Ofgem has today (8/30) said that an upgrade to the high-voltage grid is needed to connect the new nuclear plant at Hinkley Point, but considers that the costs to consumers of the upgrade can be reduced.
In March National Grid submitted to Ofgem its economic case for an £840 million upgrade of the network to connect the new power station in Somerset.
Ofgem is challenging around 20 per cent of National Grid's proposed costs, particularly in relation to the treatment of how severe weather could delay construction of the grid upgrades.
As well as driving down the costs of the upgrade, Ofgem has put forward two additional options for using the benefits of competition to deliver further potential savings for consumers, over and above what could be delivered under the existing delivery and funding mechanisms for large projects under our transmission price controls.
The options are for National Grid to put the financing, construction and operation of the infrastructure upgrade out to competitive tender for a third-party to deliver on National Grid's behalf. Alternatively Ofgem could estimate National Grid's revenue for building and operating the infrastructure based on if the upgrade had been tendered on a fully competitive basis. (See notes to editors for more information).
Ofgem has today (8/30) launched a consultation on these options, as well as the proposed costs for the upgrade. Ofgem will make a final decision on whether the upgrade is needed and if so how it should be delivered by the end of this year. A decision on what costs will be allowed for the upgrade would be made in late 2018 or early 2019.
- Ofgem's experience in running a successful tender regime for offshore transmission links suggests that the Hinkley Point upgrade could be delivered at a lower cost through the effect of competition. The delivery options are:
- National Grid could tender the construction, financing and operation of the new infrastructure, for delivery through a special purpose vehicle (a legal entity set up with the specific aim of delivering the project) The winning organisation would finance, build and operate the link on behalf of National Grid for 25 years, with competition between bidders setting how much revenue the winner could earn. This is different to Ofgem's Competitively Appointed Transmission Owner (CATO) model as Ofgem would not be running the tender and the assets would remain governed by National Grid's transmission licence.
- National Grid would build the link. However Ofgem would set its revenue for building and operating the link over 25 years based on what we think costs would have been if we had tendered the construction, financing and operation of it. Ofgem would set the revenue by applying what it has learnt by running successive tenders under the offshore transmission regime. This option is known as competition proxy.
- Ofgem has indicated a preference for these delivery models over using the Strategic Wider Works (where transmission companies put forward a needs case for grid upgrades and Ofgem determines the level of funding required, if it agrees to the need) approach in the transmission price controls, or the CATO regime which is still under development. This is because Ofgem believes these delivery models could lead to the upgrade being delivered more efficiently.
Ofgem is the independent energy regulator for Great Britain. Its priority is to make a positive difference for consumers by promoting competition in the energy markets and regulating networks.
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