Ofgem, the energy markets regulator for the UK, has gone ahead with the budget cut for the Hinkley Point C nuclear power station located in Somerset, England.
Ofgem had previously proposed an £80-million budget cut on the project allocation, aiming to link the new Point C nuclear reactor with the National Grid. The market watchdog deemed the costs to be ‘too high’.
The proposal was announced after Ofgem rejected the National Grid Electricity Transmission’s (NGET) initial request for cash. However, this budget cut was revised post-analysis of some new evidence and consultation.
Ofgem recently announced that they would be reducing the budget cut by only £60 million, £20 million less than the earlier figures announced.
Ofgem termed this move as one that would provide significant savings for consumers’ energy bills. This decrease in costs also lessens the capital that the NGET can recover from consumers for delivering this project. Ofgem estimates that the savings from this budget cut would be felt by consumers for at least the next 45 years.
The total cost of the Hinkley-Seabank project, which connects this power station with the national electricity grid, is now projected at £656 million after the cut.
The following costs have been reviewed by Ofgem and have noted that these are appropriate and provide value:
£11.3 million in development costs for the T-pylons in the project,
£5.8 million additional costs for contingency measures,
£1.6 million for project management costs.
This decision is not the only change for the Hinkley-Seabank project. The funding framework is also proposed to be restructured. Ofgem has plans for funding this project via RIIO-2, which is the next price control for the energy network.
This price cap would come into effect from March 2021 through 2026. Earlier, Ofgem had plans to apply its ‘Competition Proxy’ model for funding. This model is designed to replicate the effects of competition by fixing a lower interest rate and locking it in the asset’s lifetime.
Just a few days before the budget cut announcement, Ofgem had rejected a request of £40 million from NGET for ‘risk funding’. NGET had requested this amount to be included in the link’s upfront cost.
As per Ofgem, RIIO-2 is an updated framework compared to RIIO-1. It is expected to result in billions of pounds worth of savings for consumers.
Hinkley Point C is the first new nuclear power plant in the UK within the last three decades and has been hit by several delays and increasing costs. Located in South-West England, the project is managed by GCN (backed by the Chinese government) and EDF (energy utility company backed by the French government).
The Hinkley-Seabank project is what links the entire project to the National Grid. It would enable the plant to deliver electricity across the country.
While the budget cut is presumed to save money for consumers, the overall impact is yet to be analysed. The plan was initially approved in 2016 and is due for completion by 2024. Ofgem has presented the newly revised figure as the ‘lower-cost’ with which the project can be delivered efficiently and successfully.
The new link is set to add more capacity and ease some of the transmission constraints for the South-West region of England. With the new funding model and decreased costs, the project can now continue without expecting any further problems.
While costs for consumers would come down, this decrease in funding and additional delay may impact the overall project. The effect of this budget cut and consumer insight remains to be seen in the coming months.