Undersea electric ‘superhighway’ moves a step closer

Ofgem has said it believes there is a “clear consumer benefit” in progressing the £3.4bn electricity ‘superhighway’ project linking Scotland and England.

The Eastern High Voltage Direct Current (HVDC) project, jointly proposed by National Grid, Scottish and Southern Electricity Networks (SSEN) and SP Energy Networks, will consist of two subsea links which will have a capacity of up to 4GW.

One cable will run 176km under the sea from Torness in Scotland to Hawthorn Pit in County Durham and the other 440km under the sea from Peterhead in Aberdeenshire to Drax in North Yorkshire.

In a consultation on the project’s final needs case published today (30 March), Ofgem said: “We consider there is a clear consumer benefit in the Eastern HVDC projects progressing and that a clear case has been made for the two proposed HVDC links that form the Eastern HVDC projects.

“We continue to appreciate the risk that not delivering substantial reinforcements in this area could cause a significant detriment to consumers in terms of constraint costs.”

The regulator confirmed it was minded to continue using the Large Onshore Transmission Investment mechanism (LOTI) after assessing three other delivery mechanisms which would have allowed for competition.

Under the Competitively Appointed Transmission Owner (CATO) model a competitive tender would be run for the financing, construction and operation of the assets with a transmission licence awarded to the winning bidder.

This however requires legislative changes to allow for new parties to be awarded a transmission licence following a competition and there is uncertainty as to when the required legislation will be in place. Furthermore for construction to commence in 2024, the invitation to tender must start in spring 2022.

Ofgem said a decision to apply CATO at this point to the Eastern HVDC projects is likely to lead to delays that could “significantly increase” constraint costs.

Under the Special Purpose Vehicle (SPV) model a tender is run by the incumbent network licensee to finance, deliver and operate a new, separable, and high value project on the licensee’s behalf through a contract in effect for a specified revenue period.

Ofgem said that “significant work” would be needed to finalise the model and that given the close proximity of the invitation to tender stage, it does not consider the SPV model can be applied to this project without leading to likely delays.

The third model, the Competition Proxy Model (CPM), involves setting a largely project-specific set of regulatory arrangements to cover the construction period and a 25-year operational period for an asset.

It is intended to replicate the efficient project finance structures that tend to be used in competitive tender bids for the delivery and operation of infrastructure projects.

“In RIIO-2 Final Determinations we explained that due to recent market conditions and our allowed financing arrangements for RIIO-2, we may not be able to have sufficient confidence that the application of the CPM to projects that need to start construction at the start of the RIIO-2 period would deliver benefits to consumers,” Ofgem said.

The regulator added that since its decision on the Hinkley-Seabank and RIIO-2 Final Proposals in 2020 it has seen some variations in the cost of debt benchmarks used to set the financing arrangements under CPM. However, it has not seen movements that would indicate it can be confident that the model is likely to deliver a benefit to consumers relative to LOTI arrangements under RIIO.

Chris Bennett, interim president at National Grid Electricity Transmission, said the green links are a “critical step” in helping achieve greater energy independence and net zero.

He added: “Ofgem’s recognition of their benefit and the likely delivery model is encouraging. Final approval will offer opportunities for job creation, economic growth and consumer savings – at the same time as delivering the essential infrastructure required for meet the UK’s climate targets.

“We now look forward to working constructively with Ofgem and other stakeholders as the project continues to move forward.”

Barnaby Wharton, director of future electricity systems at Renewable UK, said: “Onshore is the cheapest form of electricity generation we have, so getting on with these projects means that we will be able to deliver even more power produced by windfarms in Scotland to consumers in England.

“Having more transmission capacity means that we won’t have to curtail wind generation when the networks can’t cope, saving consumers even more.”