Guidance

IED derogation cost-benefit analysis tool: user guide

Updated 9 December 2020

1. Title worksheet

This is where you start your analysis. You navigate through the tool by selecting the coloured boxes. The yellow box called ‘Start cost-benefit analysis’ will take you to the derogation case description worksheet.

Please note: if you enter incorrect information into a cell or cells, you must not use ‘cut and paste’ to move it – doing this will cause problems with the formulae in the tool. Instead, use ‘copy and paste’ then delete the original data.

2. Derogation case description

This worksheet is for you to fill in background details about your application.

First enter a reference permit identification number, where available, and provide the name of the process being considered.

Then select whether the derogation is a change to an existing technology or an investment in a new technology, and describe the activity or process in more detail.

Next, set out what the aim of each option is. Provide information about the processes and technologies being considered and how these impact on each option.

You must include an assessment of the costs and benefits of implementing best available techniques (BAT) by the date set out in the BREF (BAT reference document), even if this requires closure of your plant.

You must also set out the costs and benefits of your alternative options and those for the business as usual (BAU) case – this is the investment profile you would have followed in the absence of the IED. We do not consider BAU as an option in its own right – it is there to help us check the data you have entered into the proposed derogation option.

You must indicate which of the alternative options is your proposed derogation option. You must also demonstrate that the selection of your proposed option comes as the result of an option appraisal in which a number of different options have been considered.

You may be able to make the case that the engineering aspects of some options do not require input into the tool. The tool allows you to consider 3 options in addition to meeting BAT and your proposed derogation option.

Where more options are required, you will need to use 2 versions of the tool.

3. Qualitative assessment

This worksheet is for you to conduct a comprehensive qualitative assessment of the environmental impacts of each option being considered.

You must select which impacts are applicable and provide a description of them.

You must also provide a preliminary assessment of the likely significance of the impact.

This assessment is crucial because we will not make a decision on your derogation application solely on the basis of the quantitative output from the cost-benefit analysis (CBA) tool. We will also look at the potential impacts not captured by the tool’s quantitative analysis.

The significance of an impact must be assessed relative to other impacts from your site and the size of the particular impact across the various options you are considering. Whether the impacts are positive or negative should be assessed relative to the current status. For significance, the categories should be interpreted as:

• large: high risk and high impact relative to other impacts and options
• medium: high risk and low impact or low risk and high impact relative to other impacts and options
• low: low risk and low impact relative to other impacts and options

4. General data input

This worksheet provides space for you to enter over-arching inputs to the analysis.

You must choose a river catchment location, which is used in the analysis of water impacts under the sensitivity and scenario analyses. If you are unsure as to which river catchment your installation is in, search our Catchment Data Explorer.

You must make it clear whether the installation is located in an Air Quality Management Area and whether different greenhouse gas emissions are covered under the UK Emissions Trading Scheme (UK ETS). This information is used to determine which carbon prices should be used to value different greenhouse gas emissions.

You must then enter a relevant weighted average cost of capital (WACC) and an uncertainty range around this, followed by a justification for the WACC proposed.

Next, you must enter the year in which the derogation application began. The year you enter is used as the start year for the appraisal (year 0). This also determines the price base for the analysis and the year to which all costs and benefits are discounted. You must enter all costs and benefits in year 0 prices.

You must then complete the remaining yellow boxes for each option, which includes the ‘first’ installation year. This is described as ‘first’ because, depending on the appraisal period, a further set of investment costs to replace the asset may need to be included at a later date. However this box is purely focused on the first instance of investment.

You must also enter the length of time to complete the installation, allowing time for planning, raising finance, physical installation and the lifetime of the technology once installed. It may be difficult to define the lifetime of equipment that is constantly repaired and refurbished rather than replaced, however it is impossible to conduct a CBA without this parameter.

If full replacement is not likely to happen then the act of major refurbishment should be used to define the end of a piece of equipment’s lifetime.

If you cannot come to an agreement with us on this issue, then this parameter must be used as a sensitivity test – in other words try running the tool with the 2 different lifetimes entered to see whether it makes a difference to the overall result.

Where an existing technology is considered in your BAU case, you must enter the remaining life of the technology at the start of the appraisal period.

This worksheet also includes a cell for each option which automatically tells you whether reinvestment is required over the appraisal period. So, where this box states ‘yes’, the lifetime of the particular option being appraised is less than the overall appraisal period. You must enter a further set of investment costs at a later date in the appraisal, which show the technology being replaced or substantially renewed.

5. Data input (scenario name)

These worksheets contain the bulk of the tool’s required inputs. You should complete a sheet for BAU and each of the options being considered in the appraisal.

All costs and impacts should be entered as absolute values, rather than reductions compared to another option. For example, the BAU emission level should be the current emissions from your plant. For the other options the emissions level should be the emissions produced by implementing each option rather than the emission reduction achieved.

The tool will calculate the additional costs and benefits of meeting the BAT-AEL (annual emission limit associated with a best available technique), and any other options, relative to your proposed derogation option.

If you are making the case that some aspect of your site means it will always be more expensive to meet BAT, then you must enter the total cost of meeting BAT for your plant, but make clear which of those costs you consider to be above what a roughly ‘typical’ site might incur. An example might be the presence of a major road near to your site that would need to be closed in order to allow construction to take place.

All costs must be entered as positive values apart from cost savings, which should be shown as negative costs. Benefits will also be shown as positive and dis-benefits as negative. Please note that the units of the tool are thousands of pounds.

All costs must be entered in the years in which they fall using the price base defined by the year in which the derogation application is being made (that is, year 0).

All costs and impacts in the UK must be included. Impacts outside the UK must be recorded qualitatively but not entered as data in the tool.

For each data input, such as ‘equipment’, several subcategories are listed where appropriate. However, you can overwrite categories that are not relevant and space is left for you to enter additional categories – these are marked ‘other (please specify)’. Where you need to enter more than one alternative category, you must either collate your costs into fewer categories or contact the Environment Agency so they can add more rows for you.

5.1 Upfront investment costs

Start by entering the total upfront costs in the appropriate year in which they fall. These are then aggregated for each year.

When you consider an investment in an alternative technology (for example, one designed to meet BAT-AEL), there may be a residual or scrap value attached to an existing asset. This must be recorded in the appropriate year (that is, when the new investment commences) as a negative cost.

If equipment installed before the beginning of the appraisal period needs to be replaced before the end of its expected lifetime, there is a cost associated with that in terms of the years of operation that have been foregone by the need to meet the requirements of the IED. To understand how this is dealt with in the tool, the concept of ‘lost years of operation’ needs to be split down into its component parts, as follows:

• output that the equipment would have produced had it not been replaced
• capital outlay brought forward by the decision to replace the equipment early
• lost output during construction works also brought forward by the decision to replace the equipment early
• the negative cost during construction of not needing to pay for operation and maintenance

The tool has been constructed with an implicit assumption that output does not change when BAT, or another option, is installed, so any output that is not produced by the old equipment will be produced by the replacement technology.

The capital outlay brought forward is estimated by comparing the costs of the BAT-AEL and other options with those of the proposed derogation option.

Lost output during construction works can be accounted for in the tool, although given that this will be planned downtime you will need to justify the cost entered. Where this is done, you must only capture the lost value added by your company, which is different to the total value of your output. So for example, neither profit, which is a transfer of value that should not be captured in a social CBA such as this, nor the costs of inputs, can be included in this cost.

When construction is being undertaken you must reflect this in much lower (or zero) operation and maintenance costs.

5.2 Financing costs

You can enter your financing costs manually, or allow the tool to calculate them for you using the central WACC figure, which you entered in the ‘Data input – General’ worksheet.

If you enter your financing costs manually, they must be derived using the central WACC figure and entered in the appropriate years according to the repayment period specified. They must only reflect the interest paid on the capital, as including the capital repayment will cause double counting of the capital investment. The tool then sums the upfront investment costs and the financial costs to produce the total capital costs.

If some of your capital is being raised from existing shareholders then the cost of this capital should be taken to be the opportunity cost of the capital raised – that is, what is the next best return that could be earned by putting this capital elsewhere?

If you ask the tool to automatically calculate your financing costs, it will use the Spackman Approach to cost-benefit analysis. This means that the cost of accessing financial capital is incorporated into the tool’s calculations, but is discounted using the social discount rate. The cost of capital calculation is carried out by the PMT function in Excel (calculates the constant periodic payment required to pay off a loan or investment, with a constant interest rate, over a specified period).

5.3 Operating costs

Use this space to record all operating costs associated with the option in absolute terms, in the appropriate years in which they fall. This should not include costs associated with energy, waste handling or financing of investment. These are handled elsewhere.

Labour costs should be entered as the wage plus any additional costs associated with employing human resources, such as National Insurance contributions.

5.4 Waste output

Use this space to record the volume and value (separately) of waste output under the different options. If, for example, one of the options leads to an increase in recycling or re-use of materials compared to the proposed derogation option, the benefits associated with this reduction will be captured by the model in terms of lower volume of waste relative to the proposed derogation option.

You must only consider the costs that accrue to your installation and you must enter volumes of all waste streams where possible, including those which cannot be costed. Although this information will not be used in calculations within the tool, it will still inform our final derogation decision.

5.5 Energy consumption

Use this space to record the amount of energy consumed under different options in the yellow boxes. For those fuels listed, the quantities of energy consumed are automatically combined in the tool with retail energy prices from the Department for Business, Energy & Industrial Strategy’s (BEIS’s) appraisal guidance to calculate the value of consumption.

Where the technology consumes an energy type not listed, you will need to enter this in the row marked ‘other (please specify)’, changing the name to the appropriate fuel. You can ask the Environment Agency to insert more rows below this if needed.

You will also have to enter the value of this energy consumption by suggesting an appropriate retail price.

5.6 Air pollutant emissions

You will need to select an appropriate air pollutant from the drop down boxes and enter the total volume of emissions of each pollutant over the appraisal period in the yellow boxes.

The emission volume for each of the options should represent the level that each option will produce. The tool will automatically calculate emission reductions by subtracting the emissions due to each option from the emissions level in the proposed derogation option. The tool will then combine these reductions in emissions with damage costs from Defra’s Inter-departmental Group on Costs and Benefits (IGCB) to calculate the monetary value of the change in emissions brought about by each of the options.

The damage costs used to assess air pollutant impacts in the tool are taken from 2 sources: the IGCB and the European Environment Agency (EEA). The IGCB values are used in the central analysis but cover only a limited range of pollutants (PM₁₀, NO₂, SO₂ and NH₃). All dust emissions, except coarse dust, must be entered as PM₁₀ to begin with. If the results of the analysis depend on this assumption you will need to split the PM_2.5 fraction out, with a different damage cost applied to this fraction. Where there are other pollutants not covered by the IGCB, you must first use the wider set of pollutant values covered by the EEA damage costs data set. This calculation is automated as part of the sensitivity analysis.

Where there are no published damage costs at all, you have 2 options:

1. Suggest a damage value to use alongside sufficient justification and supporting evidence.
2. Treat the impact qualitatively.

In the case that some emissions do have damage costs and some do not, then the CBA should be conducted using damage costs where available and the qualitative section of the CBA should be used to point out which emissions have not been included.

If you are unsure whether to provide your actual and predicted emissions levels or your current and future permitted levels, then the Environment Agency’s preference in the absence of any clear alternative justification is to use the permit levels. Such a justification might be that your site is currently performing well below its permit limit.

If there is disagreement over which comparison to use you must undertake a sensitivity analysis. This takes the form of running the CBA model with one set of values then running it again with the other set. It may be that the overall result of the analysis is the same whichever set of values is used.

You must also take this approach if your site is currently exceeding its permitted emission levels.

Occasionally you will find that there is an emission range in the BAT conclusions rather than a single permitted level of emissions. This range is often a result of considering different techniques to meet the BAT-AELs. You must check which part of the range refers to which technique and apply the value that corresponds to the technique you are proposing.

The emissions limits are expressed as concentrations – it is not acceptable to achieve emission limit values by diluting emissions to any medium. We will reject any applications in which an alternative technique involving dilution is proposed to achieve a BAT-AEL. This is explicitly covered by Article 15(1) of the IED.

5.7 Greenhouse gas emissions

Enter all process-related (that is, non-fuel related) greenhouse gas emissions in the relevant year in which they occur.

These must be entered both in terms of tonnes of the specific greenhouse gas, and in terms of tonnes of carbon dioxide equivalent (tCO2e). To aid conversion, we have included a list of ‘global warming potentials’ in the ‘Assumptions’ worksheet (reached from the ‘Underlying Data’ worksheet). These figures are calculated automatically for the 6 fuels specified in the worksheet.

Where a technology involves consumption of an energy type not listed, you must add this data manually, splitting emissions by fuel type. A recommended set of emissions factors for use in this conversion are included in the ‘Emission factors’ worksheet (reached from the ‘Underlying Data’ worksheet).

The value of these emissions is automatically calculated using BEIS’s recommended carbon values. The value used (traded or non-traded) is determined by the selections you made in the ‘Data inputs – General’ worksheet regarding the coverage of the installation by the UK ETS.

5.8 Inputs for sensitivity analysis

You must enter an uncertainty range around both upfront investment and operating costs. These values are not used in the calculation of the base case but are used by the tool when undertaking sensitivity analysis and scenario analysis.

5.9 Emissions to water

Where you consider there to be non-negligible impacts on emissions to water, you must choose an option to describe how water quality could change over the appraisal period (as a result of emissions to water from your installation).

You can enter an assessment for emissions to rivers, coasts, lakes and transitional waters. These assessments are additional and so entries can be made in both.

6. Results

The ‘summary results’ worksheet presents all the key results from the base case, the sensitivity testing and the scenario analysis. The ‘detailed results’ sheet includes sensitivity and scenario analysis.

6.1 Scenario analysis – water (optional)

Only use this worksheet when water impacts are deemed to have a potentially significant impact on the appraisal. Enter an assessment of the water quality at the beginning of the appraisal period and how this changes under each option.

Note that the definitions of the different qualities refer to those used in the Environment Agency’s Water Appraisal Guidance. This is combined with information on the size of the water course affected that you entered into the ‘data inputs (scenario)’ tabs for each option.

The tool then calculates an illustrative (central) impact of emissions to water which is automatically included in the CBA. The expanded NPV is automatically calculated and presented in this worksheet.

7. Appraisal checklist

Have you ‘shown your workings’ in producing data for entry into the CBA tool? Is it clear how these numbers were derived?

Have you checked your assumptions? You must:

• make it clear whether current emission levels are likely to be maintained in the medium to long term
• include the results of the CBA tool’s automated sensitivity and scenario analyses and list the non-monetised costs and benefits in any accompanying appraisal report
• show you have assumed that a new technology is working at full capacity at the beginning of the last year of installation, but also shown that there is still a large proportion of upfront capital to be spent in that last year (we would expect the new technology to be working at a lower capacity for that year or to be working for only a proportion of that year at full capacity)
• convert all prices into constant prices using the tool’s GDP deflator (a measure of the level of prices of all new, domestically produced, final goods and services in an economy)
• not include inflation in the level of future prices
• convert all prices into pounds sterling
• use benefit values that take into account the income effect

Check that the various options have been correctly entered. You must:

• ensure that a minimum of 2 options have been considered along with BAU – if any options are the same then the ‘copy values from another option’ box at the top of the data input worksheets can be used to copy information across (please check that the data has copied across correctly)
• ensure that BAU has been accounted for correctly (ideally this would be based on a pre-existing maintenance and replacement regime
• check that the benefits cited for each option are either all entered as ‘expected actual emissions’ or ‘expected emission limit values’ (either method is acceptable but a mixture of the two is not as it would either under or over estimate the value of the benefits)
• use the NPV to justify disproportionate cost if possible (other metrics can be included)

Review the magnitude of the cost and benefits. Does the magnitude seem right? Are any of the costs and benefits much larger than the others (millions rather than thousands for example)? If the magnitude does not seem appropriate, check:

• if the low, central and high WACC values are unrealistically high or low
• the maintenance cost as a proportion of asset replacement value (annual maintenance costs should be about 2% to 3% of the asset replacement value)
• if the magnitude of costs can be compared with costs from the BREF or BAT conclusions documents