Regulator Ofgem yesterday warned the £1.23 billion cost of a major Scottish energy infrastructure project was too high.
The watchdog said it had estimated the value of establishing the new Caithness to Moray (CM) transmission link at £1.06bn – almost £174 million lower than project developer Scottish Hydro Electric Transmission’s (SHETL) own financial forecast.
Ofgem said it did not think the costing put forward by SHETL – a subsidiary of Perth-based utility firm SSE – could be justified on the evidence presented.
The regulator’s viewpoint matters as it has to sign off on the revenue which SHETL recoups from the project over its 40 year lifespan.
Ofgem has now opened a four-week consultation over the project to allow a final decision on costs to be reached before the end of this year and any necessary adjustment made to SHETL’s 2015/16 revenues.
The watchdog’s lower cost estimate for the project came after Kersti Berge, partner, electicity transmission, completed an assessment of the Caithness Moray project with assistance from DNV GL.
The scheme is designed to reinforce north Scotland’s ageing electricity network and provide new capacity for oncoming renewable generators.
Costs were assesed in three key areas – the 160 kilometre subsea high voltage direct current pipeline, the onshore works and the project risks.
The Ofgem analysis envisages a 6.4% cut in the cost of establishing the onshore power conversion facilities at Blackhillock near Keith and Spittal in central Caithness, and a 1.4% reduction in the offshore pipe-laying element.
However, the major reductions earmarked by the regulator are in resourcing – where it estimates 38.1% can be shaved from SHETL’s figures – and in risk in which it has outlined a massive 60.9% cut.
In total, Ofgem is proposing a 14.1% cost reduction in comparison with SHETL’s figures.
“Based on our assessment, the construction costs for the two parts of the CM project are at the higher end of our efficient cost range,” Ms Berge said in a letter.
“In addition, we consider SHE Transmission’s proposed costs for its resourcing, and for the project risks it holds are not justified by the evidence presented.
“In our view, the overall project cost of £1,236.2m proposed by SHE Transmission is not justified.
“We propose the efficient cost is £1,062.3m. This is £173.9m lower than SHE Transmission’s estimate.”
The new 1.2 gigawatt link – the need case for which was approved by Ofgem in July – is expected to be operational from 2018 and its construction by Swiss power giant ABB will support around 600 jobs.
SHETL yesterday said it was “disappointed” with the level of allowances proposed but said it would “engage constructively” in the consultation period ahead.
“SHE Transmission believes that it has produced a well defined and well scoped project that offers value for money for customers while allowing the realisation of the vast potential of renewable electricity generation in the north of Scotland for the benefit of the whole country,” the company said.
“While SHE Transmission is disappointed with the level of the allowances proposed today, the consultation does enable further engagement with Ofgem to take place on important issues, such as the best way for treating contingency and risk-related costs.
“SHE Transmission believes the consulation process provides the right opportunity for these to be considered and resolved in a way that’s fair to customers and investors alike, and will engage constructively in it.
“The project itself is still expected to be completed in 2018, with the first revenues due to be received in 2015.”