Grid squares up for Hinkley fight with Ofgem

As if the new Hinkley Point ‘C’ nuclear power station being built at Somerset were not already controversial enough, it now looks like becoming the centre of a row between National Grid and Ofgem, the energy industry regulator.

The power plant, Britain’s first new nuclear power station for more than two decades, is expected to supply 7% of the country’s electricity requirements when it finally opens in 2025.

In order to do that, the plant will need to be connected to the UK’s national electricity grid, a project on which Ofgem has been consulting.
Today, it published a report on its findings, in which it said that the project – known as Hinkley Seabank – must be delivered under what it called ‘competition proxy’.
That means National Grid must complete the project, the cost of which it has previously put at £839m, in such a way as to simulate the effect of the work being done by third parties who had won the right to do so via a competitive tender.

Image: National Grid will connect Hinkley Point C to the UK’s power network
The reason for doing it this way is to try and achieve the same outcome achieved when Britain’s offshore wind farms were connected to the grid. That work was put out to competitive tender and resulted in it being done more cheaply than had National Grid simply completed the work in-house.
The cost of building the connection between the grid and Hinkley Point C will be passed on to consumers through their energy bills – with the costs fully recovered by National Grid 25 years after the work is due to be completed.
Announcing its decision, Ofgem said: “(Our) plan to use the benefits of competition to fund connection of the new Hinkley Point C generator to the grid could save consumers over £100m.”
But National Grid, whose shares fell by more than 2% on news of the announcement before recovering, said it was “very disappointed” with the proposal.
It added: “We have prepared for a number of financial scenarios, however, we do not believe the proposed ranges for cost of debt and cost of equity included in the consultation reflect either the actual cost of financing the project or the risk being taken for construction of this complex project.
“We also believe that Ofgem has significantly overestimated the potential consumer savings in their consultation.
“These parameters do not, in our view, offer the level of returns that would allow sustainable investment in the UK energy sector needed to deliver good outcomes for both customers and investors.”

There are a number of conclusions to draw from this episode.
The first is that, while outsourcing is currently being portrayed as unattractive by some politicians in the wake of Carillion’s collapse, Ofgem remains convinced it has a part to play in cutting the cost of delivering important infrastructure.
While it is not telling National Grid to outsource this important work, it clearly believes replicating the costs of outsourcing will benefit consumers.
The second is that, while Ofgem is routinely castigated by consumer groups and politicians for supposedly going soft on the big six energy suppliers – an accusation not borne out by the facts – it is clearly in this instance fighting hard to protect consumers from being overcharged, in its eyes, for a vital piece of national infrastructure.
Thirdly, and perhaps most importantly, this marks a shift in the relationship between Ofgem and National Grid.
The Grid is one of the UK’s biggest single investors in infrastructure, shelling out something like £12bn between 2006 and 2011 alone on network upgrades, but is also seen as having run rings around the regulator in the past.
This is because the Grid’s earnings have been boosted by investment to lift transmission capacity, mainly to support more wind-powered generation, that was incentivised by the regulator.
The Grid’s role as ‘system operator’, in which it has to balance supply and demand across the system, has also been called into question but Ofgem rejected calls, just over a year ago, to break up the company.