Ofgem’s plans to use competition to drive down the cost of expanding the electricity network have taken a further knock, as the regulator abandoned plans to use a ‘competition proxy’ for a new power line, Hinkley Seabrook, to be built to accommodate Hinkley Point C.
The regulator had planned to use a ‘competition proxy’, which would try to replicate the effects of competition by setting a lower rate of return and locking it in for the life of the asset (up to 45 years). But costs of capital during the transmission owner’s next price review period (RIIO2, which runs for five years) are set to be much lower than they are in the current period and meanwhile the likely cost of the CPM model has increased. ”As a result, the consumer savings range for the CPM which we identified in our July 2018 decision has reduced,” the regulator said, “there is insufficient certainty that the CPM will deliver a benefit relative to funding HSB through RIIO”. It now proposes to fund the link under the existing ‘strategic wider works’ model using the RIIO framework.
The Seabank decision also raises a question mark over Ofgem’s decison on how to fund a new undersea link to Shetland. That link is also separable and valued at over £100 million, in theory bringing it into Ofgem’s planned competitive regime.
Ofgem has aleady decided it cannot take a ‘special purpose vehicle’ approach, saying there was too little time to run a tender process. Instead, in March, it consulted on using the competition proxy model, using a financial comparison from previous consultations in 2018. Final decisions on that link are expected in late autumn.
Ofgem has already been forced to delay plans to introduce earlier competition models (dubbed the Cato model) because it would require primary legislation. It said, “we consider that there may be very real benefits in using the CPM. We may apply the model to projects that are new, separable and high-value during the remainder of RIIO-T1 and during RIIO-2 depending on the circumstances of those projects and the information available to us at the time.”
Announcing the ‘minded to’ decison on the Hinkley Seabank connection and opening a consultation on its plans, Ofgem said it had reduced the cost allowed for the link to £637 million, compared to NGET’s initial request for £717 million.
It rejected £40 million in “risk funding” and some of the additional costs associated with the new ‘T-Pylons’ used on the route. It also transferred £3 million in costs for work that would be carried out by local distribution network operators.