Ofgem cuts Hinkley connection budget by £60m

Ofgem has reduced the allowed budget for the connection of the Hinkley Point C nuclear plant to the transmission network by £60 million.

The Hinkley Seabank project will involve the installation of 49 kilometres of overhead power lines – mostly using the new “T-pylon” design rather than traditional lattice towers – as well as 8.5 kilometres of underground cabling through the Mendip Hills. National Grid Electricity Transmission requested a budget of £716 million but has only been allowed £656 million.

Ofgem rejected £34 million of up-front contingency funds, £12.3 million of spending on the construction and installation of T-pylons and £8.2 million of project management costs. It also disallowed £3.2 million of costs associated with work that will be undertaken by distribution networks and £2.2 million related to land compensation and legal fees.

Its preliminary decision in October was to cut an additional £20 million from the budget.

However, based on consultation responses, the regulator has changed its position on £11.3 million of costs for the development of the T-pylon, £5.8 million of contingency funding and £1.6 million of project management costs.

With regards to the T-pylons, Ofgem previously argued that it was inappropriate to use project-specific allowances to fund innovation that may be utilised elsewhere on the network. It is now satisfied that NGET has explored all alternative options and that the costs are specifically related to the Hinkley Seabank project.

Ofgem also confirmed that it has abandoned plans to fund the project under the competition proxy model which aims to replicate the results of competitive tendering – the regulator’s ultimate goal – by locking in financing costs at current market rates.

It will be instead be funded through the strategic wider works mechanism – part of the RIIO framework – whereby network operators can secure funding for pre-construction work as part of their main spending allowance and later request construction funding once the costs they have become more certain.

Ofgem selected the competition proxy model as its preferred option for funding the Hinkley Seabank project in July 2018.

But since then, the regulator said the assumed cost of capital under the competition proxy model has risen, whilst expected financing costs under the RIIO framework have fallen. It said it is no longer confident, as it once was, that the new model will save money for consumers in this instance.