Energy watchdog Ofgem conceded some financial ground to SSE over the costs of developing a vital electricity link to the Highlands.
The regulator yesterday said it had decided to increase approved expenditure on the Caithness to Moray transmission project by £56 million to £1.11 billion.
However, the increase still means SSE subsidiary and project developer Scottish Hydro Electric Transmission Limited (Shetl) faces a £105m shortfall compared with its own estimate of the cost of installing and commissioning the 160km-long high voltage direct current (HVDC) subsea cable.
The link, which will connect onshore power conversion stations at Blackhillock near Keith and Spittal in central Caithness, is designed to transform the ageing electricity network in the Highlands and provide additional capacity to allow for the connection of future renewable energy projects to the grid.
Its construction will add £1 to the network component of an average domestic electricity bill.
A published letter stated, electricity transmission partner Kersti Berge said Ofgem’s decision to increase the expenditure allowance had followed a number of challenges by Shetl since it first announced its cost estimate for the project in October and put out the issue for consultation.
That document outlined Ofgem’s concerns that proposed staffing costs for the project and Shetl’s estimate of the risks associated with the development were “excessive” based on the evidence presented.
“SHE Transmission responded with challenges to our project assessment,” Ms Berge said.
“These cover some aspects of the onshore and HVDC costs, the project risks and overall resourcing.
“SHE Transmission also reduced its overall cost estimate by £13m to £1,223m.
“The lower estimate is the result of a revaluation of some contract costs (based on a favourable currency movement), and a reduction in its estimated value of project risks.
“Additional contract negotiations and an increase in operations and regulatory consents costs partly offset these reductions.
“We’ve considered SHE Transmission’s arguments and new information and we’ve revised our view in some areas.
“As a result we have decided the efficient cost for the project is £1,118m.
“This is £56m more than the project costs we consulted on in October.”
The changes represent an overall 5% upwards revision of Ofgem’s initial cost proposal, with 2% improvements offered in budgets for both the onshore and seabed cable works.
The largest difference relates to the risk profile of the project where Ofgem is now proposing a 34% cut in budget compared to a previously envisaged 62% fall.
Shetl yesterday said it “noted” Ofgem’s cost decision and a secondary move to change regulatory funding of uncertain costs that would allow it to increase it allowances for the link during construction.
The firm said it would now assess whether the Ofgem funding package represented an adequate return for the business.
“The Caithness Moray transmission project is intended to release the potential for up to 1.2GW of new renewable generation in the far north of Scotland,” the developer said in a statement.
“SHE Transmission will now closely study the decision to assess whether the allowed costs and mechanism for recovering other future costs are, when taken together, adequate remuneration for the risks associated with the project.”
Energy Minister Fergus Ewing said the project was of huge significance to the economy and the Scottish Government’s clean energy ambitions.
He said: “The project will enable 1.2 GW of new renewable generation to connect to the high-voltage network providing enough electricity to power the equivalent of over 500,000 homes and also making a substantial contribution toward our renewable electricity target.”
“We trust that the terms announced by Ofgem today will help enable theproject to proceed on time and we will be staying in close contact with the relevant parties as the project moves forward to construction.”
He also welcomed a decision by the regulator last month to approve Scottish Power Transmission’s amended revenue allowance of £110.6m for the souther portion of the controversial Beauly to Denny overhead electricity line.