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Row over Hinkley grid connection funding model

Hinkley Point C, EDF

A crucial connection to link the new Hinkley Point C power station in Somerset to the electricity grid is at the centre of a row between energy regulator Ofgem and the National Grid about the delivery and funding model.

Under the proposed model for delivering the estimated £839M piece of infrastructure from Hinkley to Seabank, National Grid will build the connection but Ofgem will set the cost of building and operating it on the assumption that all the work had been put out to tender.

Ofgem has set a lower rate of return for private investors on the construction than what is in the National Grid’s existing price control agreement. Ofgem claims this lower rate of return will save consumers around £100M. Consumers would pay towards the construction via their bills for a period of 25 years, but Ofgem proposes to limit this contribution.

Last August, the regulator said the connection could go out to tender to a third party to create consumer savings, although it now favours this “competition proxy” model.

National Grid said Ofgem had “significantly overestimated the potential consumer savings” and the model proposed by the regulator fails to reflect the risks involved.

“We have prepared for a number of financial scenarios,” said National Grid. “However, we do not believe that the proposed ranges for cost of debt and cost of equity included in the consultation reflect either the actual cost of financing this project or the risk being taken for construction of this complex project.”

National Grid said it would now work with the regulator over the coming months to resolve the issue. Ofgem is expected to make a final decision in the Spring.

In a letter to the National Grid yesterday, Ofgem also disputed the costs associated for extreme weather delaying construction and for the development of the T-pylons which will be built instead of conventional lattice towers.

Ofgem said it disputed the way an estimated £116M allowance for the impact of extreme weather during construction had been calculated. It said this cost should be removed from the total amount to be passed on to the consumer and only added later if costs actually incurred were “efficient”.

It also went on to say National Grid should do more to justify the need for consumers to fund the £65M additional cost of the T-pylons.

Ofgem said it was not opposed to environmental mitigation measures, saying it had approved the additional cost of burying cables through the 8.2km long stretch through the Mendip hills. But it said that before it was “comfortable” that consumers should fund the cost differential, National Grid would have to quantify the visual benefit that T-Pylons provide.

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