Cost Benefit Analysis Pipeline
Cost Benefit Analysis Pipeline
Cost Benefit Analysis Pipeline
PRESENTED TO
PRESENTED BY
Marcella Fantini
Lessons Learned
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The Project
The Shannon Pipeline is a 26 km. 30 pipeline that will connect
the Shannon LNG Terminal in Ralappane Co. Kerry to the Bord
Gis Eireann (BGE) transmission system at Foynes in Co.
Limerick
The Shannon Pipeline is a part of the Shannon LNG terminal
project, which has been included in the list of Projects of
Common Interest (PCI)
The pipeline allows Third Party Access (TPA) while the LNG
terminal does not;
Building the pipeline before a decision has been made on the LNG
terminal will allow connection to the gas grid of three towns that
it is not otherwise economic to connect.
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The Shannon Pipeline Project
Shannon Pipeline
Connection to grid
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Financing of the Project
Shannon LNG wishes to apply for a grant for the Shannon
Pipeline. The criteria to get a grant are:
The infrastructure allows for Third Party Access
The project is not commercially viable without the grant
The project specific cost-benefit analysis provides evidence of
significant positive externalities
The project has received a cross-border cost allocation decision or
aims to provide cross-border services
ACER Guidelines for cross-border allocation decision provides
that a cost-benefit analysis is required
Lessons Learned
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The Cost-Benefit Analysis
Methodology to evaluate infrastructures
proposed by the DG REGIO (2008)
Financial Analysis Discounted Cash Flow methodology (DCF)
Financial indicators to evaluate return on
investment and on capital and financial
sustainability
Takes the perspective of the investors
Lessons Learned
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Approach and Summary of Results
Pipeline on a Stand-Alone Basis Pipeline and LNG Terminal
Interested Area: Ireland Interested Area
Major benefits Ireland
Substitution of more expensive Northern Ireland
fuels with gas (avoided purchase Great Britain
and transportation costs) Major benefits
Reduction in CO2 emissions from Increased security of supply
fuel substitution Reduction in import dependence
Positive net benefits (Ireland)
Sensitivities Positive impact on gas prices
Fuel prices (marginal price reduction)
Investment costs Positive net benefits
O&M costs Sensitivities
Fuel prices
Investment costs
Privileged and Confidential O&M costs
Prepared at the Request of Counsel 9 | brattle.com
The Pipeline and the Terminal
Combining elements of the project
SLNG is applying for a grant for the Shannon pipeline, not the
terminal;
However, the terminal has positive economic benefits, and the
pipeline increases the chance that the terminal will be built and
the benefits realized.
Therefore we calculated the benefits for the terminal and credited
the pipeline with a fraction of the benefits (5-10%).
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Inputs
Variable Pipeline on Stand-Alone Basis Pipeline and LNG Terminal Notes/Source Variable Pipeline on Stand-Alone Basis Pipeline and LNG Terminal Notes/Source
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Analysis Calculation of Avoided Costs (1/2)
EXAMPLE
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Analysis Calculation of Avoided Costs (2/2)
(+) Avoided cost to residential
Avoided coal costs EXAMPLE
Purchase cost EUR/GJ
Transportation cost EUR/GJ
CO2 emissions EUR/GJ
Other externalities
Total unit cost
EUR/GJ
EUR/GJ
The net benefit is equal to
Total avoided cost mEUR the sum of avoided costs to
Avoided gasoil costs
Purchase cost EUR/GJ
the power, industrial,
Transportation cost
CO2 emissions
EUR/GJ
EUR/GJ
commercial and residential
Other externalities
Total unit cost
EUR/GJ
EUR/GJ
sector net of the cost to
Total avoided cost mEUR
purchase and deliver gas
(-) Cost of gas
Purchase cost EUR/GJ
and of the cost of gas
Transportation cost
CO2 emissions
EUR/GJ
EUR/GJ emissions
Other externalities EUR/GJ
Total unit cost EUR/GJ
Total gas cost mEUR
Economic Benefits
Avoided fuel & transport costs (mln )
Avoided emissions (mln )
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Analysis Calculation of Net Benefits
Pipeline (mln ) [1]
Investment costs EXAMPLE
O&M Costs
Taxation
Replacement costs
The net benefits of the
Residual value
LNG (mln ) [2]
project are equal to the
Investment costs sum of national and cross-
O&M Costs
Taxation border benefits net of all
Replacement costs
Residual value costs
TOTAL INVESTMENT COSTS [3]=[1]+[2]
Avoided fuel and transport costs Project specific indicators
Avoided emissions (net present value of net
BENEFITS ON ROI [4]
UK benefits, internal rate of
NI
CROSS BORDERS BENEFITS [5]
return, ratio between costs
and benefits) are used to
TOTAL BENEFITS [6]=[4]+[5]
NET BENEFITS [7]=[6]-[3]+TV
assess the economic
ENPV NPV di [7] relevance of the project
ERR IRR di [7]
and to rank different
B/C ratio NPV di [7] / NPV di [3]
projects
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Calculation of Project Specific Indices
Calculation of project-specific indices has been carried out using
formulae provided by EntsoGs draft methodology
Available data allowed us to calculate the Daily Peak Exposure
Index (EXP) for Ireland and Northern Ireland and the Import
Dependence Index (IDI) for Ireland
Other project specific indices (such as (N-1) indicator and the
import route diversification index) discussed qualitatively on the
basis of data and information provided by the national regulator
and/or the Government
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Estimating Price Effects
The LNG terminal will increase the supply of gas in the UK/Irish
gas market, and increase the level of competition.
We used a simple model of quantity or Cournot competition,
which gives the relationship between the market shares of the
suppliers and the margin.
We re-calculated the new lower margin with the SLNG terminal,
and multiplied the price reduction by the expected demand to get
the expected reduction in gas costs in Euros.
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Agenda
The Project
Lessons Learned
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Lessons learned
Implementation of the cost benefit analysis has highlighted
several issues
The costs of a project are obvious, but identifying all of the
benefits can be difficult
For example, Shannon LNG did not initially identify the customers
switching from gas oil to natural gas as a benefit.
But this turned out to be one of the most important benefits of
the project
As a result, the analysis crucially depends on fuels and carbon
prices.
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Lessons learned (cont.)
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Project Team
MARCELLA FANTINI
Senior Associate Rome
[email protected]
+39.064.888.8145
DAN HARRIS
Principal Rome
[email protected]
+39.064.888.8146
The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc.
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