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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
SINCLAIR KNIGHT MERZ PAGE 3
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
SINCLAIR KNIGHT MERZ PAGE 4
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.
SINCLAIR KNIGHT MERZ PAGE 5
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
SINCLAIR KNIGHT MERZ PAGE 6
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
SINCLAIR KNIGHT MERZ PAGE 7
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
SINCLAIR KNIGHT MERZ PAGE 8
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.
SINCLAIR KNIGHT MERZ PAGE 9
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.
SINCLAIR KNIGHT MERZ PAGE 10
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.
SINCLAIR KNIGHT MERZ PAGE 11
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.
SINCLAIR KNIGHT MERZ PAGE 12
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;
SINCLAIR KNIGHT MERZ PAGE 13
- 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.
SINCLAIR KNIGHT MERZ PAGE 14
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.
SINCLAIR KNIGHT MERZ PAGE 15
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.
.
SINCLAIR KNIGHT MERZ PAGE 16
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
SINCLAIR KNIGHT MERZ PAGE 17
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
SINCLAIR KNIGHT MERZ PAGE 18
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.
SINCLAIR KNIGHT MERZ PAGE 19
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
SINCLAIR KNIGHT MERZ PAGE 20
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;
SINCLAIR KNIGHT MERZ PAGE 21
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;
SINCLAIR KNIGHT MERZ PAGE 22
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.
SINCLAIR KNIGHT MERZ PAGE 23
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
SINCLAIR KNIGHT MERZ PAGE 24
Category of
work to be
considered at
Stage 2
Description of Study / Scenario SKM Comments – 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
SINCLAIR KNIGHT MERZ PAGE 25
Category of
work to be
considered at
Stage 2
Description of Study / Scenario SKM Comments – 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
SINCLAIR KNIGHT MERZ PAGE 26
Category of
work to be
considered at
Stage 2
Description of Study / Scenario SKM Comments – Stage 2
reinforcement to the Western
HVDC link. NGET may need to
consider this further and also other
alternatives.