Independent Review of Funding Request for Western HVDC Link€¦ · 1.2. Latest Project Status NGET/SPTL Procurement Strategy identified a four stage technical evaluation process

Independent Review of Funding Request for Western HVDC Link

STAGE 2 PUBLIC REPORT

Final

30 September 2011

The SKM logo trade mark is a registered trade mark of Sinclair Knight Merz Pty Ltd.

Independent Review of Funding Request for Western HVDC Link

STAGE 2 PUBLIC REPORT

Final

30 September 2011

Sinclair Knight Merz 13th Floor, Cale Cross House 156 Pilgrim Street Newcastle upon Tyne NE1 6SU United Kingdom Tel: +44 191 211 2400 Fax: +44 191 211 2401 Web: www.skmconsulting.com

COPYRIGHT: The concepts and information contained in this document are the property of Sinclair Knight Merz (Europe) Limited. Use or copying of this document in whole or in part without the written permission of Sinclair Knight Merz constitutes an infringement of copyright.

LIMITATION: This report has been prepared on behalf of and for the exclusive use of Sinclair Knight Merz (Europe) Limited’s Client, and is subject to and issued in connection with the provisions of the agreement between Sinclair Knight Merz and its Client. Sinclair Knight Merz accepts no liability or responsibility whatsoever for or in respect of any use of or reliance upon this report by any third party.

Cover image courtesy of Siemens

Independent Review of Funding Request for Western HVDC Link. Stage 2 Report.

SINCLAIR KNIGHT MERZ

PAGE 1

Contents

1. Stage 2 Summary 1

1.1. Introduction 1

1.2. Latest Project Status 3

1.3. Estimated Project Costs 4

1.4. Update on Needs Case 4

1.4.1. Compliance with SQSS 4

1.4.2. Update on Cost Benefit Analysis 5

1.5. Progress made towards Contract Award 8

1.6. TO Readiness to Commit Construction Expenditure in 2011/12 10

1.7. Summary of Conclusions 10

2. Stage 1 Key Messages 14

2.1. Stage 1 Conclusions and Recommendations 14

3. Other Un-monetised Risks and Benefits 16

3.1. Uncertainty 17

3.2. Real constraint costs 17

3.3. Construction risk 17

3.4. Cost risk 17

3.5. Message to market 18

Appendix A – Summary of Stage 1 Key Messages 19

Appendix B – Update on Additional Work identified in Stage 1 23

SINCLAIR KNIGHT MERZ

PAGE 1

1. Stage 2 Summary

1.1. Introduction

Sinclair Knight Merz was jointly appointed1 by NGET/SPTL Upgrades Limited and Ofgem to act

as independent reviewer of the joint NGET/SPTL funding submission to Ofgem in relation to the

Western HVDC link between Hunterston in Scotland and Kelsterton in North Wales (Connah‟s

Quay, Deeside).

Figure 1 - Western HVDC Link

The Western HVDC link project comprises three components:

a) An HVDC cable, of capacity circa 2GW and about 400km in length, together with converter

stations at each end;

b) Onshore works around the northern connection point, near Hunterston 400kV substation in

SPTL‟s area; and

c) Onshore works around the southern connection point, near Deeside 400kV substation in

NGET‟s transmission area.

1 SKM were appointed jointly by Ofgem and NGET/SPTL Upgrades Ltd to undertake an independent review of the TO

submissions under an arrangement of “duty of care” to Ofgem

SINCLAIR KNIGHT MERZ PAGE 2

In line with previous consultancy reviews under the Transmission Investment Incentives (TII),

although the detailed assessment has focussed on the specific works covered by item (a), including

those not part of the main HVDC contract, the other items (b) and (c) have also been taken into

account in considering the need case, scope and timing of the Western HVDC link project as a

whole and therefore reflected in the CBA.

The most critical driver underpinning the „need‟ for the Western HVDC link is the anticipated

development of generation in Scotland, in particular the growth of renewable generation.

NGET/SPTL used three generation scenarios to assess the „need‟ for the link, Slow Progression –

SP-, Gone Green –GG- and Accelerated Growth –AG. The GG scenario was originally developed

through work with the Electricity Networks Strategy Group (ENSG) and, updated, has

subsequently formed the basis on NGET‟s Offshore Development Information Statement (ODIS)2

alongside other scenarios, SP and AG, developed as variations to Gone Green. The scenarios have

been subject to industry consultation for the purpose of ODIS and seek to capture a credible range

of outcomes for growth of offshore generation across GB while reflecting different rates of

progress to 2020 targets. NGET/SPTL consider that GG is the most realistic path to meeting the

government 2020 targets. SP and AG represent missing and exceeding the 2020 target

respectively.3.

Ofgem established a two stage process to cover various aspects of the funding request in March

20114. SKM completed the 1

st stage of the review in July 2011 and our final (publishable) report

was issued by Ofgem on 1 August 2011 alongside their Consultation document on the minded-to

position for the Western HVDC link (“Western Bootstrap”). This report covers the outcome of our

analysis associated with Stage 2 of the review. Given the commercially confidential nature of

information considered in this stage of the review, we have prepared this Public Report as a

reduced version of our full Final Report to Ofgem which in turn sets out our findings in more

detail.

NGET/SPTL is currently undergoing a tender evaluation process for the proposed Western HVDC

project. Tenders were received in May 2011. The tender process is in four pre-defined stages and

the first two phases (Preliminary Evaluation & Clarification) are now completed. The third stage

relates to detailed negotiations with the suppliers. Final capacities and costs are therefore subject to

the outcome of the full evaluation of tenders that is currently being undertaken by NGET/SPTL.

2 http://www.nationalgrid.com/uk/Electricity/ODIS/ 3 NGET consider that the Government and Ofgem will put the appropriate policies in place to support the meeting of

2020 targets. 4 Ofgem. “Transmission Investment Incentives. Supplementary document to decision letter of 21 January 2011”, Ofgem

website, 1 March 2011


The tender documentation indicated a range of potential link capacities in the range 1.8GW to

2.2GW (based on continuous ratings) to facilitate competition between manufacturers and

technologies The Stage 1 report and CBA was based on a link capacity of XXXGW representing

the maximum rating in the possible range. However, following subsequent discussions with

potential suppliers as part of the project development phase, it has been determined that a higher

capacity can be used (based on a 6 hour rating). This capacity is referred to as the CBA Capacity in

this Public Report and has been used as the headline figure in the Stage 2 CBA. For the purposes of

the Stage 2 CBA, NGET/SPTL has used two values for the CBA Capacity, which are respectively

at the upper (XXXGW) and lower (XXXGW) end of the range of link capacities (based on 6 hour

ratings) in the latest tender returns , with all sensitivity analysis undertaken against the Max CBA

Capacity case. NGET/SPTL‟s construction programme indicates an expected delivery date of

December 2015 assuming the contracts can be awarded to the preferred bidder(s) by the end of

2011.

In reviewing the further evidence and information provided in the NGET/SPTL submission during

the Stage 2 assessment period we have considered the following main areas:

Further analysis of the net costs and benefits streams derived from the investment;

The impact on key sensitivities on the results obtained using the above;

Further assessment of specific areas identified in our Stage 1 report;

The progress made by NGET/SPTL towards contract award;

The process established within NGET/SPTL to manage the tender evaluation and contract

award;

Steps taken already and plans in place by the NGET/SPTL to commit construction expenditure

in 2011/12;

Steps taken already and plans in place by NGET/SPTL to commit non construction contract

related expenditure in 2011/2012; and

Specific areas identified by Ofgem in their 1 August Consultation Paper on their minded-to

position (specifically items 3.7 to 3.10).

The main areas above are briefly described below.

1.2. Latest Project Status

NGET/SPTL Procurement Strategy identified a four stage technical evaluation process that was

designed and approved as part of the overall procurement strategy. This consisted of:

Stage 1 – Preliminary evaluation May-June 2011

Stage 2 – Clarifications Jul-Aug 2011


Stage 3 – Negotiation Aug-Oct 2011

Stage 4 – Best and Final Offer (BAFO) from preferred bidder(s) Nov 2011

Stage 2 of the process has now been completed and the detailed negotiations associated with Stage

3 are presently taking place. The completion of the first two stages has resulted in NGET/SPTL

having an updated set of project cost data for a number of design options. It is possible that these

may change during the negotiation stage of the tender process.. These costs have been considered

further in our Stage 2 assessment both in terms of assessing estimated project costs and also the

lifetime Cost Benefit Analysis (CBA).

1.3. Estimated Project Costs

Detailed cost data is not presented in this public report due to its commercially sensitive nature,

however NGET/SPTL have provided a detailed breakdown of the estimated project costs for the

maximum and minimum values of the CBA Capacity based on the latest tender information for

SKM review during our Stage 2 assessment.

SKM considers these costs and the associated expenditure profiles as appropriate to be used as

CBA input data for the costs of the HVDC link (item (a) above), ie the works which are the subject

of the current funding request. SKM also notes that the CBA results presented in this report also

take into account the latest costs of related onshore works (items (b) and (c) above). In the case of

the onshore works at Deeside, the results also take account of the fact that the existing substation

would require replacement two years later in the absence of the link but that some of the costs are

attributable to the link .

1.4. Update on Needs Case

1.4.1. Compliance with SQSS

NGET/SPTL has provided updated Security and Quality of Supply Standard (SQSS) boundary

limit charts as part of the Stage 2 process. As discussed in the Stage 1 report, the scenarios were

updated in the course of the Stage 1 analysis to reflect latest market information and correct the

erroneous treatment of embedded wind generation, These updated scenarios, referred to as the June

2011 scenarios, were used in the final CBA provided by NGET/SPTL for Stage 1, but the SQSS

charts had been based on the original scenarios and therefore required updating for Stage 2. .

The changes made to the previous data used in Stage 1 by NGET/SPTL for calculating the

boundary limits across B6, B7 and B7a have had a marginal impact on the SQSS based need case.

The required boundary transfers are approx 100MW higher for years 2012-2015 than the values

previously calculated. This value rises such that it is approximately 300MW greater by 2020

onwards.


The main conclusion from these updated graphs is that the strong need for reinforcement remains

in order to ensure compliance with the requirements of the SQSS. In some cases, the increase in

required boundary transfers results in non compliance being forecast earlier than in the Stage 1

assessment. It is also important to note that although the deterministic SQSS provides a starting

point for identifying when investments are required, the economic justification of a specific

investment to overcome a capacity deficit may indicate a different timing.

1.4.2. Update on Cost Benefit Analysis

Following completion of our Stage 1 review, a series of discussions were held with Ofgem and

NGET/SPTL relating to further CBA studies that should be carried out by NGET/SPTL within the

scope of the Stage 2 review to update the final Stage 1 CBA submission based on the June 2011

scenarios. Following these discussions, a series of additional CBA studies were undertaken by

NGET/SPTL for the purposes of Stage 2. The studies were prioritised in order to further update the

analysis for the June 2011 scenarios (focussing on SP and GG) to take into consideration the latest

project cost, phasing of costs and link capacity information available to NGET/SPTL through the

tender evaluation process, as well as further sensitivities based on different assumptions as to

market bidding behaviour. A brief commentary on the other sensitivity studies recommended

within our Stage 1 report that were not undertaken within the Stage 2 update is summarised in

Appendix B.

The updated Stage 2 CBA demonstrates a clear lifetime net benefit for each of the cable sizes

considered. Because of the significant lifetime benefits and the high degree of certainty of the need

for the Western HVDC link, we consider the risk of the assets being stranded is low, irrespective of

which cable capacity is eventually selected by NGET/SPTL.

However, as with the Stage 1 review, the main issue centres on the optimum timing for the HVDC

link and this is determined by the background generation scenario. For SP, the optimum timing is

the same as previously assessed in Stage 1 - 2017/18.

SKM have undertaken an updated sensitivity analysis on the impact of the timing in order to

calculate the regret cost – “the cost of getting the timing decision wrong”.5. This analysis was

undertaken based on June 11 scenarios updated for the XXX GW link capacity option, with the

latest project cost information and same market bidding arrangements as for June 11 analysis. If the

Western link is commissioned in Dec 2015 and the renewable growth scenario turns out to be like

SP, the additional costs (due to forwarding of capital cost, as compared to commissioning the link

in 2017/18 as indicated under SP) would amount to circa £34m million (excluding losses). If

5 Using the same methodology applied in Stage 1


however the link is commissioned in 2017/18 (SP) and then the growth path looks like GG then the

additional cost (due to increased constraint costs as compared to commissioning the link in 2015 as

indicated under GG) would amount to circa £170m million (i.e. about 5 times higher).This “regret”

cost analysis is presented in Figure 2 below.

Figure 2 – Regret Cost for different Timing Decisions (excluding losses)

Stage 2 CBA using a tapered renewable benefit, to reflect the impact of reduced subsidy in the long

term for onshore wind generation and resulting reduction in the cost of constraining onshore wind,

results in a reduction in benefit occurring for all scenarios considered. For the SP scenario, the

lifetime reduction in benefits is in the range £501m - £537m depending on cable capacity.

However, the analysis confirms that the lifetime benefits are still significantly higher than the

estimated project capex in all scenarios presented. As this scenario assesses the impact of removing

the renewable benefit from 2030 it has zero impact on the optimum timing for the commissioning

of the Western HVDC link.

The updated Stage 2 CBA also assessed the lifetime benefits for the two Peterhead marginal

operation cases and these were lower than the lifetime benefits calculated with Peterhead operating

at 100% base. However, it is also evident that there are strong benefits achieved when compared

with the capex cost.

A summary of the sensitivities carried out as part of the SKM Stage 2 assessment is shown below

in Figure 3.This presents the results for the Max CBA Capacity against both SP & GG generation

backgrounds. The results are presented in percentage terms relative to the tendered capex to protect

commercially confidential data.

170

34

£0m

£50m

£100m

£150m

£200m

Assume SP (commission Western HVDC by 2017) but then generation scenarioturns out to be like GG [W HVDC delivered 2

years behind of need]

Assume GG (commission Western HVDC by 2015) but then generation scenario turns

out to be like SP [W HVDC delivered 2

years ahead of need]

Red = Investment made later than required Green = Investment made earlier than

required

Analysis is based on the Max CBA Capacity case


Figure 3 – Stage 2 CBA Comparison of Scenarios

For the Max CBA Capacity case with tapered benefits, and assuming SP6, SKM‟s assessment of

the CBA envelope between lifetime cost and benefits identifies an increase (the “envelope”) of

capex where the breakeven point with the calculated lifetime benefits would be reached. This

envelope equates to a capex increase by around one half. Although there is a risk of additional

project costs that may be incurred by NGET/SPTL, SKM‟s view is that these will be much lower

than the significant capex envelope quantified. For the GG scenario, the lifetime benefit is higher

and therefore the envelope would increase (representing an increase in capex by more than two-

fold.

A further sensitivity assessment has been carried out by NGET/SPTL in order to determine the

sensitivity of generation constraint costs on the lifetime CBA against the estimated project costs

derived as an output from the tendering process. In this case the estimated project capex remains

fixed and the sensitivity has been carried out on constraint costs. For the Max CBA Capacity case

with tapered benefits, and assuming SP, to reach the breakeven point the constraint costs would

have to reduce in total by the envelope equating to a constraint price multiplier 7of over 60% for the

6 SKM considers that the CBA results for the tapered benefit scenario, using the maximum cable capacity (Max CBA

Capacity case) is the most appropriate scenario to use as it considers the link capacity with the highest project cost and

with the lower level of constraint costs resulting from the SP scenario. Using these assumptions to develop the capex

breakeven point arguably results in the lowest CBA “envelope” and avoids the risk of overstating the value. 7 The “constraint price multiplier” (CPM) is the calculated value that, when applied to the constraint costs, results in the

calculated lifetime benefits being equal to the estimated lifetime project capex. A high CPM percentage value indicates

0%

100%

200%

300%

400%

500%

Capex (£M) Max CBA Cable (GW) Tapered Benefit Peterhead 50/50 Peterhead 100%

Marginal

Re

lati

ve C

on

stra

int

Be

nef

it(t

o L

ate

rst C

ape

x Es

tim

ate)

LIFETIME BENEFITS - Max CBA Capacity

Stage 2 - CBA Comparison of Scenarios

Slow Progression

Gone Green


SP scenario. For the GG scenario the resulting constraint price multiplier for breakeven point

would be under 30%.

1.5. Progress made towards Contract Award

SKM‟s assessment of progress achieved to allow the main HVDC contract(s) to be awarded is

summarised below. This is set against the minimum requirements which NGET/SPTL have

identified as needing to be satisfied for contract(s) award scheduled for December 2011.

1. Confirmation of ITT and contract strategy beng executed:

Evaluation and Contract Award Plan and Programme are being maintained in line with the

Project Plan and currently remain on schedule and the processes and procedures established

by NGET/SPTL for Evaluation and Contract Award are being implemented.

Contracting strategy - separate Lots 1 and 2; and Lot 3 awards - NGET/SPTL intend to keep

options for award open into BAFO stage.

NGET/SPTL‟s Project Governance and Board review and approval process is being

maintained and board meetings scheduled to allow key date approvals for contract award by

December 2011.

2. Position agreed (within a range) with preferred bidders on all major risks and a risk

assessed construction cost (within a range)established :

The NGET/SPTL Risk Review and assessment process is being maintained and managed with

Risk Register updated on a regular basis. SKM have noted that currently approximately half of

the top risks identified by NGET/SPTL remain with the potential to affect/impact Contract

Award by December 2011.

NGET/SPTL strategy for managing risk remains in line with their previously established risk

strategy of, where possible and appropriate, transfering risk to Contractors to leave only a

limited list of risks within the responsibility of NGET/SPTL.

3.Robust plans for obtaining outline planning permsssions, consents and land purchase:

Consents/ Land Purchase and Easements/ Licences /Planning Applications programme are

generally being maintained in accordance with Project Plan and programme.

4. Plan for conclusion of outstanding issues:

NGET/SPTL through their tender evalauation and contract award procedures, and following

the tender clarifications undertaken in Assessment 1 and Assessment 2 stages, have been

that only a small reduction to constraint costs would result in the breakeven point (with capex) being reached,

demonstrating the sensitivity to constraint prices, whilst a lower percentage value has the opposite effect.


engaged in preliminary negotiations and will enter detailed negotiations to resolve outstanding

issues by the end of BAFO stage in November 2011.

5. Confirmation of regulatory funding and confirmation of licence changes

In August 2011, Ofgem published a document for consultation setting out its minded-to

position on the regulatory funding of construction works on the Western HVDC link, and its

process for reviewing that minded-to position for new information and analysis. Ofgem

indicated that, subject to consideration of consultation responses, it expected to review the

minded-to position in September taking into account the latest available information including

the TOs‟ further submissions and SKM‟s conclusions from Stage 2 but that the information

required to reach such a decision on the specifics of any findings is likely to only become

available after contract award. Ofgem further noted that in the meantime it expected the TOs to

continue work to maintain achievability of a delivery date of 2015 in line with their planned

programme.

NGET and SP Transmission licences –Isle of Man authoroities have confirmed to NGET that

no transmission licence is required. Discussions for changes are in progress with Northern

Ireland Regulator with initial advice indicating a change to licence is not required but this

needs to be formally confirmed.

SKM would concur with NGET/SPTL risk assessment that at present the cable supply and

manufacture availability would be a key risk for NGET/SPTL to direct their resources to but other

areas of supply (e.g. key capital equipment for Convertor stations, skilled labour and

offshore/onshore cable laying plant and support vessels) may also be affected by current market

conditions and international projects coming on line and it will be a challenge for NGET/SPTL to

ensure such issues are resolved in the detailed negotaiation stage , to the extent it is commercially

possible, prior to contrat award.

The purchase of land and obtaining outline planning permissions for the Convertor Stations would

also be a main risk to focus on as any problems in this area in worst case scenario could result in

significant impact to contract award including changes to design.with resultant effect on cost and

programme. NGET/SPTL strategy of having already undertaken preliminary discussions , meetings

and negotiation with landowners and planning authorities is a positive sign that these risks are

being managed to the extent they can be at this stage in the project.


1.6. TO Readiness to Commit Construction Expenditure in 2011/12

SKM‟s assessment of readiness to commit construction expenditure in 2011/12 is summarised

below:

NGET/SPTL generally have been able to achieve the key project milestone identified in

Stage 1 and up to the current project stage demonstrating their ability to maintain progress to

allow contract award by the programmed date.

A number of key risks remain however which could affect contract award in December and

NGET/SPTL will need to actively manage and resolve these risks to be in a position to commit

construction expenditure in 2011/2012.

In addition NGET/SPTL have also advanced progress on their plans for non construction contract

related matters in connection with:

Land purchase of sites for the Convertor Stations at Kelsterton and Hunterston, of which the

terms of agreement remain to be concluded. Negotiations have taken place but a number of

item are still to be resolved.

Easement (England) and Servitude (Scotland) consent agreements and expenditure to

landowners for the Onshore works for the Northern and Southern connection points

respectively. The progress on Easement consent in England is at this stage further ahead than

the Servitude consents in Scotland but NGET/SPTL have expressed confidence that the

consents will be in place in both locations in time to commit to expenditure in 2011/2012.

NGET/SPT have identified their proposed Project Construction team with some key positions

filled and with further recruitment taking place to enable mobilisation of the team to effect in

due course a smooth transition from Project Pre-Contruction to Construction activities.

1.7. Summary of Conclusions

Based on our review of the documentation, information and evidence provided by NGET/SPTL

during the Stage 2 assessment, SKM have been able to make the following conclusions and

recommendations.

We conclude that, although the need of the project by 2015 would depend on the scenario outcome,

the proposed timing of the reinforcement is the best possible in view of the costs of delivering the

project behind of need vs. ahead of need. Consistent with the approach used in previous

consultancy reviews under TII, in Table 1 below we present our summary of the assessment of the

request for funding, using corresponding “traffic light” indicators, and show the SKM assessment

summary at Stage 1.


Table 1 Summary of assessment of request for funding of construction works

SKM Assessment Scope Need (by Dec2015) Timing

Stage 1

Stage 2

Note: „Need‟ is green by 2018 under all scenarios and sensitivities.

From the information provided SKM consider that the robust and comprehensive procedures and

processes being used by NGET/ SPTL, and previously identified in the Stage 1 report, should

continue to be applied.

Progress towards Construction contract award generally appears to be on schedule.

NGET/SPTL project development plans continue to be updated as the evaluation and assessment

stages progress but from information provided SKM are not aware of any significant changes to

NGET/SPTL plans.

The risk review process has identified a number of key risks which have the potential of affecting

contract award and also could potentially impact on costs and cable route and convertor station

design. NGET/SPT indicated their proposed approach for managing and resolving these risks to

allow contract award by the current programme date and mitigation strategy and actions.

In terms of assessing the design, cost and deliverability of the project we summarise this in.Table 2

below. In all three categories, we assess the position as “AMBER moving towards GREEN”. This

description recognises the progress made by NGET/SPTL since the Jan 2011 KEMA assessment at

“AMBER” across all three descriptors but equally recognises some of the uncertainty that still

exists with the project,noteably in relation to finalisation of link capacity, tender negotiations,

contract award, land acquisitions/easements and project costs.


Table 2 – Summary Assessment of deliverability, design and cost of specific works

Deliverability Design Costs

The current NGET/SPTL project

programme appears to be achievable

–we have not identified to date any

significant adverse commentary

which has come out of tender

submissions and NGET/SPTL

evaluation that suggests otherwise.

The programme remains achievable

subject to certain items and risks,

some of which were identified in both

the PB and KEMA reports and

continue to remain as risks. For some

of these risks such as obtaining a

cable supply and manufacture slot;

planning approvals, consents and land

acquisition; availability of offshore

vessels, then progress appears to be

made on these items through the post

ITT negotiation process and non ITT

item meetings and discussions over

the last few months. For other risks

such as adverse sea bed conditions for

offshore cable laying and unexpected

adverse ground conditions at

Convertor Stations the full extent of

these risks cannot be assessed until

surveys currently in progress have

been completed.

SKM therefore rates this presently as

“AMBER-GREEN”.

Since KEMA‟s Jan 2011

assessment, progress has been

made by NGET/SPTL engaging

with the suppliers in the design

stage through a formal

Development Agreement.

Tender Evaluation presently in

progress to assess technical

compliance of bids submitted

for link capacities in the range

Min CBA capacity (XXXGW)

to Max CBA Capacity

(XXXGW).

Further progress made in 2011

on the subsea cable route and a

revised (and preferred) route

has been determined.

Onshore route design is nearing

completion and there is still a

requirement to finalise the link

capacity as part of the tender

negotiation phase.

SKM therefore rates this

presently as “AMBER-

GREEN”.

KEMA‟s Jan 2011 report stated

that costs were likely to remain

uncertain until these become firmer

through the proposed tendering process

and therefore rated the “Cost” of this

sub-project as amber. The tender

evaluation and negotiation process is

well underway, 2 stages of the 4-stage

assessment process have been

completed and the latest tender

information has been used as an input

into the Stage 2 CBA. The Aug 2011

estimates of total project costs for the

HVDC link component of the project

for the different link capacities,

including updated tender cost

information, are not significantly at

variance with the project cost estimate

provided at the Stage 1. There is still

some uncertainty about the inclusion or

otherwise of project risk and the

selection of link rating. NGET/SPTL

have a number of options on design to

consider from a technical point of view

in relation to cable size and design and

convertor station design this is well

advanced and consideration is mainly

around optimisation of design.

SKM therefore rates this presently as

“AMBER-GREEN”.

For the purposes of assessing funding in 2011/12 and 2012/13 under TII, based on information

provided for the Stage 2 assessment, SKM consider that it is reasonable to use the following

specific assumptions:

An HVDC link with capacity of “Max CBA Capacity”(6-hour rating), on the basis that it

provides the most economical lifetime net benefits;

An expenditure profile consistent with this capacity based on the latest cost information from

the ongoing tender evaluation;

The specific activities planned to be undertaken prior to RIIO-T1 will consist of:

- the transition from pre-construction into detailed construction phase;


- contract award(s) in Dec 2011 for the main construction works associated with the HVDC

link;

- the completion of the detailed design and specification of the proposed HVDC link;

- the commencement of manufacturing of the HVDC link components;

- the completion of land purchases at both the northern & southern convertor station sites;

- securing of the necessary easements associated with the onshore cable works at both the

northern & southern connection points;

- the completion of necessary sea bed leases;

- the commencement of site works and installation works at the convertor stations; and

- the commencement of onshore and off-shore cable laying.

In terms of readiness to commit construction expenditure in 2011/12, SKM conclude that the

current NGET/SPTL programme appears achievable, subject to certain items and risks being

addressed, primarily relating to the award of the main contract in December 2011 and the securing

of the necessary planning approvals, consents and land acquisition but also securing cable supply

and manufacture. These will need to be effectively managed and closely monitored in the coming

weeks. In addition, in relation to commitment to non construction contract expenditure in 2011/12,

NGET/SPTL have commenced putting in place their proposed Project Construction team in

recruiting and mobilising key personnel to effect a transition from Pre Construction to Construction

activities.


2. Stage 1 Key Messages

2.1. Stage 1 Conclusions and Recommendations

The SKM Stage 1 Report contained a number of key messages associated with each aspect of our

review. These key messages are repeated within Appendix A of this report for ease of reference.

The Stage 1 Conclusions and Recommendations are detailed below.These items are a direct extract

from our Stage 1 Report and are presented in italicised font below.They do not take into account

SKM‟s further views developed in light of new information considered in our Stage 2 assessment.

The SKM Stage 1 report also included a list of additional analysis that the Stage 2 submission may

consider incorporating. It was recommended that SKM liaise with NGET and Ofgem in scoping the

specific issues that will be included in the work undertaken under Stage 2. These are considered

referenced within Appendix B of this report

SKM is satisfied that sufficient robust information and analysis has been provided by NGET/SPTL

during the course of Stage 1 to allow the following conclusions and recommendations.

The Western HVDC link shows robust lifetime benefits under a wide range of credible scenarios

and sensitivities of key input variables. In view of the long term renewable aspiration in the UK

and Scotland in particular, it is considered that the risk of this investment becoming stranded is

negligible.

The Western HVDC link is a superior alternative to the Eastern HVDC link as first „link‟

reinforcement in the short term, particularly noting the much earlier development state of the

Eastern HVDC link, which could only be delivered two years later than the Western HVDC link,

and also other reinforcements that would be required if the Eastern Link were to be built first. The

Eastern HVDC link design is also subject to more uncertainties that will become clearer over the

next few years. Even assuming the same commissioning date as the Western link, the CBA analysis

also indicated that superior benefits achieved by the Western link under a wide range of

sensitivities.

The optimum timing for commissioning the Western HVDC link is dependent on the scenario used

and varies from 2015 (earliest possible construction end date) for GG and AG scenarios, to

2017/18 in the case of the SP scenario. As there is great uncertainty about what renewable growth

path will outturn, an assessment of the cost that would be incurred if the assumption made turns

out to be wrong. The analysis based on the June 2011 scenarios indicated that if the Western link is

commissioned in Dec 2015 and the renewable growth scenario turns out to be like SP the

additional costs (due to forwarding of capital cost) would amount to circa £33 million.


If however the link is commissioned in 2017/18 (SP) and then the growth path looks like GG then

the additional cost (due to increased constraint costs) would amount to circa £165 million (i.e.

about 5 times higher). If losses are considered, as calculated by NGET/SPTL, then the spread in

the costs increases to £6 million and £200 million respectively. It can be concluded that the

potential cost of being wrong by delivering the project early could be very small whereas the cost

delivering the project late could be very high.

In addition, there are other difficult to quantify benefits that may result from investing earlier

rather than later. Those primarily revolve around the likely supply chain risks as more cable is

needed to connect offshore wind farms and also other related HVDC projects as we move closer to

2020 (potential for manufacturing delays and higher asset costs as demand increases). Also

empirical evidence suggests that in the presence of significant network constraints with relatively

few players behind the constraint could result in constraint costs much higher than calculated.

There are other likely un-monetised benefits such as the potential reduction in risk premiums to

developers due to the availability of transmission capacity, alleviation of cable market constraints

(and prices) to offshore wind developers which ultimately may revert to consumers, earlier delivery

of renewable projects with consequential CO2 savings, provision of confidence message to industry

etc. For all those reasons we consider that, in the presence of uncertainty, there should be a bias

towards early delivery as late delivery of reinforcements is likely to result much more costly than

calculated.

We conclude therefore that, although the need of the project by 2015 would depend on the scenario

outcome, the proposed timing of the reinforcement is best possible in view of the costs of delivering

the project behind of need vs. ahead of need.

Table 3 Summary of Stage 1 assessment of request for funding of construction works

Scope Need (by Dec2015) Timing

Note: „Need‟ is green by 2018 under all scenarios and sensitivities.

.


3. Other Un-monetised Risks and Benefits

In our Stage 1 Report we presented our views on a number of un-monetised risks and benefits

associated with the project. We have re-assessed these and consider they remain valid. The key

messages from our Stage 1 report on this subject are summarised below. These items are a direct

extract from our Stage 1 Report and are presented in italicised font below:

Key messages:

Clearly delaying the project will increase the robustness of „need‟, but...:

Investing early and „being wrong‟ will lead to a smaller penalty than investing late (using the

GG vs SP)

Empirical evidence tells us that constraints are likely to be much larger than suggested in the

CBA as players exploit the opportunity presented

So the cost of „being wrong‟ by investing late is likely to be above model calculations

Even if the project is delivered ahead of need (uncertainty about future developments) there

will be other non monetised benefits such as

Removal of uncertainties for project developers

Lower financing risk premiums

Resulting in earlier delivery of renewable projects and CO2 reductions

Alleviation of cable manufacturing constraints for other R3 projects

Others – signal to the market of UK‟s intent to invest in renewables?

Leads to a „bias‟ in favour of constructing earlier rather than later

Uncertainty is key – most investments face a degree of uncertainty that the investor must bear

For the Western link it is the customer, not the TOs, that bear the cost of getting the investment

timing „wrong‟ by delivering the project early or late

Absolute certainty over the exact required timing of the link is impossible to determine (i.e.

although all scenarios have the same initial 3-5 years as they are largely based on firm

commitments, it is uncertain which scenario will apply beyond that)

Different “optimum timing” may apply to each generation scenarios. We could end up with a

range (i.e. optimum between 2015 and 2018 depending on scenario)

The costs to the consumer will be lower if the project is delivered one year early rather than

one year late

Bias towards earlier investment given the market uncertainties and ultimate cost to the

consumer


3.1. Uncertainty

A key issue with the analysis undertaken to support the CBA is uncertainty – in particular the level

of renewable generation commissioning in Scotland over the period to 2020. While national and

Scottish targets suggest considerable volumes of onshore wind generation will be required in

Scotland, targets alone will not ensure this capacity is delivered. SKM considers NGET‟s

assessment of renewable growth in Scotland optimistic and considers a lower trajectory of growth

more plausible. However, neither view can be considered certain and both are likely to be wrong to

some extent. As a result an optimum investment decision must be taken on the basis that the

decision represents the „least wrong‟ for the consumer.

While uncertainty surrounds the future generation mix in Scotland, in particular the rate of

renewable growth, the results of the CBA suggest that investing early may be less costly to the

consumer than potentially investing late.

Furthermore, while a lower trajectory of renewable development in Scotland suggests the HVDC

link between Scotland and England may not be needed before 2017, a range of other non-

monetised issues must also be taken into account when assessing the results of deferring the

investment until 2017.

3.2. Real constraint costs

The first is the potential real cost of constraints over the period to 2017 if construction of the

Western HVDC link is deferred.

SKM considers that, on balance, investing ahead of need may lead to lower costs to the consumer

than the potential for significant exploitation of constraints.

3.3. Construction risk

Another issue to be considered in the case of investing ahead of need is the assumed construction

period of the project. The project is due to be commissioned in December 2005, although NGET

has built contingency periods within its construction timetable, the risk of weather delays is real.

One or more weather events may delay the commissioning of the link into 2016.

3.4. Cost risk

Cost creep is another risk. The cable market is one of limited competition, with cable costs difficult

to forecast. The cable market is driven less by changes in the commodity prices underpinning cable

construction costs than by the perceived supply and demand for the cables. Demand for HVDC

cables is set to increase if the anticipated growth in offshore generation in Europe and other


HVDC cable demands, such as additional HVDC reinforcements also earmarked for Scotland

before 2020, all materialise. If cable demand does indeed increase significantly over the next five

years, then delaying the project may lead to an increase in cable costs.

On the other hand if the development of offshore wind is less robust, then there may be less

pressure on the cable market and subsequent costs. Again, uncertainty surrounds key market

drivers. In terms of mitigating the risk to NGET, then it may be contractually feasible to defer the

project for a year although this would need to be confirmed

3.5. Message to market

Another issue difficult to quantify is the message that construction commitment will send to the

market. A commitment to the infrastructure underpinning renewable generation will be a

positive policy message for project developers, financers and other stakeholders. Such a

message may also play a role in reducing perceived project risk. On the upside, such a positive

message may lead to more renewable generation, with subsequent benefits in terms of CO2

reductions.


Appendix A – Summary of Stage 1 Key Messages

The SKM Stage 1 Report contained a number of key messages associated with each aspect of our

review. These key messages are repeated8 within this section of the report for ease of reference.

Stage 1 Generation Background – Key Messages

The most critical driver underpinning the „need‟ for the Western HVDC link is the anticipated

development of generation in Scotland, in particular the growth renewable generation;

NGET presented three generation scenarios to assess the „need‟ for the link. NGET‟s „middle‟

scenario Gone Green (GG) is driven solely by the requirement to meet the government‟s 2020

renewable target. SKM considers GG to represent a highly optimistic view of renewable

development in Scotland;

NGET‟s initial scenarios were based upon dated (2008/9) information. An update of the data

used in the scenarios showed that NGET‟s Gone Green scenario anticipated a significantly

higher rate of renewable growth than actual outturn development over the period 2008/9 to

2011/12;

NGET revised the generation scenarios for their June 2011 submission incorporating the

results of a bottom-up reconciliation of the development status of specific generation projects

following discussions with SKM and Ofgem. Although these scenarios are still labelled as per

the ODIS names on which they were based (SP, GG, AG) it should be noted that they are not

the same;

NGET‟s lowest scenario (Slow Progression) more accurately reflects outturn development

over the period 2008/9 to 2011/12. The highest scenario (Accelerated Growth) shows an

implausible rate of short term renewable growth in Scotland;

By 2020, SP and GG scenarios show little divergence in their assumed installed onshore wind

capacity in Scotland with the GG scenario being only 8% higher than the SP scenario. SKM

considers that NGET‟s scenario analysis does not fully take into account a wide range of

uncertainties influencing renewable development that may plausibly result in a lower level of

renewable generation in the longer term; and

Additional sensitivity analyses were requested to explore a plausible „downside‟ scenario that

takes into account market uncertainties affecting renewable and thermal generation

developments.

8 The bullet point messages in this Section are taken directly from the Stage 1 report and therefore reflect the situation at

the time


Stage 1 Project Cost Estimate – Key Messages

NGET headline capital cost estimate for the HVDC converters and cables (for which funding

is requested) is £XXXXX with a 10% tolerance at this stage, indicating a potential upper

capital cost for these components of £XXXXX;

NGET/SPTL latest overall project costs estimates for Converters, Cables and onshore

substation works directly related to the HVDC link-total £XXXXX (10/11 prices) with a 10%

tolerance indicating a potential project cost at this stage up to £XXXXX;

The capital cost estimate has seen substantial increases over the last two years due to increases

in route length following results of bed survey, the addition of an SVC at Hunterston, increase

in commodity prices between submissions and currency exchange fluctuations;

Cost excludes previously awarded construction funding and preconstruction works;

Onshore substation works are outside the scope of this review; and

Although NGET‟s June 2011 CBA has used capital costs based on August 2010 costs

estimates (£XXXXX), the sensitivity analysis to capex cost (+40%) covers the latest capital

project costs estimates and tolerances including additional substations costs.

Stage 1 SQSS Need Case – Key Messages

A strong need for reinforcement under all scenarios applying „current‟ and „proposed‟ SQSS;

Low risk of stranded asset, both Eastern and Western HVDC links to be required in the long

term assuming continuous growth of renewable generation in Scotland;

Under lower wind generation scenarios (SP) the Eastern HVDC link may not be justified

before 2025;

The Western HVDC link provides the same increase in boundary capacity across the B6

boundary to the Eastern HVDC link, however the latter provides reduced benefits across B7

and B7a but increased benefits from B2 to B4;

The Western HVDC link provides more additional boundary capability across B7a than the

Eastern HVDC link with a B7a reinforcement previously identified by KEMA;

NGET/SPTL need to update their submission on boundary capability charts under Stage 2 to

reflect the impact of Teesside closure and also the impact of changes in Scottish generation in

line with the bottom up analysis leading to the June 11 scenarios. The CBA submitted in June

had already included the effect of this closure in the boundary capability assumptions.

Stage 1 CBA based Need Case – Key Messages

Tool and methodology used in the assessment and generation costs assumptions are considered

to be based on a sound approach;


Western HVDC link demonstrates robust significant benefits under all scenarios over its

lifetime under all credible sensitivities. No credible risk of stranded asset when assessed over

project life;

However, the optimum commissioning year is sensitive to the generation profile used. In SP a

start date of 2017 is indicated, but 2015 for GG the results indicate 2015 is appropriate

(constrained by construction);

Other sensitivities may advance or delay the optimum date by a number of years although

those considered seemed to have a small effect (less than a year);

CBA indicates a range of optimum commissioning dates depending on scenario assumptions

and sensitivities;

Although from the CBA it can be concluded that the Western HVDC link is robust against all

credible scenarios and sensitivity assumptions, it cannot be concluded that the optimum start

date is 2015/16; It depends on the assumptions used. A range of between 2015 to 2017 is

suggested; and

If the Western link is commissioned in Dec 2015 and the renewable growth scenario turns out

to be like SP, the additional costs would amount to circa £33 million. If however, the link is

commissioned in 2017/18 (SP optimum) and then the growth path looks like GG then the

additional cost would amount to circa £165 million (i.e. about 5 times higher).

Stage 1 – Other Un-monetised Risks and Benefits – Key Messages

Clearly delaying the project will increase the robustness of „need‟, but...:

Investing early and „being wrong‟ will lead to a smaller penalty than investing late (using the

GG vs SP);

Empirical evidence tells us that constraints are likely to be much larger than suggested in the

CBA as players exploit the opportunity presented

So the cost of „being wrong‟ by investing late is likely to be above model calculations;

Even if the project is delivered ahead of need (uncertainty about future developments) there

will be other non monetised benefits such as:

Removal of uncertainties for project developers;

Lower financing risk premiums;

Resulting in earlier delivery of renewable projects and CO2 reductions;

Alleviation of cable manufacturing constraints for other R3 projects; and

Others – signal to the market of UK‟s intent to invest in renewables?

Leads to a „bias‟ in favour of constructing earlier rather than later;

Uncertainty is key – most investments face a degree of uncertainty that the investor must bear;


For the Western link it is the customer, not the TOs, that bear the cost of getting the investment

timing „wrong‟ by delivering the project early or late;

Absolute certainty over the exact required timing of the link is impossible to determine (i.e.

although all scenarios have the same initial 3-5 years as they are largely based on firm

commitments, it is uncertain which scenario will apply beyond that);

Different “optimum timing” may apply to each generation scenarios. We could end up with a

range (i.e. optimum between 2015 and 2018 depending on scenario);

The costs to the consumer will be lower if the project is delivered one year early rather than

one year late;

Bias towards earlier investment given the market uncertainties and ultimate cost to the

consumer.

Stage 1 – Contract Award Process Review – Key Messages

NGET/SPTL have established a comprehensive tender evaluation process and procedure

leading to contract award of the Construction contract.

NGET /SPTL have an Evaluation and Contract Award Plan and Programme with fully

resourced teams for tender assessments which overall is currently on schedule.

The procedure has an identifiable process and the programme has prescribed key dates for

project and company boards governance approvals and sign offs, however these seem to be

under review and unapproved by shareholders at this stage,

NGET/SPTL have a Risk Review Process including a maintained Risk Register which is

regularly updated, includes risk mitigation actions and will form part of the modelling for

Whole Life Cost which is one of the key assessment elements of the scoring criteria

(represents 70% )

Current level of TQ‟s and associated clarifications and meetings with respect to each of the

three tendered Lots under consideration has the potential to negatively impact progress on each

assessment stage. Management of this aspect of the process will be significant challenge to

NGET/SPT to ensure progress is maintained to meet programme key dates for approvals and

sign off and contract award in December 2011.


Appendix B – Update on Additional Work identified in Stage 1

The table below itemises a set of studies that were identified within SKM Stage 1 Report for

further consideration within the Stage 2 Report. Against each study, we have provided updated

comments regarding the completion or otherwise for each.

Category of

work to be

considered at

Stage 2

Description of Study / Scenario SKM Comments – Stage 2

Re-work the

CBA „base‟ case

Include upper capital cost estimate Include

substation costs at Hunterston and Deeside in

capex using latest information from the tender

evaluation

Stage 2 CBA includes August 2011

estimate of costs based on latest

tender information.

Hunterston costs also included in

CBA, based on TO submissions to

Ofgem

In the case of the onshore works at

Deeside, SKM has taken into

account the fact that the existing

substation would require

replacement two years later in the

absence of the link but that some of

the costs are attributable to the

link.

Stream the capex in accordance with expected

capital outflows during the construction process

CBA uses capex profile based on

latest tender information

Scottish reinforcements: Include the actual

expected timeline of these reinforcements in the

base case.

Impact of timing of Scottish

reinforcements on the optimum

timing of the Western HVDC was

considered under Stage 1 and

demonstrated to be negligible.

Include the tapering of the renewable subsidy in

the long term in the NPV and lifetime benefits

evaluation to reflect subsidy support dropping

after 20 years as onshore wind becomes an

„established‟ technology.

Included in Stage 2 CBA update


Category of

work to be

considered at

Stage 2


Include losses and improve the explanation and

rationale behind its calculation and how the

duration curve is derived and changes over time.

SKM consider that whilst not ideal,

the timescales for the completion

of the Stage 2 assessment are such

that it is now unrealistic to get

NGET/SPTL to completely re-

assess the losses calculation for the

different generation scenarios and

boundary flows. We concur that

the losses will have no material

impact on the lifetime although

they do contribute to the optimum

timing issue. The loss calculation

methodology is considered

reasonable for the short term and

has been used to review the

sensitivity on commissioning dates

in Stage 1 and subsequently used

in this Stage 2 update to calculate

the cost of getting the timing

decision wrong (regret costs).

Sensitivity

analysis

2 GW less wind in SP by 2020 with Hunterston

extension (Our additional cases 1 GW less wind in

SP and 1 GW less wind in GG are somewhat

covered by the result from above)

Stage 1 scenario assessed the delay

in connecting 1GW of onshore

wind developments by three years

from 2016 to 2019. The results

indicated a positive CBA for the

lifetime of the project and an

optimum delivery date of 2017/18

under the SP scenario.

Capex cost increases Included in Stage 2 CBA update

Impact of Teesside reopens The impact on the timing with and

without Teeside was negligible as

shown in some of the Stage 1

studies albeit with inconsistent

assumptions. It is not considered

material for the conclusions under


Category of

work to be

considered at

Stage 2


Stage 2.

Impact of developer led reinforcements connected

via HVDC Western Isles, Shetland, Kintire.

Given the assumed timing and

tapering of these developments

they are unlikely to have a material

impact on the timing issue.

Additional

information

Teesside closure

o Re-issue the boundary capability charts as

affected by Teesside closure

o B7a Explain how a potential reopening of

Teesside would affect the conclusions

o Explain how the utilisation of Teesside

would affect the boundary capability and

how that is captured in the analysis

o Are the boundaries capabilities sensitive to

the operation of any other non-base load

power station?

o Explain plan to manage apparent boundary

capacity shortfall in the short term even with

the Western HVDC interconnector

o Explain how the conclusions about the

Penwortham-Kirkby reinforcement need case

is affected by the Teesside closure.

NGET have re-issued the boundary

capability charts – these are

included in Stage 2 report with

SKM commentary –

These charts have been included in

the Stage 2 submission. The impact

of Teeside reopening can be

gauged with reference to the charts

included in the last Stage 1

submission (which included

Teeside). Comparison of charts

show that Teeside closure is

equivalent to an extra 300 MW

boundary capability on B7a so

there is no short term shortfall.

There is no change about the

conclusions about the P-K

reinforcement.

Merit order Explain the rationale for the change in

assumptions about Peterhead Longannet,

The robustness against changes in

merit order assumptions about

Peterhead has been explored in

Stage 2. It is not considered

credible that both units will

become marginal.

B7a under what assumptions would be beneficial

to proceed with the additional B7a reinforcement

Under very large renewable

connection volumes this

reinforcement may be an option

deserving further consideration as

an additional follow up


Category of

work to be

considered at

Stage 2


reinforcement to the Western

HVDC link. NGET may need to

consider this further and also other

alternatives.

Documents

Independent Review of Funding Request for Western HVDC Link€¦ · 1.2. Latest Project Status NGET/SPTL Procurement Strategy identified a four stage technical evaluation process