Cost-Benefit Analysis of Electricity Cross-Border Infrastructure Projects in Eastern Partnership Countries

1. Cost Benefit Analysis of planned electricity cross-border infrastructure projects in the Eastern Partnership Countries András Mezősi Senior Research Associate, REKK EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

2. Structure of the presentation • Methodology • Modell Reference Scenario • Project Description • Cost-Benefit Analysis (CBA) results • Sensitivity Scenarios • Indicators • Conclusion EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 2

3. Steps of the Project Assessment 2 4 1 3 4th Working Group Meeting EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 3

4. ENTSO-E 2nd CBA Methodology EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 4

5. Methodology- Assessed categories • Benefits • B1- Socio-Economic Welfare • B2- Carbon-cost Estimation • B5- Grid Losses • B6- Adequacy • Costs • C1- CAPEX • C2- OPEX • Modelling tool- REKK’s European Electricity Market Modell (EEMM) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 5

6. Socio-Economic Welfare • Total Surplus approach • Producer surplus (PS): Difference between the market price and the total variable cost of production multiplied by the equilibrium quantity • Consumer surplus (CS): Difference between the maximum price a consumer is willing to pay and the actual price they do pay. • Changes in congestion rents of TSOs on interconnectors: Price differentiate between two markets multiplied by the traded quantity EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 6

7. Other assessed categories • CO2cost: • Carbon pricing will be applied in the EaP region after 2035 • The economic impacts are included in the socio-economic welfare category • Grid Losses • The variation is monetised by the EEMM model and is added to the quantified impacts of the evaluation. • The quantity changes in the loss values were requested from the project promoters through the questionnaires. • Adequacy • Expected Energy Not Supplied (EENS) values were provided by the project promoters, their impact were monetized by using Value of Loss Load (VOLL) estimations for the region. • We used the same benchmarking value as in the PECI/PMI evaluations which was 1.04 €/kWh. • Cost data need • Cost data was provided in the questionnaires by the promoters. EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 7

8. Calculating the Net Present Value of Social Welfare Changes Modelling results Welfare change in 2020 Welfare change in 2021 … … Welfare change in 2030 Welfare change in 2050 Assumed real discount rate: 4 % Welfare change discounted to 2018 Welfare change discounted to 2018 … Welfare change discounted to 2018 … Welfare change discounted to 2018 Net present value of welfare change 4th Working Group Meeting EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 8

9. Evaluation criteria • All submitted projects wereevaluatedrelative to a modelled reference scenario. • Net present value (NPV) • NPV= total welfare change - CAPEX – OPEXchange+EENS change benefit- cost of transmission loss change • If NPV > 0 – Beneficial project (green) • If NPV < 0 – Not Beneficial project (red) • Profitability index • PI= • If PI > 1.1 – Beneficial projects (green) • If 0.9 < PI < 1.1- Undecided (yellow) • If PI < 0.9 – Not beneficial project (red) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 9

10. Structure of the study • Methodology • Modell Reference Scenario • Project Description • Cost-Benefit Analysis (CBA) Results • Sensitivity Scenarios • Indicators • Conclusion EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 10

11. European Electricity Market Model (EEMM) REKK in-house developed model • Partial equilibrium model in which homogeneous product is traded across neighboring markets • Competitive behaviour in production and trade • Constrained capacity limits on cross border networks, power flows on an interconnector are limited by NTC. • 45 markets (ENTSO-E + neighbours + EaPcountries) • Around 3400 power plant blocks • More than 100 interconnectors between countries EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 11

12. Reference scenario– generationdata Electricity power plant investment plans in the EaP region Existing conventional electricity generation capacities in the EaP countries by fuel types, GW EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 12

13. Reference scenario- main input data • Planned interconnectors related to EaP countries Forecasted electricity consumption for the EaP countries, 2020-2050, TWh EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

14. Reference scenario - price dynamics • In 2025, with the exception of UA_W, prices are significantly lower in the EaP region than in Central Europe: Price difference withinEaP region- UA_E and Moldova cheaper than other countries • Until 2030 price decrease and convergence inthe Caucasus because of increased Azeri gas production, price increase in other countries • Between 2030 and 2040 drastic price increase in all countries due to the introduction of EU-ETSsystem in the region • Price level remains below Central European • Further price increase because of the growing carbon price until 2050 • Outstandingly high prices in UA_W and MD as a result of potential capacity shortage EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 14

15. Structure of the study • Methodology • Modell Reference Scenario • Project Description • Cost-Benefit Analysis (CBA) Results • Sensitivity Scenarios • Indicators • Conclusion EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 15

16. Technical details of submitted projects • Three projects were submitted • Black Sea II project has two alternative destination (Romania and Bulgaria) • The project was divided into two subprojects (EL_02a and EL_02b) • Belarusian-Ukrainen line has two separate stages with different commission date and NTC values • The projects was divided into two subprojects (EL_04a and EL_04b) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 16

17. Map of the assessed projects EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 17

18. Input datafor CBA modelling • On top of classical PINT analysis, we measured the simultaneous effect of the infrastructures located in the same countries • In total 9 infrastructure scenarios were modelled • No data was available about the OPEX of EL_04 – It was estimated that OPEX= 0,007*CAPEX (first year of operation), OPEX= 0.022* CAPEX (last year of operation) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 18

19. Structure of the study • Methodology • Modell Reference Scenario • Project Description • Cost-Benefit Analysis (CBA) Results • Sensitivity Scenarios • Indicators • Conclusion EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 19

20. CBA results- Whole modeled region *Profitability index=Benefit/cost ratio EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 20

21. CBA results- Whole modeled region • Based on both NPV and PI criteria, all standalone projects are evaluated as socially beneficial • Highest NPV is associated with the lower capacity Black Sea project,followed by the other two Black Sea cables • Based on the PI criteria however Belarusian projects performed better than the Black Sea cables • Black Sea lines are competitors to each other • If more than one line is built, there is a relative welfare loss compared to the state, when only one of them is commissioned • The two stages of Belarusian-Ukrainianlines are supplementary to each other • Highest benefits are estimatedwhenbothstagesarecompleted simultaneously EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 21

22. CBA results – Hosting countries For the hosting countries the completion of high capacity Black Sea lines are not beneficial as a standalone project EL_01 and the completion of EL_04 both stages are beneficial for the hosting countries as well EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 22

23. Structure of the study • Methodology • Modell Reference Scenario • Project Description • Cost-Benefit Analysis (CBA) Results • Sensitivity Scenarios • Indicators • Conclusion EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 23

24. Sensitivity analysis- Scenarios • Low_demand:Yearly electricity demand change is 0.5% smaller than the reference scenario in all modelled countries • High_demand: Yearly electricity demand change is 0.5% larger than the reference scenario in all modelled countries • Gas_release: Increase of capacity on the Azeri-Georgian natural gas pipeline in 2030; Spot trade is allowed on the Yamal pipeline • ETS_ENC: Only Georgia, Moldova and Ukraine will join the EU-ETS system in 2035 • ETS_2025: All countries of the EaP region will join the EU-ETS system in 2025 • Isolated_GE:Feasibility of the Georgian electricity projects without the planned projects that will connect Georgia with a neighboring countries EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 24

25. Sensitivity results • Whole modelled region • Hosting countries EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 25

26. Sensitivity results II • As a standalone project with the exception of EL_02 lines all projects are socially beneficial in all scenarios • Change in assumptions can have detrimental impact on the results • Projects perform generally better in the Low_demand & ETS_ENC scenarios, while worse in the High_demand, ETS_2025 and Isolated_GE scenarios than the reference • Mixed results for the Gas_release • In almost all scenarios highest benefits are achievable with the completion of EL_01 and the simultaneous completion of the two Belarusian projects, socially and for the hosting countries as well • In the High_demand scenario the completion of EL_04(either stage) is socially beneficial but associated with negative NPV if only hosting countries are considered EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 26

27. Structure of the study • Methodology • Modell Reference Scenario • Project Description • Cost-Benefit Analysis (CBA) Results • Sensitivity Scenarios • Indicators • Conclusion EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 27

28. Indicators • Electricity modelling can not monetize all benefits associated to the projects, so we calculated two additional indicators for 2030 • System AdequacyIndicator (SAI) - Measures the additional electricity capacities relative to the highest consumption • Hirschmann-Herfindal Index (HHI) - Measures market concentration • -Project promoters only provided ownership information about the Belarusian power plants- Only calculated for Belarus EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 28

29. Indicators- SAI results There are four regions where SAI is lower than 0.5 in the reference scenario -In UA_W and UA_E the SAI is critically low The completion of low capacity Black Sea cable would increase the SAI of Georgia over 1 -If all three projects are completed a SAI of more than 2 is achievable The 0.3 SAI of Belarus can be increased to 0.46 if both stages of EL_04 is finished If EL_04 is completed than the SAI of UA_E becomes 0.06 which is still very low EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 29

30. Indicators- HHI results (Belarus) • Calculations were based on three main assumptions • -Allcross-border infrastructure will be competitive • -Newcross-border infrastructure will be competitive • -Nocross-border infrastructure will be competitive • Independent of interconnector assumption in all scenarios HHI is significantly larger than 2500, so the Belarusian market can be considered as centralized • If interconnectors are assumed to be competitive sources with the completion of the two planned lines a HHI of 4900 is achievable. • If only new infra is competitive HHI cannot go below 8000 • If new lines are not considered as a competitive source HHI would increase to 915 if the two stages are finished EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 30

31. Structure of the study • Methodology • Modell Reference Scenario • Project Description • Cost-Benefit Analysis (CBA) Results • Sensitivity Scenarios • Indicators • Conclusion EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 31

32. Conclusions • -As a standalone project, all investments are socially beneficial • -BlackSea lines are competitors while Belarusian lines are supplementary projects • -Most beneficial investments are EL_01 and the two Belarusian projects combined. Completion of these lines are beneficial for project promotersas well • -As a standalone project with the exception of EL_02 lines all projects are socially beneficial in all scenarios EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 32

33. Reference scenario- Country level welfare effects EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 33

34. EL_01 (Georgia-Romania) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 34

35. EL_02a (Georgia-Romania) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 35

36. EL_02b (Georgia-Bulgaria) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 36

37. EL_04a (Belarus-EasternUkraine) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 37

38. EL_04b (Belarus-EasternUkraine) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 38

39. EL_02a + EL_02b EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 39

40. EL_01 + EL_02a EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 40

41. EL_01 + EL_02b EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 41

42. EL_01 + EL_02a + EL_02b EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 42

43. Thank you for your attention! EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects