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Cost assessment for sustainable energy systems

Final Report Summary - CASES (Cost Assessment for Sustainable Energy Systems)

The CASES Coordination Action (CA for short) carried out its activities from April 2006 to September 2008. In this period it evaluated policy options for improving the efficiency of energy use, underpinning this evaluation with a consistent and comprehensive picture of the social cost of energy, and made this crucial knowledge available to all stakeholders.

In particular, CASES compiled a complete and coherent assessment of the social cost (external plus private cost) of different electricity generation technologies, in EU countries and in selected non-EU countries, under well defined energy scenarios to 2030.

In detail the objectives of the CASES CA were the following:
- To compile coherent and detailed estimates of both external and internal costs of electricity generation for different energy sources at the national level for the EU-25 Countries and for some non-EU Countries under energy scenarios to 2030.
- To evaluate policy options for improving the efficiency of energy use, taking account of the Full Cost data.
- To disseminate research findings to energy sector producers and users and to the policy making community.

Policy and project appraisal usually involves the consideration of alternative courses of action along multiple decision aspects, such as their cost of implementation and their positive and negative effects on the social and natural environment. In order to provide a basis for selecting among the alternatives, all these effects need to be expressed in comparable value terms.

One can distinguish two main valuation approaches, which in turn specify two different assessment frameworks applicable in environmental policy making.

The first valuation approach is based on neo-classical economics and provides the value information needed in Cost-Benefit Analysis (CBA). The underlying assumption is that the market, as guided by individual preferences is the best indicator for environmental values, while social preferences resulting as the sum of individual preferences secure optimal allocation of resources and social welfare. Money is the appropriate vehicle to express these preferences in order to make them commensurate with the values of other goods and to comply with the rules of the market mechanism.

The second valuation approach is part of the Multiple Criteria Decision Analysis (MCDA) framework which is increasingly applied during the last 30 years for aiding decisions involving several actions compared along multiple competing criteria. The underlying assumption is that values do not a-priori exist in human mind - especially for unfamiliar environmental goods - and that there is a need to apply a systematic value elicitation procedure to facilitate stakeholders construct and articulate their preferences. Value elicitation and the subsequent aggregation phase takes usually place with the participation of all parties involved or interested in the decision to be taken.

Cost-Benefit Analysis (CBA) has long been used as a powerful appraisal technique for investments in the developing world where markets are seriously distorted and prices do not provide a satisfactory basis for assessing their overall impact on society.

CBA aims at aggregating all costs and benefits associated with each policy option, the former defined as reductions and the latter as increases in human wellbeing. Hence, any policy impact affecting social wellbeing should be included in CBA.

Central in the theoretical foundation of CBA is that costs and benefits reflect the preferences of individuals which are measured as Willingness To Pay (WTP) for benefits and Willingness To Accept compensation (WTA) for costs.

Cost-Effectiveness Analysis (CEA) aims at determining the least cost option achieving a predefined policy goal. For this reason, it is principally implemented in cases where the assessment refers to different actions intended to achieve some predefined standards set by legislation or related with other commitments.

Multiple Criteria Decision Analysis (MCDA) is aiming at providing a formal approach helping decision makers to effectively handle complex decision situations in which the level of conflict between criteria is such that intuitive solutions can not be satisfactory. MCDA is particularly suited if, in addition to the conflict between criteria, there is significant ambiguity in measuring performances and/or in articulating preferences. Finally, MCDA can help in resolving disagreement if stakeholders have different views on the relative importance of the considered criteria.

MCDA methods are classified in two broad categories. The first category (Multi-Attribute Value Theory (MAVT) methods) use a compensatory approach assuming that it is possible to completely offset a disadvantage on one evaluation dimension by an advantage in another dimension, while the second one (outranking methods) follow a non-compensatory approach denying such possibility.

Weighting techniques are one of the several preference elicitation approaches used to derive in quantitative or qualitative terms the importance attached by people to various criteria considered in a decision or a policy making procedure. These methods include surveys trying to approximate public values in monetary terms, indirect economic approaches where public values are obtained indirectly from consumer behaviour at the market place, and focus groups or workshops where experts or stakeholders construct their preferences through a deliberative approach.

Weighting techniques are developed in the framework of MCDA. As a consequence they are also divided in two broad categories following the classification of MCDA methods: Compensatory weighting techniques are used for aggregating partial values in MAVT methods, while non-compensatory ones are used for aggregating partial preferences in outranking methods. The former assume strong compensation between criteria and are used as scaling factors, while the latter reject this assumption and are used as importance coefficients in the respective aggregation formula.

The most widely used compensatory weighting methods are the following:
- Trade-off method
- Swing method
- SMART method
- Conjoint method.

The most widely used compensatory weighting methods are the following:
- Direct point allocation or fixed point scoring techniques.
- Ratio weighting techniques.
- Resistance to change.
- The Analytic Hierarchy Process (AHP).

A policy appraisal procedure -independently of the methodological approach used can be divided in three distinct phases:
Phase A) Pre-assessment phase, in which the problem faced is defined and its structural elements are identified and analysed. The approach to be followed for the problem solution is selected and the necessary preparatory actions are undertaken.
Phase B) Assessment phase, in which the valuation procedure is implemented and the distinct decision perspectives are synthesised. This aggregation procedure provides an ordinal or cardinal ranking of the examined alternative options, while an uncertainty analysis is performed before concluding on the most advantageous policy action(s).
Phase C) Post-assessment phase, in which the outcome of the assessment procedure is subject to the examination of different actors or policy centres for arriving, through deliberation and negotiations, at a commonly agreed solution to be disseminated to a wider public and successfully implemented.

The pre-assessment phase has the same function in both CBA and MCDA assessment frameworks and consists practically in defining the policy problem under consideration and selecting the methodological tool used to synthesise all its structural elements and assist the policy making procedure.

Problem definition and structuring is an integral stage in most MCDA applications, especially those dealing with unstructured, one-off problems. On the contrary, CBA is usually applied in more or less well-structured problems. However, here also the first step in any CBA application is to specify the policy issue at hand and the policy options to be assessed.

The structural elements to be identified during the problem structuring process are the following:
- Define fundamental objectives.
- Identify the time horizon.
- Identify alternative policy options.
- Analyse objectives and define criteria.
- Measure criteria and identify non-quantified ones.

The direct outcome of the above structuring process is an evaluation matrix comprising:
- A set A of n alternative -mutually exclusive- options: A= (A1,A2,…,An) and
- A set C of m evaluation criteria: C= (C1,C2,…,Cm) of which k criteria can be measured in an objective physical scale, while m-k criteria can only be ranked on a subjective ordered scale.

However, it is often necessary to investigate two additional issues that might influence the structure and/or the mathematical representation of the evaluation matrix:
- Uncertainty: in the pre-assessment stage uncertainty relates mainly to the measurement of performances and is very common in policy issues.
- Dynamic aspects: dynamic aspects constitute another type of uncertainty related with future developments. More specifically, the effects of policies are expected to vary with time, as long as the systems change or the policy itself evolves according to these changes.

The evaluation of discrete policy options with respect to multiple criteria can be accomplished with two alternative assessment frameworks: Cost-Benefit Analysis (CBA) and Multiple Criteria Decision Analysis (MCDA).

MCDA is usually implemented in a participative framework involving experts and stakeholders interacting with each other and facilitating a deeper understanding of the policy issue at hand.

CBA is generally conceived as a non-participative procedure capable of including in an objective way public opinion, as revealed in the marketplace or derived from relevant surveys. Objectivity is recognised as an important advantage of CBA together with the commensurability of the examined effects in a familiar valuation scale.

The stages comprised in the assessment procedure differ according to the selected assessment framework, although in both methodologies the objective is the same: to synthesize the multidimensional problem in order to obtain on a single value scale an index reflecting human preferences and denoting the relative dominance of the examined alternatives.

The steps included in a typical MCDA assessment procedure are the following:
- Specify the stakeholders to be involved.
- Elicit preferences.
- Intra-criterion preferences.
- Inter-criterion preferences.
- Apply aggregation rule.

A typical CBA procedure is normally performed by the group of analysts, consultants or researchers assigned with this responsibility. The tasks accomplished are the following:
- Select monetary values.
- Select discount rate.
- Apply aggregation rule.

During the post-assessment phase the results of the appraisal procedure have to be scrutinized in order for them to be widely accepted and be transformed in a workable operational plan for policy implementation. To this end the following steps should be undertaken:
- Negotiation and consensus: in the framework of MCDA this stage is usually the last stage of the assessment procedure. This is because in the presence of multiple stakeholders it is very common the case of diverging results indicating different value systems and policy priorities. In the case of CBA, where the solution results from an 'objective' assessment procedure, an ex-post involvement of stakeholders is also highly recommended. This involvement can take the form of a workshop in which the working team introduces the policy issue under consideration, describes the analytical procedure followed, gives the necessary details for underlying values and relevant assumptions and presents the obtained results.
- Dissemination and implementation: the aim in this final stage is to communicate the whole policy problem and the agreed solution to a wider public in order to achieve the maximum possible social awareness and minimise the risks of hindering, altering or delaying its practical implementation.