99506 v2 Public Disclosure Authorized Public Disclosure Authorized Volume 2: Guidelines for Economic Analysis of Power Sector Projects TECHNICAL NOTES September 2015 Public Disclosure Authorized Public Disclosure Authorized ACKNOWLEDGEMENTS The Economic Analysis Guidance Note and this Annex Volume of Technical Notes were prepared under the Direction of Vivien Foster (Practice Manager, PMSO) and Gabriela Elizondo Azuela (Task Team Leader, PMSO), and guided by an Advisory Committee that included Jamie Fergusson, Brian Casabianca (CNGSF), Kseniya Lvovsky (GENDR), Wendy Hughes, Todd Johnson, Fanny Missfeldt-Ringius, Demetrios Papathanasiou (GEEDR), and Grzegorz Peszko (GCCPT). The peer reviewers were Morgan Bazilian, Richard Spencer, Ashish Khanna (GEEDR) and Efstratios Tavoulereas (IFC). Important contributions and suggestions were made by Marianne Fay (GCCPT), Michael Toman (DECEE), Gevorg Sargsyan, Deb Chattopadhyay, Natsuko Toba (GEEDR), Laura Bonzanigo, Julie Rozenberg, and Adrien Vogt-Schilb (GCCPT). The report was prepared by Peter Meier (Consultant). September 2015 i CONTENTS Part I: Basic Concepts ................................................................................................... 1 C1 Costs .................................................................................................................. 1 C2 Benefits .............................................................................................................17 C3 Externalities .....................................................................................................19 C4 Decision-making approaches .......................................................................... 24 C5 Risk Assessment .............................................................................................. 34 C6 Distributional Analysis .................................................................................... 39 C7 Energy Security ............................................................................................... 44 C8 The discount Rate ........................................................................................... 52 Part II: Technology Related Issues ............................................................................ 53 T1 Variable renewable energy............................................................................... 54 T2 Incremental Transmission Costs for Renewables ........................................... 66 T3 Learning Curve Benefits for Renewable Energy ............................................. 69 T4 Renewable Energy Counterfactuals ................................................................ 74 T5 Macroeconomic Impacts ................................................................................. 80 Part III: Methodologies & Techniques ....................................................................... 84 M1 CBA Best Practice ........................................................................................... 85 M2 Estimating Demand Curves ............................................................................ 93 M3 Supply Curves .................................................................................................. 99 M4 Local damage costs of Fossil Generation ....................................................... 106 M5 Carbon Accounting ........................................................................................ 117 M6 Multi-attribute Decision Analysis................................................................... 126 M7 Monte Carlo Simulation ................................................................................. 131 M8 Mean-variance portfolio Analysis ................................................................... 136 M9 Scenario Discovery ......................................................................................... 139 Part IV Annexures ....................................................................................................... 142 A1 Bibliography ................................................................................................... 143 A2 Index .............................................................................................................. 150 A3 Glossary .......................................................................................................... 154 A4 Sample Economic Analysis Tables: Indonesian Wind Farm ........................ 156 September 2015 ii BEST PRACTICE RECOMMENDATIONS Costs .............................................................................................................................................. 16 Risk assessment ........................................................................................................................... 38 Distributional analysis ................................................................................................................ 43 Energy Security ............................................................................................................................ 51 Variable renewable energy(VRE) .............................................................................................. 65 Transmission connections for renewables ............................................................................... 68 Learning curve benefits for renewables ................................................................................... 73 Macroeconomic spillovers ......................................................................................................... 81 Employment impacts of renewable energy projects .............................................................. 83 Numeraire & standard correction factors ................................................................................ 87 Variables to be included in the switching values analysis .................................................... 90 Demand curve estimation .......................................................................................................... 98 Local air pollution damage costs ............................................................................................. 116 GHG accounting ........................................................................................................................ 125 September 2015 iii ABBREVIATIONS ADB Asian Development Bank MENA Middle East and North Africa BTU British Thermal Unit (Region), World Bank CAPEX Capital investment expenditure MFO marine fuel oil CBA Cost/benefit analysis MIT Massachusetts Institute of CCGT Combined cycle gas turbine Technology CCS carbon capture and storage mmBTU million British Thermal Units CEB Ceylon Electricity Board (Sri mtpy million tons per year Lanka) MUV Manufacture Unit Value (index) CGE computable general equilibrium NEA Nepal Electricity Authority (model) NPV Net present value CRESP China Renewable Energy Scale-up NREL National Renewable Energy Program Laboratory (US) CSP Concentrated solar power OCC Opportunity cost of capital CTF Clean Technology Fund ONE Morocco State Power Company CV Compensating variation OPEX Operating cost expenditure DMU Decision-making under uncertainty OPSPQ Operations Policy and Quality DPC Development Policy Credit Department (World Bank) DPL Development Policy Loan PAD Project Appraisal Document DSCR Debt service cover ratio (World Bank) DSM Demand side management PAF Project affected person EMP Environmental Management Plan PCN Project Concept Note EOCK economic opportunity cost of PLN Indonesian Electricity Company capital PMU Project Management Unit EPRI Electric Power Research Institute PPA Power purchase agreement (US) PPP Public-Private-Partnership ERAV Electricity Regulatory Authority of PSIA Poverty and Social Impact Vietnam Assessment ERR Economic rate of return PV Photovoltaic EU European Union RDM Robust decision-making EU ETS European Union Emissions Trading RE Renewable energy System SCF Standard correction factor FGD Flue gas desulphurisation SER Shadow exchange rate FIRR Financial internal rate of return SMP social mitigation plan FIT feed-in tariff SPR Strategic Petroleum Reserve (of FS feasibility study the US) GDP gross domestic product SPV special purpose vehicle GHG Greenhouse gas SVC Social value of carbon GWh gigawatt-hour SRTP Social rate of time preference (see HHV Higher heating value (see Glossary) Glossary) HSD high speed diesel T&D transmission and distribution HVDC High voltage direct current TTL Task Team Leader (World Bank) (transmission) UAHP Upper Arun Hydro Project IEA International Energy Agency (Nepal) IEG Independent Evaluation Group (of US United States the World Bank) USAID United States Agency for IFI International Financial Institution International Development IPP Independent power producer USEIA United States Energy ISO International Standards Information Administration Organisation VND Vietnamese Dong IWGSCC Interagency Working Group on the VOLL Value of lost load Social Cost of Carbon (US) VRE variable renewable energy LCA Life cycle assessment VSL Value of statistical life LCOE Levelised cost of electricity WDI World Development Indicators LHV Lower heating value (see Glossary) (World Bank database) LNG Liquefied natural gas WACC weighted average cost of capital MAC Marginal abatement cost WEO World Energy Outlook (IEA) MADA Multi-attribute decision analysis WTP willingness-to-pay MASEN Moroccan Agency for Solar Energy MATA Multi-attribute trade-off analysis mbd million barrels per day September