A comparison of cost-benefit analysis of biomass and natural gas CHP projects in Denmark and the Netherlands

TL;DR: In this paper, the authors investigate what drives differences in the project appraisal of biomass and natural gas combined heat and power (CHP) projects in two countries with very similar energy profiles.

Abstract: We investigate what drives differences in the project appraisal of biomass and natural gas combined heat and power (CHP) projects in two countries with very similar energy profiles. This is of importance as the European Commission is assessing the potential scope of harmonizing renewable electricity support schemes post 2020. Concurrently, it is also promoting the use of cost benefit analysis (CBA) for transnational energy infrastructure projects. We use CBA to assess the same project proposal in Denmark and the Netherlands, following the respective country's guidelines. We find that especially the fuel costs and the valuation of emissions drive the differences. Furthermore, we establish that the sensitivity of the CBA results not only from policy differences in the countries, but also from differences in the methodology used.

Summary

1. Introduction

• Full harmonization of common, binding provisions for the support of renewably sourced electricity is a long-term aspiration for the EU Commission (EC), where full harmonization extends across the level of support, the support schemes and the legal framework including regulatory issues [1].
• Externalities relating to energy generation and the valuation perspective of consumers are usually being investigated with willingness to pay studies.
• The methodology aims to find out whether benefits of a project or policy actually outweigh its costs, and by how much in relation to the alternatives (among which usual a ‘do nothing’ option) [7].
• The purpose of their paper is to demonstrate the extent and determinants of any disparities between two EU member states, the Netherlands and Denmark, by applying their respective CBA methods to the same case study.
• Both countries have significantly higher shares of CHP generation than the EU-28 as a whole, and both countries are net exporters of natural gas.

2.1. Background of the case study

• Assuming that support policies are related to an ex post estimation of net benefits and to correct market externalities, it makes sense to use CBA to determinewhether disparities in CBA methodology might threaten potential gains from harmonizing energy policy across EU member states.
• Any such differences in conditions between countries might be reflected in the socioeconomic values for economic externalities e positive and negative e set for the CBA of public projects.
• Natural variations between states in, for instance, electricity prices are assumed to reflect national priorities and comparative advantages.
• The energy profiles of Denmark and the Netherlands share a number of common characteristics, such as substantial natural gas fields and an abundance of biomass and wind resources.
• For Denmark the average share for 2011 was 46%, with corresponding values for the Netherlands and the EU-28 at 33% and 11% respectively.

2.2. CBA analysis

• Cost-benefit analysis (CBA) is an approach that is used for estimating the strengths andweaknesses of several project alternatives [6,7].
• The extra electricity produced by the natural gas CHP systemwas sold to the grid previously, but with the biomass unit, all electricity produced is used onsite instead.
• The Dutch price projection is based on the background data used to evaluate the Dutch energy agreement [24].
• After the net tax impact factors, the values correspond roughly with the price projections used in the recent public CBA analysis of a 6,000 MW wind farm [29].
• The amount of emissions associated with each generated unit of energy (emission intensity) depends not only on the fuel type but also on technology characteristics of the energy plant used [39].

3. Results

• Table 3 provides the results of the NPV calculations.
• These are net benefits of the biomass CHP over the natural gas CHP.
• Deadweight social loss has a minor impact in both states and for both alternate natural gas systems in this case study.
• The Danish subsidy levels are significantly lower than the Dutch ones for the same technology, and they do change in line with the reduction in NPV from one comparison to the other.
• In their fifth sensitivity analysis, the authors increase respectively decrease electricity costs with 25% and calculate the impact on the net NPV as reported in Table 3 (Panel C) and in the first line of Table 5.

4. Conclusion

• The aim of this paper was to examine sources of any discrepancies in cost-benefit analysis (CBA) methodology and to estimate how this might impact the results.
• The authors want to find out whether the CBA yields similar results for identical projects located in two EU member states with highly identical preferences.
• Any differences in the results of their case study would suggest that there is divergence in the methodology or a natural variance between the two countries, or a combination of both.
• These differences are pervasive enough that the net fuel costs are included as a benefit in the Danish case, i.e. the switch from natural gas CHP to biomass CHP results in annual fuel cost savings, while net fuel costs in the Netherlands impose an additional cost on the biomass CHP owner.
• Related is that the inclusion or exclusion of the impact of methane on the environment turns out to make a huge difference regarding the value and appraisal of the investment projects.

Figures

Table 2 Emission intensities of CHP units studied.

Table 4 Cost benefit and subsidy NPVs for Denmark and the Netherlands (in 2011 Euros for base year 2014).

Table 3 Net present values for the biomass CHPminus the natural gas CHP (in million Euros).

Table 5 Sensitivity analyses; changes in relation to the original NPV (in thousands of 2011 Euros for base year 2011).

Frequently asked questions

Q1. What are the contributions in "A comparison of cost-benefit analysis of biomass and natural gas chp projects in denmark and the netherlands" ?

The authors investigate what drives differences in the project appraisal of biomass and natural gas combined heat and power ( CHP ) projects in two countries with very similar energy profiles. Concurrently, it is also promoting the use of cost benefit analysis ( CBA ) for transnational energy infrastructure projects. The authors use CBA to assess the same project proposal in Denmark and the Netherlands, following the respective country 's guidelines. This is of importance as the European Commission is assessing the potential scope of harmonizing renewable electricity support schemes post 2020. Furthermore, the authors establish that the sensitivity of the CBA results not only from policy differences in the countries, but also from differences in the methodology 

Q2. What have the authors stated for future works in "A comparison of cost-benefit analysis of biomass and natural gas chp projects in denmark and the netherlands" ?

The authors suggest that further research in the formulation of CBA methodology for a common EC policy framework includes case studies to demonstrate the extent of sensitivity both due from natural variations between states and from discrepancies in the approach used.