From investment to net benefits: A review of guidelines and methodologies for cost–benefit analysis in the electricity sector

Abstract

The electricity sector is transforming to integrate renewable energy sources while ensuring grid quality, efficiency, and reliability. Such a transformation demands major investments from both private and public stakeholders. Economic appraisal tools such as cost–benefit analysis (CBA) have become increasingly relevant in identifying investments that optimize financial and social net benefits. Despite this, many CBA applications in the electricity sector, such as those for transmission and distribution infrastructure, tend to prioritize financial metrics and single-criterion evaluations, often neglecting broader social and environmental considerations. This highlights the need for a more inclusive approach to addressing these limitations. To this end, this paper provides a comprehensive review of the literature on CBA as applied to electricity infrastructure appraisals. First, the review examines various facets of CBA methodology, including its key steps, scope, standing, metrics, models, and approaches for addressing uncertainty. Second, this study analyzes relevant CBA guidelines employed to assess electricity projects’ social costs and benefits across the entire value chain, encompassing power generation, transmission, distribution, and end-use. Third, the paper highlights challenges and barriers within CBA guidelines, noting significant variations in their development and applicability across electricity domains and regions. The review categorizes these barriers into CBA into methodological, regulatory, and domain-specific barriers. Advancing CBA requires standardizing scope, unveiling cost and benefit causal chains, enhancing uncertainty handling, and leveraging synergies across regions to bridge gaps between theory and practice.