Experience you can trust.1

Ofgem Stakeholder Workshop

Review of the scale & timing of proposed transmission network developments to deliver 2020 renewable targets

Mike Wilks, David Porter, Goran Strbac & Toby Manning

London - 7 December 2009

2

Contents

Context

Scope and delivery of KEMA’s support

Overview of the TOs’ schemes

Assessment of the TOs’ schemes

Cost benefit analysis assessment

Summary and Conclusions

Final Remarks

Context – significant challenges ahead

Nonetheless key questions need to be asked

• Are all the proposed of transmission investments needed for 2020 targets?

• Could any of the proposed transmission investments be premature?

• Are the costs of the proposed investments reasonable?

It is universally recognised major transmission investments will be

required for required new power generation

Important not to lose sight of the longer-term ‘Big Picture’

• Must seek to avoid delaying renewable generation deployment BUT must

also avoid unduly increasing the cost of renewable integration

There is a clear objective

4

BackgroundENSG Report 2009: A joint transmission development plan produced as a means of delivering 2020 renewable targets

Transmission requirements based on a ‘Gone Green’ generation scenario with 3 generation mix variants:

– Requirement to integrate 147 TWh of renewable generation output

– Scottish wind generation capacities: 6.6GW / 8.0GW / 11.4GW

England & Wales generation providing remainder

– Cost Benefit Analysis used to assess Anglo-Scottish reinforcements

– Existing planning framework used to assess other reinforcements (SQSS)

Transmission owner investment proposals cover current & future price control periods

5

Contents

Context

Scope and delivery of KEMA’s support

Overview of the TOs’ schemes

Assessment of the TOs’ schemes

Cost benefit analysis assessment

Summary and Conclusions

Final Remarks

6

Scope of KEMA’s support for Ofgem

Review robustness of the system-wide development plan for

delivery of 2020 renewable targets

Review included assessment of:

– Key assumptions influencing investment requirements

– Treatment of uncertainties in the investment plan

– Methodology review including:

Impact of the GB System Quality & Security standard (SQSS)

Cost Benefit Assessment (CBA)

– Consideration of options and/or operational measures

Verifying the Need and Timing of the proposed investments

– Requirements for funding during current price control period

High-level scope and cost effectiveness

7

Approach

Reviewed joint transmission company report submitted to ENSG

with supporting analysis

Reviewed detail of proposed investments as provided by the

transmission companies:

– Written Q&A process

– Bilateral meetings with Transmission Owners (TOs)

– Close liaison with Ofgem and PB Power to share information

and insights gained within each area of work

8

Contents

Context

Scope and delivery of KEMA’s support

Overview of the TOs’ schemes

Assessment of the TOs’ schemes

Cost benefit analysis assessment

Summary and Conclusions

Final Remarks

Scheme overview

Scottish – Reinforcements

• Knocknagael (SHETL)

• Western Isles link (SHETL)

• Beauly – Dounreay

• Beauly – Blackhillock – Kintore

• Hunterston – Kintyre link

• East- West upgrade

• East Coast upgrade

Schemes consist of stand alone and joint TO investments. There is a

mix of reinforcement and new build projects

SHETL

SHETL

SHETL

SHETL

SPTL & SHETL

SPTL

SPTL & SHETL

Scotland – England Expansion

• Scottish interconnector circuits

• West Coast HVDC link

• East Coast HVDC link

SPTL & NGET

SPTL & NGET

SHETL & NGET

England & Wales

• East Anglia

• London

• North Wales

• Central Wales

• South West

• Humber

NGET

NGET

NGET

NGET

NGET

NGET

Geographic overview - SHETL

• Schemes comprise submarine links & network

reinforcements from Northern Scotland to England

• SHETL not seeking TPCR4 funding for East Coast upgrade

but cost estimates provided

Orkney not submitted for additional

funding and Shetland scheme

proposal not firm so not

considered by KEMA

Geographic overview – SPTL

• SPTL reinforcements to enable power flow from Northern

Scotland through to England & Wales

• Hunterston-Kintyre is a joint SHETL/SPTL scheme

Geographic overview - NGET

Schemes to enable power flows

from Scotland and extremities of

E&W towards demand centres

Two major offshore Links between

Scotland and England are indicated

• Western HVDC Link is a joint

NGET/SPTL initiative

• Eastern HVDC Link is a joint

NGET/SHETL initiative

Overview of the schemesAnnual profile of proposed expenditure: 2009/10 – 2017/18

Scale of proposed investments

• Total equates to current allowed GB TO capex for

period 2007/08-2011/12

• 2014/15 investment requirement is roughly equal to

current annual total GB TO capex.

0

200

400

600

800

1000

1200

09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18

An

nu

al

Ex

pe

nd

itu

re (

£m

illio

n)

Year

Annual Expenditure Profile

Construction

Pre-construction

Excludes Shetland

£548m or £679m dependent on design

Not considered by KEMA

14

Contents

Context

Scope and delivery of KEMA’s support

Overview of the TOs’ schemes

Assessment of the TOs’ schemes

Cost benefit analysis assessment

Summary and Conclusions

Final Remarks

Assessment of the schemesComparison of schemes by financial commitment sought in

current price control period (finishes 2011/12)

• Chart illustrates scale of

additional TPCR4 funding

sought per scheme

• Includes pre-construction

and construction costs.

• Considerable variations in

proportion of funding

sought during TPCR4

• Modest commitments now

have significant impact

during TPCR5

Projects Ranked by TPCR 4 Expenditure

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

We

ste

rn Isle

s H

VD

C lin

k (

SH

ET

L)

Ea

st A

ng

lia

(N

GE

T)

We

ste

rn H

VD

C lin

k (

NG

ET

/SP

TL

)

Sco

tla

nd

in

terc

on

ne

cto

rs (

NG

ET

/SP

TL

)

Hu

nte

rsto

n-K

inty

re lin

k (

SH

ET

L/S

PT

L)

Be

au

ly-D

ou

nre

ay (

SH

ET

L)

Kn

ockn

ag

ae

l (S

HE

TL

)

No

rth

Wa

les (

NG

ET

)

Be

au

ly-B

lackh

illo

ck-K

into

re (

SH

ET

L)

Ea

st C

oa

st u

pg

rad

e (

SP

TL

/SH

ET

L)

Lo

nd

on

(N

GE

T)

Ea

ste

rn H

VD

C lin

k (

NG

ET

/SH

ET

L)

Hu

mb

er

(NG

ET

)

So

uth

We

st (N

GE

T)

Ce

ntr

al W

ale

s (

NG

ET

)

Pro

ject

Co

sts

(£m

illi

on

)

TPCR 5

TPCR 4

Assessment of the schemesTotal cost comparison and high-level unit costs per scheme

• Chart shows relative size

of schemes

• Larger schemes towards

latter end of period.

• Larger schemes more

cost effective in terms of

£/kW capacity release

• £/kW does not always

convey full scheme

benefit

• High £/kW sometimes

unavoidable

Projects Ranked by Construction Start Date

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

Kn

ockn

ag

ae

l (S

HE

TL

)

Be

au

ly-B

lackh

illo

ck-K

into

re (

SH

ET

L)

We

ste

rn Isle

s H

VD

C lin

k (

SH

ET

L)

Ea

st A

ng

lia

(N

GE

T)

Be

au

ly-D

ou

nre

ay (

SH

ET

L)

Hu

nte

rsto

n-K

inty

re lin

k (

SH

ET

L/S

PT

L)

Sco

tla

nd

in

terc

on

ne

cto

rs (

NG

ET

/SP

TL

)

We

ste

rn H

VD

C lin

k (

NG

ET

/SP

TL

)

Lo

nd

on

(N

GE

T)

Ea

st C

oa

st u

pg

rad

e (

SP

TL

/SH

ET

L)

No

rth

Wa

les (

NG

ET

)

Ce

ntr

al W

ale

s (

NG

ET

)

So

uth

We

st (N

GE

T)

Hu

mb

er

(NG

ET

)

Ea

ste

rn H

VD

C lin

k (

NG

ET

/SH

ET

L)

To

tal

Pro

ject

Co

st

(£m

illi

on

)

0

100

200

300

400

500

600

700

800

900

Cap

acit

y I

ncre

ase C

ost

(£ /

kW

)

Total

£/kW

09/10 10/11 11/12 12/13

13/14

14/15

Assessment of the schemesScheme Timing Certainty

of need

Certainty

of timing

Materiality of

TPCR4

funding

Knocknagael (SHETL) 09/10 - 11/12 HIGH HIGH MEDIUM

Western Isles link inc. Lewis infrastructure

(SHETL)

09/10 – 13/14 MEDIUM LOW VERY HIGH

Beauly-Blackhillock-Kintore uprating (SHETL) 09/10 – 14/15 HIGH HIGH LOW-

MEDIUM

Beauly-Dounreay (SHETL) 10/11 – 12/13 HIGH HIGH MEDIUM

Hunterston-Kintyre link (SHETL/ SPTL) 10/11 – 13/14 HIGH HIGH MEDIUM –

HIGH

Scottish Interconnector upgrade1 10/11 – 14/15 MEDIUM MEDIUM MEDIUM –

HIGH

East Coast upgrade (SPTL/SHETL) 11/12 – 17/18 MEDIUM MEDIUM LOW

Western HVDC link (NGET/ SPTL) 10/11 – 15/16 LOW-

MEDIUM

LOW HIGH

Eastern HVDC link (NGET/ SHETL) 09/10 – 12/13

(pre-con only)

LOW

East Anglia (NGET) 09/10 – 16/17 HIGH HIGH -

MEDIUM

HIGH

London (NGET) 11/12 – 15/16 HIGH HIGH LOW

North Wales (NGET) 11/12 – 16/17 LOW LOW LOW -

MEDIUM

Central Wales (NGET) 12/13 – 15/16 LOW LOW -

MEDIUM

LOW

South West (NGET) 12/13 – 16/17 LOW LOW LOW

Humber (NGET) 13/14 – 16/17 LOW LOW LOW

1. Comprises Anglo-Scottish incremental works (NGET), SPTL-NGET interconnection scheme (SPTL) and

East - West upgrade (SPTL).

• Earlier schemes

have greatest

certainty re-

need & timing

• Earlier schemes

require most

additional

TPCR4 funding

• Greatest

uncertainty with

Western Isles

and Western

HVDC Link

schemes

18

Contents

Context

Scope and delivery of KEMA’s support

Overview of the TOs’ schemes

Assessment of the TOs’ schemes

Cost benefit analysis assessment

Summary and Conclusions

Final Remarks

Investment assessment methodology

Many investments justified on a deterministic basis – i.e. specific

generation scenario and SQSS requirements to secure peak demand

Cost Benefit Analysis undertaken for Scotland – England network

capacity expansions

NGET indicates that investment case for other schemes may be

reinforced by CBA assessment, e.g. East Anglia, South West England

Thus review of the CBA methodology & inputs undertaken

Cost Benefit Analysis (CBA) & deterministic

approaches undertaken by NGET

Transmission

investment cost

Principles of CBA Constraint

management cost

20

Cost benefit analysis resultsNorth – South expansion: ‘Boundary B6’

TOs concluded that two B6 expansion options are required

before 2020 – equal weighting of scenario variants

CBA results suggests the Eastern HVDC Link is marginally

more cost effective than Western HVDC Link in longer term

Greater certainty of generation projects driving Western HVDC

link; and more uncertainty over the Eastern HVDC Link design

TO preferred order for B6 reinforcements is:

1. Incremental works” on Scottish Interconnector circuits

2. Western HVDC Link

3. Eastern HVDC Link

Key CBA input assumptions

Market evidence & other sources suggests significant scope

to refine CBA input assumptions, particularly 1, 3, 4 & 5

Input CBA Assumption Alternative

1Wind load

factor

35% for onshore and

offshore (average)

Onshore wind currently 28% load factor

Offshore expected to be higher but current

projects indicate similar performance

2Plant Merit

Order

Plant hierarchies based on

historic operation. No

locational factors

Changing generation mix may change status

of some key conventional plant, especially in

Scotland; adoption of locational costs would

change relative merits of specific plant

3Constraint

Prices

£90/MWh assumed based

on relationship of bid and

offer prices.

Model bid/offer prices according to LRMC

principles. Assumed price has significant

impact and higher than other sources

4Renewable

scenario mix

Equal weighting of

6.6/8.0/11.4 GW variants

Varied weightings - important to understand

sensitivity of results

5Project cost

estimates

April 2009 Cost estimates,

e.g. Western HVDC £697m

Some September 2009 figures now

increased, e.g. Western HVDC £805m

6Transmission

losses costAssumed cost of £60/MWh

Model assumes wholesale prices fall from

£50/MWh to £40/MWh

CBA sensitivity – 15 year time horizonFor Scottish wind capacities of circa 8 GW, the economics of the

Western HVDC link appears marginal

Source: NGET - this analysis was undertaken using the lower estimated scheme costs

as presented in the ENSG Report and does not reflect higher costs as submitted to

Ofgem for additional funding.

Chart illustrates

impact of

constraint

prices for B6

investments to

break even

under the 3

Gone Green

scenarios.

>100% requires

contraction;

<100% requires

expansion

51%

135%

90%

224%

16%

26%

321%

50%

0%

25%

50%

75%

100%

125%

150%

175%

200%

225%

250%

275%

300%

325%

6.0 7.0 8.0 9.0 10.0 11.0 12.0

Scottish wind (GW)

Co

ns

train

t p

ric

e m

ult

ipli

er

a. - 0. a. + b. - a. a. + b. +c. - a. + b.

GG5 cGG5 bGG5 a

Incremental

onshore

expansion

Western

HVDC

link

Eastern

HVDC

link

£90/MWh

CBA sensitivity – 40 year time horizonEconomics of investment inevitably improve with extended time

horizons as aggregate constraint costs increase

Source: NGET - this analysis was undertaken using the lower estimated scheme costs

as presented in the ENSG Report and does not reflect higher costs as submitted to

Ofgem for additional funding.

Chart illustrates

impact of

constraint

prices for B6

investments to

break even

under the 3

Gone Green

scenarios.

>100% requires

contraction;

<100% requires

expansion

30%

78%

62%

172%

8%

13%

161%

25%

0%

25%

50%

75%

100%

125%

150%

175%

200%

225%

250%

275%

300%

325%

6.0 7.0 8.0 9.0 10.0 11.0 12.0

Scottish wind (GW)

Co

ns

train

t p

ric

e m

ult

ipli

er

a. - 0. a. + b. - a. a. + b. +c. - a. + b.

GG5 cGG5 bGG5 a

Incremental

onshore

expansion

Western

HVDC

link

Eastern

HVDC

link

£90/MWh

Anglo-Scottish reinforcement summary

Proposed reinforcementScottish wind capacity (GW)

6.6 8.0 11.4

Incremental onshore expansion

Western HVDC Link

Eastern HVDC Link

40 Year

Assessment

period

Incremental onshore expansion

Western HVDC Link

Eastern HVDC Link

?

15 Year

Assessment

period

Which of the proposed investments are required; and

which are required urgently?

Key

uncertainty

Investment requirement conclusions from the CBA produced for

ENSG report (15yr time horizon) and CBA with 40yrs time horizon

Note: All other assumptions unchanged between the two assessments

25

Assessment of Cost Benefit Analysis

Generation scenario sensitivity – the Scottish Government 6.6 GW wind target may not require significant Anglo-Scottish reinforcements

Material increased project costs undermine the CBA case for implementing two network reinforcement schemes across the Anglo-Scottish border

CBA results highly sensitive to generation constraint prices

Need to not just look at sensitivities to single assumptions in isolation

CBA is regarded as the most appropriate tool for wind energy driven transmission investment assessment

Approaches based on securing demand with wind generation are now less relevant

NGET’s CBA approach is robust – appropriate to review inputs

26

Contents

Context

Scope and delivery of KEMA’s support

Overview of the TOs’ schemes

Assessment of the TOs’ schemes

Cost benefit analysis assessment

Summary and Conclusions

Final Remarks

27

Scheme Conclusions (1)Schemes commencing in 2012/13 i.e. beyond TPCR4 (TPCR5)

Four schemes are to be commenced in TPCR5 timeframes– Central Wales

– Humber

– South West

– Eastern HVDC

The first three are stand alone scheme whose certainty of need and timing directly reflect forecasts of generation developments

The latter is proposed a 3rd of three B6 reinforcements driven by CBA and investment case not conclusive

No funding commitment for construction required for any of these schemes prior to TPCR5 process

Reasonable to fund pre-construction assessments as planned

28

Scheme Conclusions (2)Scheme commencing in 2011/12 (Phase 2)

Five schemes are proposed to commence in 2011/12 – last year

of TPCR4

The phasing of the Anglo-Scottish and East West Scotland

schemes appear reasonable

The London, North Wales and Scottish East Coast schemes could

probably commence construction in TPCR5 without impacting

delivery

Thus probably no construction funding commitment is required for

the latter three schemes until TPCR5

Reasonable to fund pre-construction works for all

Scheme First Year Construction

Spend in 11/12

(Last Year of TPCR4)

Total Scheme Cost Percentage of scheme

expenditure

Anglo-Scottish Incremental works £47m £182m 26%

East-West Upgrade £8m £83m 10%

North Wales £17m £422m 4%

East Coast Upgrade £7m* £253m 3%

London £4m £186m 2%

1. This is a joint SHETL/SPTL scheme. However, only SPTL submitted construction costs for this scheme

and SHETL are not planning any expenditure before 2013/14

29

Scheme Conclusions (3)Scheme commencing in 2010/11 (Phase 1)

Schemes proposed to commence construction in 2010/11 are:– Beauly-Dounreay

– Hunterston-Kintyre Link

– SPTL-NGET interconnection

– Western HVDC

KEMA believes, the first two are required in relatively short timeframes and should receive funding

The third could viably be commenced in 2011/12 but KEMA accept specific constraint cost savings supports 2010/11 start

The Western HVDC link is the 2nd of three B6 reinforcements and subject to uncertainties whether two B6 reinforcements are required. Unclear need to commence construction during TPCR4

Reasonable to fund pre-construction assessments

30

Scheme Conclusions (4)Scheme commenced in 2009/10 (Phase 1)

Schemes already commenced construction in 2009/10 are:– Knocknagael (will be completed within TPCR4)

– Beauly-Blackhillock-Kintore

– East Anglia

– Western Isles (450MW HVDC link)

KEMA believes, the first three schemes are required and should receive (efficient) funding

– though latter part of East Anglia should be subject to review under TPCR5

The timing of the fourth (Western Isles) is less clear– £8m of onshore costs (Lewis) incurred in 2009/10

– £102m of costs to occur in 2010/11 (offshore works start)

– Only c.50MW of WI generation has consent – may rise to 200MW in New

Year (suggested 150MW justifies WI Link on CBA basis)

– TO indicated it will not proceed on anticipatory basis; but it is unclear users in

position to commit to securitise 2010/11 spend

31

Contents

Context

Scope and delivery of KEMA’s support

Overview of the TOs’ schemes

Assessment of the TO’s schemes

Cost benefit analysis assessment

Summary and Conclusions

Final Remarks

32

Final RemarksSeriousness of climate change challenge acknowledged and

importance of UK 2020 renewables targets recognised

KEMA conclusions will not impact on the ability of the required

level of renewable generation to connect by 2020

Connecting renewable capacity to meet 2020 targets may not

necessarily require all the proposed transmission investments

Decisions to postpone some proposed investments during TPCR4

is a ‘low regret’ approach from a consumer cost perspective

compared to premature investment commitment

Important to monitor wind capacity increases in Scotland

Important to quickly establish and agree the investment planning

framework to integrate large-scale renewables

Experience you can trust.33

Thank you for your attention

KEMA Limited

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T +44 203 170 8165

www.kema.com