‘Competitive proxy’ model to be used for Hinkley connection

Ofgem is pressing ahead with plans to squeeze the amount National Grid can earn from building the Hinkley Point C nuclear plant’s new grid connection.

The regulator confirmed today (30 July) that it wants to fund the connection with the transmission network by using a new “competition proxy” model (CPM), which works on the assumption that the project has been opened up to competition.

Under this model, which is informed by the regulator’s experience in tendering contracts for new transmission links to offshore windfarms, National Grid would build the project without having to compete for the tender.

But its revenues for building and operating the connection would be set in line with the expected outcome if it had done so.

Ofgem said in January that it was minded to adopt the CPM model.

Ofgem estimates in a report, published today alongside its wider price control framework update, that using the CPM model will save consumers £50 million to £100 million than if the connection were funded through the RIIO T-1 price control arrangements.

This is down on an estimate earlier this year by Ofgem of £100 million savings, which the regulator says reflects an increase in the anticipated costs of debt and equity during the lifetime of the scheme.

The estimated cost of the connection has also reduced from £800 million to £650 million because it is assumed that the project’s pre-construction costs will now be funded through RIIO.

The report, which is informed by analysis carried out by consultancy Cambridge Economic Policy Associates (CEPA), concludes that the CPM arrangements are “sufficiently attractive” to secure investment grade capital.

Jonathan Brearley, Ofgem’s executive director for systems and networks, said the CPM model is an example of how the regulator is seeking to ensure impact on bills is minimised while carrying out upgrades to the network.

He said: “As part of this continuous drive to deliver value for consumers we are using a new benchmarking approach to cut the costs of connecting the new Hinkley Point C nuclear power station.

The document also reaffirms Ofgem’s support for the connection.

In its response to Ofgem’s decision, a spokesperson from National Grid, said: “We are committed to delivering the Hinkley-Seabank connection on time and to quality and Ofgem’s decision does not affect this.

“We will now review the detailed decision by Ofgem and consider all of our options prior to Ofgem formally implementing the proposals into our licence later in the year or early 2019.”

National Grid plans to start construction in early 2019 to meet EDF’s 2024 target for connecting Hinkley.