Shetland link: Ofgem consults on cost assessment, allows £1.4M to cover Brexit risk

Ofgem has proposed to allow SSEN £628.6 million to build a 600MW HVDC link between Shetland and Caithness, which would allow power to be exported from new wind farms in the island. That figure is £46.8 million lower than the northern Scotland network owner had requested, with the regulator cutting back mainly on construction costs (£15 million disallowed) and risk (£30.3 million disallowed, almost halving the network’s estimate although the network may have access to some risk coverage through another mechanism).
The network had costed risk at £68.6 million, including £14.3 million for Covid and £3.3 million for risks around Brexit. The regulator allowed £1.4 million in Brexit risk and disallowed £1.9 million, saying it was appropriate to make that decision in upfront allowances as risks were predictable. In contrast, it allowed for £3.8 million upfront for Covid risk, disallowing just £0.1 mililon. Although it removed a further £10.4 million, it said the network could recover that in future through separate ‘ring fenced’ Covid allowances.
Some more typical risks it disallowed for reasons such as being better placed with contractors.
Among the cuts in allowed construction costs Ofgem said proposed incentivisation payments to contractors were “neither economic nor efficient”.
The regulator agreed that SSEN’s strategy to use a multi-contract delivery strategy, although it incurs higher project management costs, would be cheaper than using an ‘engineer, procure, construct’ strategy.
The link has to be delivered by 31 December 2024 as SSEN has contracted to export power from SSE Renewables’ planned Viking Energy wind farm by Q4 2024. Any delay in the link could mean that the current power station at Lerwick would have to operate for longer, and that power could not be exported from the Viking Energy, and both would have an environmental detriment, Ofgem said. The consultation therefore seeks responses on a delay charge, one option for which is a daily late payment fee of £30-£121k
The consultation closes on 4 October. Full consultation here

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