Introduction to Cost Benefit Analysis

Cost Benefit Analysis

Cost Benefit Analysis (CBA) is the flow of costs of a project over its entire lifetime versus the flow of benefits of a project over its entire lifetime. By costs, we mean ALL the costs associated with the project; the financial costs measured in currency, the environmental costs measured in noise disturbances, impact on wildlife, emissions cost of transport and construction, impact on future generations etc. Likewise, by benefits we mean ALL the benefits from a specific project, financial, environmental, social etc.

Furthermore, the analysis must be compared to the most likely alternate scenario, usually a continuation of the current scenario. For the example in this section, the proposal is for a straw-based district heating plant in an area where heating is predominantly supplied by individual oil-based furnaces. Therefore all the costs and benefits of a corresponding investment in oil-based furnaces have to be calculated as a flow over the lifetime of the project.

Ideally, all costs and benefits can be monetized such that the conclusion can be summed as one number; a negative value if the proposal worsens the socioeconomic balance relative to the closest alternative, and a positive value if the proposal improves the socioeconomic balance. A positive value indicates a net improvement of welfare - i.e. the total benefits of the project outweigh the total costs, and the project is a better use of resources than the closest alternative.

In addition, the stream of monetized costs and benefits is discounted over time, resulting in a net present value (Net present value). The rate of discount used is generally set by a regulatory authority for national guidelines on cost benefit analyses, in order to secure comparability across projects.

For Denmark the guideline for socioeconomic analyses in the energy sector is released by the Danish Energy Authority and can be found on the following page:

Guideline for Socioeconomic Analysis(external link)

Additionally, the Danish Energy Authority has calculated a series of standard values to be used for energy calculations, which can be found here:

Overview of key assumptions for socioeconomic calculations(external link)

Unfortunately, both sites are only available in Danish.

The table below shows some of the given emission coefficients for heat producing boilers based on some fuel sources. Source: Table 7 of the key assumptions for socioeconomic calculations from DEA database.

Table 1. Overview of emission coefficients
Fuel Boiler type CO2 CH4 N20 SO2 NOx
- - Kg/GJ g/GJ g/GJ g/GJ g/GJ
Electricity Central power plant N/A 16.3 26.0 636 1318
Biogas District heating plant 0 4.0 2.0 25.0 28.0
Hay District heating plant 0 32.0 4.0 130.0 90.0
Heating oil Private boiler 74.0 1.5 2.0 23.0 52.0
Wood pellets Private boiler 0 200.0 4.0 25.0 120.0
Natural gas Private boiler 56.8 6.0 1.0 0.3 30.0

The corresponding guideline for socioeconomic analyses in the UK can be found here:

Economic Assessment of Spending and Investment(external link)

EU related links

;Evalsed(external link): Evalsed is an online resource providing guidance on the evaluation of socio-economic development

;CBA(external link): Guidance on the Methodology for Carrying Out Cost-Benefit Analysis

Created by tanja.groth. Last Modification: Saturday 24 July 2010 10:01:44 CEST by jj.