Ofgem has set out proposals to allow £1.1 billion funding to build a vital new subsea link connecting the electricity grids on either side of the Moray Firth – but the UK regulator’s proposal is £174 million less than the funding request from Scottish Hydro Electricity Transmission (SHE Transmission).
SHE Transmission’s estimated project costs were £1,236.2 million. But Ofgem has told the utility company that project should cost no more than £1,062.3 million.
The new link will connect 1.2GW of new renewable electricity generation following completion in 2018. This additional capacity will increase the resilience of Britain’s energy infrastructure.
Ofgem’s lower cost assessment was based on a range of analysis including unit cost benchmarking, a detailed review of some costs, comparisons to similar projects, and a review of SHE Transmission’s procurement strategy and processes.
The UK regulator said: “Based on our assessment, the construction costs for the two parts of the Caithness-Morey project are at the higher end of our efficient cost range.
“In addition, we consider SHE Transmission’s proposed costs for its resourcing, and for the project risks it holds are not justified by the evidence presented.
“In our view the overall project cost of £1,236.2 million proposed by SHE Transmission is not justified. We propose the efficient cost is £1,062.3 million. This is £173.9 million lower than SHE Transmission’s estimate.
“Whilst information provided by SHE Transmission on future proofing, anticipatory investment to connect new generation, and some site specific works explained most of the gap, it did not justify all the difference.”
A spokesman for SHE Transmission – part of the giant Perth-based Scottish & Southern Energy (SSE) utility company – said: “We have produced a well-defined and well-scoped project that offers value for money for customers while allowing the realisation of the vast potential of renewable electricity generation in the north of Scotland for the benefit of the whole country.
“While we are disappointed with the level of the allowances proposed, the consultation does enable further engagement with Ofgem to take place on important issues, such as the best way for treating contingency- and risk-related costs.
“We believe the consultation process provides the right opportunity for these to be considered and resolved in a way that’s fair to customers and investors alike, and will engage constructively in it.”
An Ofgem spokesman added: “If SHE Transmission spends more or less than its allowed expenditure, the sharing factor will allocate the difference between the company and consumers.
“The sharing factor provides a strong incentive for SHE Transmission to manage costs efficiently.”
Fergus Ewing, Scotland’s Energy Minister, commented: “This project will ensure continued progress towards our renewable energy ambitions, support hundreds of jobs during construction and pave the way for connections to Orkney and Shetland.
“Enabling connections to the Scottish islands to support future island generation is a top priority for the Scottish Government. The deployment of renewables could have a transformational impact on island economies and provide the opportunity to address their severe levels of fuel poverty.
“It also underlines once again the essential role that renewable energy in Scotland has to play in meeting the UK’s long-term energy requirements and keeping the lights on.
“Ofgem’s decision brings delivery of the project one step closer – with the added bonus of identifying a potential saving for consumers.”