OFGEM Ofgem proposes cost cuts for Hinkley Point link (8886P)

TIDM46QK

RNS Number : 8886P

OFGEM

15 October 2019

Ofgem proposes to cut costs to consumers of new Hinkley Point grid link

Consumers will save money under Ofgem plans to reduce National Grid Electricity Transmission's (NGET) funding request to connect the new Hinkley Point C nuclear reactor to the grid by GBP80 million.

Ofgem plans to grant NGET GBP637m to build the transmission link, compared to NGET's initial request for GBP717 million. (1)

Ofgem reduced the allowed funding after rejecting GBP40 million in "risk funding" NGET had sought to be included in the upfront cost of the link.

NGET may be in a position to seek additional funding for some risks, such as extreme weather or widespread flooding, if they are efficiently managed and take place during construction.

Ofgem also does not intend to allow all the additional costs associated with the new 'T-Pylons' used on the route. It is not satisfied that NGET has sufficiently justified all these costs or demonstrated that they represent value for money for consumers. (2)

Ofgem plans to use its network price control framework to allow NGET to fund the investment and recoup the cost from consumers' energy bills over 45 years.

Most of this investment will be covered by RIIO2, the next network price control which takes effect from March 2021 to 2026 for electricity transmission, and will deliver lower rates of return for investors, lower capital costs and significant savings for consumers. (3) In this way Ofgem can use its regulatory powers to deliver decarbonisation at lowest cost to consumers.

Ofgem had planned to use the new 'Competition Proxy' funding model to fund the link, but updated analysis shows this funding model may no longer deliver the best savings for consumers for the Hinkley link at this time. Changes include a decrease in cost of equity allowed under RIIO 2, and an increase in the cost of equity and debt allowed under the competition proxy model.

Ofgem will make a final decision on the allowed cost and whether to use the RIIO2 price control model for delivering the upgrade following a six-week consultation period. (4)

Notes to editors

(1) Under our network price control framework, National Grid will build the infrastructure to the initial cost of GBP637 million allowed by Ofgem. The project will be built under RIIO1 until 2021, when it will fall under future price controls. Returns on investment will be updated every five years in line with price controls.

(2) In addition to disallowing some costs associated with T-Pylons and upfront risk funding, we also propose to disallow around GBP10m of costs relating to project management and support, and to exclude around GBP3m of costs associated with works that will be undertaken by the local Distribution Network Operator.

(3) In May 2019, Ofgem confirmed the network price control methodology for the RIIO-2 price control, which will allow consumers to benefit from cheaper, smarter, and more sustainable energy network. The RIIO-2 price control will run from April 2021 - March 2026. For more information, see: https://www.ofgem.gov.uk/publications-and-updates/ofgem-confirms-network-price-control-methodology-so-consumers-can-benefit-cheaper-smarter-and-more-sustainable-energy-network

(4) Today's consultations on how the upgrade will be funded are here:

Hinkley - Seabank: Consultation on our updated delivery model minded-to position

Hinkley - Seabank: Consultation on cost assessment

For media queries contact Ofgem media manager Ruth Somerville 0207 901 7460/ 07766 511 470 ruth.somerville@ofgem.gov.uk

For investor queries contact Ofgem head of investor relations John Bolitho 0207 901 1858 john.bolitho@ofgem.gov.uk

About Ofgem

Ofgem is the independent energy regulator for Great Britain. Its priority is to make a positive difference for consumers by promoting competition in the energy markets and regulating networks.

For facts, figures and information about Ofgem's work, see Energy facts and figures or visit the Ofgem Data Portal.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

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