Ofgem’s plan to use the benefits of competition to fund connection of the new Hinkley Point C nuclear reactor to the grid could save consumers over £100 million.
Ofgem, Britain’s grid operator, has confirmed that the grid upgrade, currently estimated to cost around £800m to build, is needed. Like other network costs, these costs will be passed onto consumers through their energy bills. The costs would be recovered from customers over 25 years after the upgrade is complete.
The regulator is minded to use a ‘competition proxy’ approach for delivering the link to reduce the bill for consumers.
Under this approach, National Grid will build the infrastructure. but Ofgem will set the company’s revenue for building and operating on the assumption that all the work had been put out to tender.
Ofgem will set the revenue that National Grid is allowed to earn based in part on the regulator’s experience in tendering the ownership of transmission links to offshore wind farms. Successive tender rounds have cut the cost to consumers of connecting offshore wind by at least £700m since 2009.
Ofgem is considering setting a weighted average cost of capital for National Grid to operate the upgraded infrastructure for Hinkley Point over a 25-year period of between 0.60% and 1.75%.
Ofgem will make a final decision on whether to use the ‘competition proxy’ approach for delivering the upgrade and the methodology for determining the allowed rate of return in spring 2018.
The 0.60% to 1.75% range is in line with lower rates of return recently bid by investors to operate links to windfarms under Ofgem’s Offshore Transmission Operator competitive tendering regime. The cost of capital Ofgem is proposing to allow National Grid for the construction of the upgrade for Hinkley Point is between 1.12% and 2.70%. All figures are for a weighted average cost of capital that takes into account changes due to inflation (using RPI).
Ofgem has started the review process for the next energy network price controls from 2021. Early evidence points toward cost of capital and returns being lower than in the current price controls.