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Ofgem questions £840 million Hinkley grid reinforcements

Ofgem has contested National Grid’s potential £840 million bill for grid reinforcements required to bring the controversial Hinkley Point C project on-stream.

The 4GW nuclear power plant was green-lit last year however rows over the finer points of its operation continue, not least the cost estimates National Grid Electricity Transmission (NGET) has put forward for various works on the transmission network in Somerset.

In March this year National Grid submitted its final needs case to industry regulator Ofgem, setting out its technology and works costs while justifying the choices it has made.

In its response, published today, Ofgem said that while it agreed that the “majority” of the company’s design choices had been “economically justified”, it disagreed with two specific cost allocations.

Ofgem said it could not justify the choice of ‘T-pylon’ infrastructure at a cost of £65 million, while also found reason to dismiss costs National Grid associated with setting risk funds and cost contingencies associated with delays caused by extreme weather, which the transmission operator had placed at £116 million.

In total, Ofgem said it had found reason to question around 20% of the total costs put forward in NGET’s final needs case.

The costs are significant because the works would be carried out under the RIIO framework, with spending and profit under this already up for debate. Earlier this year Ofgem began its preparatory work for RIIO-2 by suggesting that distribution and transmission network operators would not enjoy the kinds of profit they have made in the past.

Ofgem has today launched a consultation on the proposals, which will feed into a final assessment of the needs case pencilled in for December this year. NGET will have the opportunity to strengthen its case for these works or revise them, but if Ofgem remains unsatisfied those works can be disallowed.

Meanwhile, Ofgem has also suggested two specific ways in which competitive benefits could be used to drive down costs associated with the works.

One way, dubbed the SPV model, would see National Grid put the financing, construction and operation of the upgrades out to competitive tender for a third party to take on. A second way Ofgem is keen to explore, dubbed the competition proxy model, would see National Grid assume responsibility for the infrastructure’s development, however Ofgem would cap its revenue on the basis of what it thinks costs would have been had National Grid ran a competitive tender.

While onshore infrastructure works are regulated under RIIO, Ofgem has tendered for offshore works under the Competitively Appointed Transmission Owner (CATO) regime, something the regulator is looking to bring into onshore works in a bid to reduce costs passed on to consumers.

Ofgem has delayed bringing CATO into action for onshore works until the “timing of legislation is made more certain”, meaning it will not actively look to apply CATO to the Hinkley-Seabank works.

However Ofgem has said it remains flexible to applying CATO should Hinkley Point C’s grid connection works be delayed any further.

The project has been beset by numerous delays as doubts persisted over both EDF’s ability to finance the project and the government’s commitment to the nuclear power plant as cost estimates spiralled