a positive impact and Member States on which the project has a negative impact.
The Methodology also provides concrete examples in chapter 3.1.
The CBA Methodology recommends (chapter 3.5) considering sensitivity analyses on different
relevant parameters concerning gas market factors (e.g. demand evolutions), project-specific
data (commissioning year) and monetary or financial data (e.g. social discount rate).
Additionally, with reference to
Annex V.13, and as explained earlier in this document, the
“consistent and interlinked model” developed by the ENTSOs was submitted as a draft version
to ACER and the Commission for their opinion in December 2016. Once adapted and approved
by the Commission it will be included in the CBA Methodology in force.
5
https://www.entsog.eu/public/uploads/files/publications/TYNDP/2018/TYNDP062_180119_Practical_Impleme
ntation_Document_FINAL.pdf
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3.4 The CBA Methodology takes into account the criteria for projects of common interest
as defined by Article 4 and Annex IV of the Regulation
To properly support the PCI selection process, the metrics which are developed in the CBA
Methodology and explained in chapter 3 comply with
article 46 and
Annex IV7 of the
Regulation.
These article and Annex describe the general and specific criteria that projects of common
interest shall meet.
In particular,
article 4.2 (b) indicates that gas projects falling under the categories set out in
Annex II.2 have to contribute significantly to at least one of the following specific criteria:
Market integration
Security of supply
Competition
Sustainability
Annex IV.2 provides additional indications on how the criteria listed in Article 4 shall be
evaluated.
The CBA methodology combines monetary elements pertaining to the CBA approach, as well
as non-monetary and/or qualitative elements referring to the Multi-Criteria Analysis approach
(chapter 3.1).
As shown in the table below, chapter 3.2 of the 2nd CBA methodology provides guidelines to
evaluate the benefits along these criteria through the quantification and/or monetisation of
specific indicators. Taking into consideration the broad definition in the Regulation of these
criteria, some of the indicators allow to capture different dimensions of the impact of a
project.
6 Article 4 on “Criteria for projects of common interest”.
7 Annex IV on “Rules and indicators concerning criteria for projects of common interest”.
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Figure 1 - CBA metrics and Regulation criteria (chapter 3.2 of the CBA Methodology)
Market integration
Art. 4.2 (b)(i) defines
that a project contributes to market integration
“through lifting the
isolation of at least one Member State and reducing energy infrastructure bottlenecks;
interoperability and system flexibility”.
Additionally,
Annex IV.3 (a) provides further indication explaining that
“market integration
and interoperability shall be measured by calculating the additional value of the project to the
integration of market areas and price convergence, to the overall flexibility of the system,
including the capacity level offered for reverse flows under various scenarios”.
Market integration benefits stemming from the realisation of a project can be measured in
the CBA Methodology by the following metrics:
Bi-Directionality indicator (BDP);
Reduction in gas supply cost (as part of the project socio-economic welfare), which mainly
informs the impact of the project in terms of competition, but additionally in terms of
market integration8.
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Competition
Art. 4.2 (b)(iii) defines
that a project contributes to competition
“through diversification of
supply sources, supplying counterparts and routes”.
Additionally,
Annex IV.3 (b) provides further indication explaining that
“competition shall be
measured on the basis of diversification, including the facilitation of access to indigenous
sources of supply, taking into account, successively: diversification of sources; diversification
of counterparts; diversification of routes; the impact of new capacity on the Herfindahl-
Hirschmann index (HHI) calculated at capacity level for the area of analysis”.
Competition benefits stemming from the realisation of a project can be captured by measuring
the ability of a project:
To reduce gas supply costs (as part of the project socio-economic welfare)9;
To increase the number of sources a country has access (Supply Source Access indicator);
To reduce supply dependence (Supply Dependence indicator);
To increase LNG an interconnections diversification (LICD indicator), indicator that is
recommended to be measured as a HHI index calculated at capacity level.
Security of supply
Art. 4.2 (b)(ii) defines
that a project contributes to security supply
“through appropriate
connections and diversification of supply sources, supplying counterparts and routes”.
Additionally,
Annex IV.3 (c) provides further indication explaining that
“security of supply shall
be measured by calculating the additional value of the project to the short and long-term
resilience of the Union’s gas system and to enhancing the remaining flexibility of the system to
cope with supply disruptions to Member States under various scenarios as well as the
additional capacity provided by the project measured in relation to the infrastructure standard
(N-1 rule) at regional level in accordance with Article 6(3) of Regulation (EU) No 994/2010”.
Security of supply benefits stemming from the realisation of a project can be captured by
measuring the ability of a project:
To increase resilience of the system to security of supply events (SoS benefit in terms of
avoided curtailed demand calculated under normal situation as well as under climatic,
supply and infrastructure stress);
To increase remaining flexibility.
With regard to the N-1 rule the benefit of a project in fulfilling the infrastructure standard is
measured by the curtailed demand indicator measuring its ability to increase the resilience
and the remaining flexibility of the European gas system, by mitigating or lifting infrastructure
9 CBA Methodology Chapter 3.
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constraints that create risk of demand curtailment in case of infrastructure stress related to
the disruption of the main infrastructure. Additionally, the assessment will focus on the
disruptions listed in the Union-wide simulation of gas supply and infrastructure scenarios
carried out for the risk assessment defined in article 7, Regulation (EU) 2017/1938 concerning
security of gas supply, as well as on the risk groups defined in Annex I of the same Regulation.
Sustainability
Art. 4.2 (b)(iv) defines
that a project contributes to sustainability
“through reducing emissions,
supporting intermittent renewable generation and enhancing deployment of renewable gas”. Additionally,
Annex IV.3 (b) provides further indication explaining that
“sustainability shall be
measured as the contribution of a project to reduce emissions, to support the back-up of
renewable electricity generation or power-to-gas and biogas transportation, taking into
account expected changes in climatic conditions”.
Sustainability benefits stemming from the realisation of a project can be captured by
measuring the ability of a project to reduce CO2 emissions by replacing more polluting fuels in
countries/areas/sectors not yet or not largely connected to gas.
Additionally, projects may also allow to replace more expensive alternative fuels with gas
ensuring fuel cost savings and supporting market competition.
Furthermore, the 2nd CBA Methodology recommends running scenario-based sensitivities on
the level of renewable energy penetration. This sensitivity will represent an input to the
assessment and the calculation of indicators. Changes in the climatic conditions and their
impact in terms of gas and renewable energy consumption are tackled directly in the scenarios
and represent an input to the calculation of the impact of projects (included on avoided
curtailed demand).
Annex IV.1 (c) and (d) of the Regulation indicate that:
For gas transmission projects the project shall
▪ concern investment in reverse flow or
▪ change the capability to transmit gas across the borders of the Member States by at
least 10% compared to the situation prior to the commissioning of the project
Storages and LNG terminals shall
▪ aim at supplying directly or indirectly at least two Member States or
▪ aim at fulfilling the infrastructure standard (N-1 rule) at regional level10
10 As of Annex I.5 of Regulation (EU) No 994/2010 of the European Parliament, “
The regional N – 1 calculation
can only replace the national N – 1 calculation, where the single largest gas infrastructure of common interest is
of major importance for the gas supply of all Member States concerned according to the joint risk assessment”.
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The 2nd ENTSOG CBA Methodology recommends the collection of all project information
essential for the allows system and project assessment. It also indicates that this information
must be reported when the project is submitted to the TYNDP as part of the project data
collection. The CBA Methodology, through its indicators, allows to identify whether a project
fulfil the criteria defined in
Annex IV.1.
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CONTACT
Should you require any further information please contact
Mr Stefano Astorri
Investment Subject Manager (xxxxxxx.xxxxxxx@xxxxxx.xx)
Mr Laurent Percebois
Market Adviser (xxxxxxx.xxxxxxxxx@xxxxxx.xx)
with always in copy
Ms Carmel Carey
Communication Adviser (xxxxxx.xxxxxxxxxxxxx@xxxxxx.xx)
Publisher:
ENTSOG aisbl
Avenue de Cortenbergh 100
1000 Brussels, Belgium
Co-Authors:
Stefano Astorri, Laurent Percebois, Céline Heidrecheid, Louis Watine,
ENTSOG INV WG
Cover picture:
Courtesy of FGSZ
ENTSOG aisbl
Avenue de Cortenbergh 100
1000 Brussels, Belgium
Tel. +32 2 894 51 00
xxxx@xxxxxx.xx
www.entsog.eu