Ofgem consultation on the costs of the proposed new energy solution for .

Shetland New Energy Solution Who we are

Ofgem is the Office of Gas and Electricity Markets. Following a competitive process led by SHEPD, National Ofgem’s principle objective when carrying out its Grid Shetland Link Ltd (NGSLL) has been nominated as the functions is to protect the interests of existing and future preferred service provider for the Shetland New Energy electricity and gas consumers. Solution (SNES) in response to the NGSLL proposal to develop a High Voltage Direct Current (HVDC) electricity They do this in a variety of ways including promoting value for money and link, which along with Shetland based back-up power promoting security of supply and sustainability. generation will ensure Shetland has reliable access to the Major investment decisions, such as a new energy solution for Shetland, power it requires to meet its needs. require approval by Ofgem to ensure they are made on an economic and efficient basis. National Grid Shetland Link Ltd would be entirely responsible for the development, construction and operation of the proposed HVDC link, with partner holding similar responsibility for the proposed back-up power generation on Shetland.

National Grid Shetland Link Ltd is a wholly owned subsidiary of formed specifically to develop, own and operate the HVDC assets for the Shetland New Energy Solution project. It will be the licensed entity for operation of the assets and is legally separate from other companies within National Grid.

National Grid plc, owns and manages gas and electricity infrastructure in the UK and in the north-eastern states of the US. In the UK, the National Grid group runs the systems that deliver gas and electricity across the entire Scottish and Southern Electricity Networks (SSEN), country. The group holds a vital position at the centre of the energy system, joining everything up. The company has extensive experience developing operating as Power Distribution similar projects and already co-owns and operates HVDC electricity links (SHEPD), owns and operates the distribution network with a number of European partners. of overhead lines and underground cables across the Shetland islands and the north of Scotland.

On Shetland, SSEN is responsible for ensuring demand and generation is balanced. SHEPD is regulated by Ofgem.

In April 2014, Ofgem directed Scottish and Southern Electricity Networks (SSEN) to run a competitive process to identify the most efficient solution for Shetland’s energy future.

Having completed the tender evaluation stage of the competitive process, in May 2017 SSEN submitted a recommendation to Ofgem proposing a new Aggreko is the world’s leading provider of modular, energy solution for the Shetland Islands from 2020. mobile power and heating and cooling, operating in

Subject to Ofgem’s consultation, SHEPD intends to enter into contracts over 100 countries worldwide. with National Grid Shetland Link Ltd and Aggreko UK Ltd for services to meet Shetland’s electricity demand. Aggreko helps transform the lives and livelihoods of individuals, organisations and communities across the globe, in both developed and developing countries and markets. The company has considerable experience in the utility industry; they know how to reduce outages, keep customer interruptions to a minimum and maintain a safe working environment.

Ofgem consultation on the costs of the proposed new energy solution for Shetland.

SSEN - Shetland Event A1 - Board 1 - ARTWORK.indd 1 10/08/2017 11:21 Ofgem consultation on the costs of the proposed new energy solution for Shetland.

Shetland New Energy Solution Keeping the lights on

History Existing Arrangements Shetland is not connected to the main electricity network in Great Most of Shetland’s electricity is currently supplied by Britain. This means that the islands rely entirely on local sources of two fossil-fuel power stations, with the remainder generation and the supply and demand must be balanced locally. being supplied by wind generators. In 2016 the main electricity generation sources were: The electricity network on Shetland is made up of approximately 1,650km of overhead lines and underground cables operating at distribution voltages (33kV and below). Thirteen subsea cables join the smaller islands to the main island. There are no overhead lines or (LPS) underground cables operating at transmission voltages (132kV and above). A 67MW diesel-fired station that provides around 50% of Shetland’s electricity on an annual basis. LPS is approaching SSEN owns and operates the network on Shetland. During the introduction of the British the end of its operational life. Electricity Trading and Transmission Arrangements (BETTA) more than 10 years ago, it was formally agreed that SSEN would also administer electricity generation and network The station was built in 1953 and is owned by SSE Generation operation on Shetland, although SSEN had been fulfilling this role for some time before and operated by SSEN. The majority of the generators are this. This means that SSEN is also the System Operator (SO) on Shetland, and is responsible operating significantly beyond their design life. for balancing the islands’ supply and demand.

Generation Sullom Voe Terminal (SVT) Power Station An independently owned gas-fired power station, which meets New Wind around 40% of Shetland’s demand.

The station’s primary purpose is to supply electricity to the Sullom Voe gas terminal, but it also provides up to 15MW to the Shetland system through a third party contract arrangement North Hoo put in place by SSEN. The future use of SVT is uncertain New Large Tidal (0.5MW) Existing Generation beyond 2020.

Garth Luggies Knowe (4.25MW) (3MW)

Northern Isles New Energy Solutions (NINES) An innovative trial project developed by SSEN in partnership Cullivoe Shetland Tidal with third parties and approved by Ofgem in 2011. It aimed Tidal Array Lerwick SVT Burradale Ollaberry to increase renewable generation output, reduce reliance (1 x Nova 30) (5 x Nova 100s) Power Station Power Station Wind Farm on fossil fuels and cut the cost of electricity by lowering the maximum demand on the island network. The project LIC LIC comprised renewable generation, storage and demand- side managed assets including a number of small-scale, community-based wind generators taking advantage of the above average wind conditions that Shetland experiences. Active Network Management System (ANM) The NINES trial has now ended, but core elements of the project will continue on the Shetland system on an enduring basis, as the Shetland Active Network Management LIC LIC (ANM) system.

WC SH Burradale Wind Farm A small (3.68MW) independent wind farm, which contributes Domestic DSM 3MWh Battery around 7% of the islands’ electricity supply.

Controllable Demand NINES connected renewable generation This is made up of a mix of wind generation and tidal Abbreviation Key generation with a total generation capacity of 8.5MW DSM = Demand Side Management WC = Water Cylinder SH = Storage Heater LIC = Local Interface Controller

Ofgem consultation on the costs of the proposed new energy solution for Shetland. www.ssepd.co.uk/ShetlandEnergy

SSEN - Shetland Event A1 - Board 2 - ARTWORK.indd 1 10/08/2017 11:21 Ofgem consultation on the costs of the proposed new energy solution for Shetland.

Shetland New Energy Solution Finding the optimum solution

Stages and participants Q3 2013 SHEPD submission of the competitive process to Ofgem of Integrated Plan (IP), including NINES Stage 1 Initial consultation (302 responses received): In line with Ofgem’s 2014 determination, SSEN carried out a public consultation before starting the competitive process. The purpose of the consultation was to raise awareness and promote discussion in Shetland and elsewhere about the Q2 2014 islands’ energy needs and how they could best be met in the future. To inform this process, consultation events were held in Shetland, Glasgow and . Ofgem decision on IP; new Stage 2 Pre-Qualification Questionnaire requirements to run competitive tender (19 proposals received): for new solution SSEN commenced the Project Qualification process in 2015. The PQQ was divided into the following “Lots”, which SSEN had outlined in the initial consultation were aimed at encouraging a range of proposals from different interested parties:

Q3 2014 Lot 1 – Reliable Provision of Availability and Output SHEPD publishes SHEPD and Ofgem Lot 2 – Intermittent Provision of Energy Lot 3 – Demand Reduction public consultation select and appoint Lot 4 – Provision of Additional Services Independent Auditor Stage 3 Invitation to Tender (8 tenders received): Only bidders who had prequalified for a specified Lot(s) were allowed to submit an ITT bid for that Lot(s). The ITT documentation was issued to those bidders in May Q1 2015 2016 and the tenders were submitted in December 2016.

Public During the bid period, which included extensive tenderer engagement aimed at consultation understanding the potential bids, for various reasons it became clear that a number closes of potential tenderers may not be able to find a way to compile a viable tender relative to their technology solution and a number of tenderers withdrew from the process, culminating in 8 tenders being submitted.

Stage 4 Tender Evaluation (8 tenders): Q2 2015 The tender evaluation process was undertaken between December 2016 and May 2017 by the competitive process delivery team (as outlined below) and overseen by Competitive tender SSEN, the Independent Auditor and Ofgem, in accordance with the methodology process begin described in the ITT documentation.

The 4 key steps in the evaluation process, all of which were overseen by the IA, were as follows:

Step 1 – Tender compliance Step 2 – Technical compliance evaluation Q4 2016 Step 3 – Security of supply and system modelling Step 4 – Commercial evaluation Competitive tender process ends Stage 5 Award Recommendation (NGSLL-Aggreko solution): The evaluation stage culminated in SSEN’s Award Recommendation to Ofgem being submitted in May 2017. This confirmed that the NGSLL-Aggreko submission for Lots 1 and 4 was recommended as the new energy solution for Shetland, with no contracts to be placed for Lot 2 tenderers due to the nature of the successful Q2 2017 Lot 1 solution. No Lot 3 tenders were received. Notification Energy solution of preferred recommended to Competitive Process Delivery Team Technical Consultant Systems Analysis Consutant Legal Advisor Commercial Evaluation Consultant Independent Project Consultant bidder; contract Ofgem finalisation; licence modification

Ofgem consultation on the costs of the proposed new energy solution for Shetland. www.ssepd.co.uk/ShetlandEnergy

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Shetland New Energy Solution What is the recommended New Energy Solution?

To meet the demand for electricity This will connect to a converter station at each end to withstand even the harshest environmental in the community, National Grid of the link thereby providing Shetland with electrical conditions on Shetland. The primary role of the cable power from the GB mainland. A submarine cable back-up generation is to provide further reassurance Shetland Link Ltd propose to from the GB mainland would come ashore in the and reliable power when the HVDC link requires construct a new 260km long, vicinity of Scalloway and an alternating current planned maintenance or in the unlikely event of an 60MW subsea High Voltage Direct (AC) underground cable would then run from a unplanned outage event. converter station in the Scalloway area to the 33kV Current (HVDC) cable link between Gremista substation in Lerwick. On the mainland The preferred location for the converter stations, in Caithness to Lerwick an underground cable will run from a converter back-up generation and onshore and offshore cable in the Shetland Islands. station in Dounreay to the existing 132kV substation route will be established once the options have been in Dounreay. discussed with local stakeholders and the necessary surveys and investigations have been undertaken. This solution consists of proven The back-up generation for this cable consists of technology, giving Shetland access 50 MW of specially designed diesel generators. National Grid Shetland Link Ltd and Aggreko will to the same reliable energy that These will be provided by the Scottish-based hold separate consultation events in advance of a company, Aggreko. This portable, scalable solution planning application to allow people to find out more people across GB enjoy, for at least is commonly used to provide back-up power about the proposed solution and to gain feedback the next 20 years. generation around the world and is designed on the project.

Please note: the total route including offshore and onshore cable is 260km.

Ofgem consultation on the costs of the proposed new energy solution for Shetland.

SSEN - Shetland Event A1 - Board 4 - ARTWORK.indd 1 10/08/2017 11:23 Ofgem consultation on the costs of the proposed new energy solution for Shetland.

Ofgem’s consultation on the Shetland New Energy Solution

On 19th July, Ofgem published its consultation on the Shetland New Energy Solution. Reflecting Ofgem’s duties to protect current and future consumers, this consultation sought views on both the proposed costs of the solution and the associated incentives arrangements.

Costs of the Shetland New Energy Solution Incentive arrangements for the Shetland New Energy Solution

The total costs of the Shetland New Energy Solution The new solution will be exposed to incentive arrangements to ensure consumers (NES) will be around £40m per annum over a 20-year get good value for money and good service over the life of the solution. period and a Net Present Value (NPV) of the evaluated These arrangements will be reflected in two areas: costs of £581.7m. All of the costs of the solution will be recovered through incentivised Output/Utilisation and (1) contractual arrangements between SSEN and NGSLL-Aggreko; and Availability payments from 2020/21 to 2040/41. (2) incentives SSEN has to minimise their additional integration costs of the new solution. We have confidence in the costs as: Contractual arrangements • The competitive process undertaken by SSEN The contract between SSEN and NGSLL-Aggreko risk/financial robustness: The contract structure encouraged a wide and open competitive process with will include a range of provisions aimed at requires the service provider to pay SSEN any 15 bidders at the tender stage. An Independent Auditor maximising service availability and minimising incremental costs associated with service failures (IA) oversaw the competitive process and verified that it cost increases to consumers. These include: up to certain caps. Also, the service provider is was fair, open and transparent. required to have credit support in place. Security of supply • The winning bidder presented the lowest cost and The contract will incentivise the service provider, Environmental i.e. NGSLL, to ensure its services are available as The contract structure incentivises power most efficient solution that met the required security payments reduce or cease if they are not. This generators to minimise fuel usage, and hence of supply standards. The outcome of the competitive places a strong incentive to maintain assets. carbon emissions. process solution found the NGSLL-Aggreko solution was £188m lower cost than the reserve solution1. Price certainty Availability This commercial assessment was undertaken by an The contract has components which fix the price SSEN as Shetland SO will test the power sources throughout the 20-year operational term from on an ongoing basis to ensure the necessary independent expert, Baringa. 1 January 2021 to 31 December 2040. Financial capacity is available at all times. • As the preferred solution was relatively capital intensive, we undertook a detailed bottom-up assessment of the Minimising integration costs underlying capital costs and found the solution to be SSEN will need to undertake work to We are asking one question in within a range of +/-10% of the overall expected cost accommodate the Shetland New Energy Solution. for such a technical solution. This will include ongoing project management, consultation on the incentive system testing and modelling. arrangements: The isolated nature of its electricity infrastructure means that costs are significantly higher on Shetland than in the They will also include continuing to run Lerwick rest of northern Scotland. Domestic and non-domestic Power Station and pay for services from Sullom Do you have any views on consumers on Shetland currently benefit from a Voe Terminal Power Station while the link is being whether the proposed incentive cross-subsidy arrangement, which protects the people built, and in the longer-term to accommodate the arrangements are sufficient to new solution on its network. of Shetland from paying significantly higher prices than maximise the availability of the consumers on the mainland pay. The cost allowances and the incentive service, and to minimise increases The Government proposed that from the point at which mechanisms for each of these activities will in costs to consumers on an the NES is implemented, the costs of the NES will be be subject to a separate Ofgem assessment and consultation. ongoing basis? spread across all GB consumers, rather than only those in the north of Scotland. The cross-subsidy will also be continued for all existing domestic and non-domestic Next Steps electricity consumers on Shetland. Ofgem will review all feedback National Grid Shetland Link As the project moves forward, We are asking two questions in our consultation on costs: received throughout the Ltd and Aggreko will seek the both companies will look to consultation process, and will relevant planning permission consult the community on • Do you have any views on the costs of the preferred then take a decision. and licences required to proposals relating to Shetland New Energy Solution? develop the HVDC link and the HVDC link and back-up • Do you have any views on whether the recommended Should the new energy back-up power generation. power solution. solution represents the optimal level of cost efficiency solution be approved by Ofgem, the various contracts currently available? are expected to be signed by The link is expected to be installed and the end of 2017. available for operation by the end of 2020. 1 This calculation is based on a specific methodology called the Overall Solution Evaluation Cost, which considers the cost of services if dispatched in a number of different scenarios which could arise.

Ofgem consultation on the costs of the proposed new energy solution for Shetland. www.ofgem.gov.uk/publications-and-updates/consultation-cost-new-energy-solution-shetland

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Shetland from December 2020 Overview of how the system will operate

If approved, the New Energy Solution (NES) will begin to meet Shetland’s electricity demand from Changes from current Relationships between December 2020. In the intervening period, all arrangements SHEPD and NG-Aggreko Shetland’s electricity needs will continue to be met from existing generation sources on the islands, The main changes from the current SHEPD will have ongoing engagement arrangements on Shetland will be the with NGSLL-Aggreko to ensure the including Lerwick Power Station, which will remain control of the generation assets at services are available as required. operational until such time that the new energy Lerwick Power Station, where SHEPD solution is established. would start and stop these units to For the majority of the time, the link suit Island demand. When the new will run to meet Shetland demand and When the link is operational, Shetland demand will be met and Energy Solution is in operation these little engagement will be required. the system will be balanced as a result of the services provided assets will not be needed after the first by the link. When the link has a planned or unplanned outage, year and after this SHEPD will issue During planned and unplanned the standby power station will run to meet Shetland’s electricity instructions to the service providers outages, SHEPD will be in constant demand. SHEPD will agree planned outages with the service to meet demand. communication with the service providers, and will oversee unplanned outages, in order to providers, issuing dispatch instructions ensure interruptions to supply are minimised. to the Aggreko standby power station and managing impacts on SHEPD will issue forward looking demand forecasts and the Shetland system. nominations to the service providers to ensure the island supply is maintained at all times.

SHEPD SO Shetland ANM and DNO role and participants

SHEPD will continue to fulfil its roles The ANM system will continue to play on Shetland of System Operator a key role in managing renewable (SO), managing supply and demand, generators and energy storage on and operating and maintaining the the islands. distribution system as Distribution Network Operator (DNO), on an SHEPD will work with the existing enduring basis. renewable generators to identify revised arrangements for their access to the Shetland system, reflecting the characteristics of the new solution.

Ofgem consultation on the costs of the proposed new energy solution for Shetland.

SSEN - Shetland Event A1 - Board 6 - ARTWORK.indd 1 10/08/2017 11:24 Ofgem consultation on the costs of the proposed new energy solution for Shetland.

Shetland New Energy Solution Next steps

19 Jul 2017 Ofgem National Grid Shetland Link Ltd and Aggreko will seek the relevant planning permission Consultation and licences required to develop the HVDC link and back-up power generation. Published 31 Aug As the project moves forward, both companies will look to consult the community on 2017 proposals relating to the HVDC link and back-up power solution. Ofgem Consultation The link is expected to be installed and available for operation by the end of 2020. Period ends Sep 2017 Ofgem review of consultation responses and Have your say preparation of minded to position Ofgem welcome responses from all parties to our consultation on the Shetland New Energy Solution. If you would like to share your views, Late feedback forms are available to fill in at the drop-in event today. Sep 2017 Representatives from Ofgem, Scottish and Southern Energy Networks (SSEN), National Ofgem decision Grid Shetland Link Ltd and Aggreko UK Ltd are available today to answer any questions on NES costs, you may have. solution and licence changes Enquiries after the events can be directed to: [email protected].

Oct Details of the consultation, and the opportunity to provide feedback is also available 2017 on the consultation section of Ofgem’s website www.ofgem.gov.uk/consultations. Contract Award The consultation closes on 30 August 2017.

Q3/Q4 2020 Commissioning of New Energy Solution

31 Dec 2020 New Energy Solution Service Start Date

Jan 2022 Lerwick Power Station taken out of service

Jan 2022 Enduring New Thank you for taking the time to visit our drop-in session today. Energy Solution (until 2040) Further information, and progress updates on the New Energy Solution can be found at: www.ssepd.co.uk/ShetlandEnergy

Ofgem consultation on the costs of the proposed new energy solution for Shetland.

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