Decision on the Final Project Assessment of the Viking Link interconnector to Denmark Publication date: 30 September Contact: Iqra Latif and Andrew Martin 2020 Team: Interconnectors Tel: 0141 341 3957 Email: [email protected] This document provides our final position on the Final Project Assessment (FPA) of the Viking Link interconnector to Denmark. This includes our provisional determination of the cap and floor levels for the project, which will apply to National Grid Viking Link Limited’s 50% share of the interconnector. Decision - Final Project Assessment of the Viking Link interconnector to Denmark © Crown copyright 2020 The text of this document may be reproduced (excluding logos) under and in accordance with the terms of the Open Government Licence. Without prejudice to the generality of the terms of the Open Government Licence the material that is reproduced must be acknowledged as Crown copyright and the document title of this document must be specified in that acknowledgement. Any enquiries related to the text of this publication should be sent to Ofgem at: 10 South Colonnade, Canary Wharf, London, E14 4PU. Alternatively, please call Ofgem on 0207 901 7000. This publication is available at www.ofgem.gov.uk. Any enquiries regarding the use and re-use of this information resource should be sent to: [email protected] 2 Decision - Final Project Assessment of the Viking Link interconnector to Denmark Contents Executive summary ....................................................................................... 4 Background and scope .............................................................................................. 4 What our assessment shows ...................................................................................... 4 Next steps ............................................................................................................... 6 1. Introduction .............................................................................................. 7 What are we making a decision on? ............................................................................ 7 Structure of this document ........................................................................................ 8 Related publications .................................................................................................. 9 2. Background ............................................................................................. 10 Project overview ..................................................................................................... 10 Our cap and floor regime .......................................................................................... 11 3. Cost assessment ..................................................................................... 14 Scope of our cost assessment ................................................................................... 14 Our view on Viking Link’s submitted costs .................................................................. 15 Assessment of firm devex costs ............................................................................. 17 Assessment of firm and estimated capex costs ........................................................ 17 Tender processes and main EPC contracts award ..................................................... 19 Firm and estimated capex components ................................................................... 19 Assessment of capex risk costs .............................................................................. 22 Assessment of post-construction costs .................................................................... 23 4. Annual reporting and our Post Construction Review ............................... 24 Annual reporting ..................................................................................................... 24 Scope of the Post Construction Review ....................................................................... 25 Timing of the Post Construction Review ...................................................................... 25 5. Other aspects of our Final Project Assessment........................................ 27 Cap and floor financial model .................................................................................... 27 Technical assessment .............................................................................................. 28 Availability incentive ................................................................................................ 28 Force majeure request ............................................................................................. 30 Appendices .................................................................................................. 31 Appendix 1 – Regime summary for Viking Link ........................................... 32 Appendix 2 – Risk-related eligibility at the PCR .......................................... 36 3 Decision - Final Project Assessment of the Viking Link interconnector to Denmark Executive summary Electricity interconnectors can provide significant benefits to GB energy consumers. We1 confirmed our cap and floor regulatory regime in 2014, to provide a clear and transparent regulatory approach for the development of new electricity interconnector projects between GB and other countries. This aims to incentivise commercial investment in interconnectors where it stands to benefit consumers. This decision provides our position on the Final Project Assessment (FPA) of the Viking Link interconnector to Denmark. The Viking Link project is being jointly developed by National Grid Viking Link Ltd (NGVL)2 and by Energinet, the Danish transmission system operator (TSO). Background and scope The Viking Link project is a 1.4GW electricity interconnector between Bicker Fen in Lincolnshire, Great Britain (GB) and Revsing in South Jutland, Denmark. Our cap and floor regime applies to National Grid’s 50% share of the Viking Link project. The cap and floor regime is the regulated route for interconnector development in GB. There are three main stages to our cap and floor regime – the Initial Project Assessment (IPA), the FPA and the Post Construction Review (PCR). We assessed the needs case for the Viking Link project at the IPA stage and decided in July 20153 to grant the project a cap and floor regime in principle. This was based on the expected net benefits of a 1GW interconnector over a 25- year period, which were projected to be circa £2.5bn to GB consumers (in 2019/20 prices). In 2016, NGVL notified us that they planned to increase the capacity of the interconnector from 1GW to 1.4GW. We published updated analysis4 in July 2017, which projected circa £5.2bn in consumer welfare (in the base case) as a result of the increased capacity (in 2019/20 prices).5 This document sets out our final position on the FPA of the Viking Link interconnector. We present our view on Viking Link’s proposed costs and the resulting update to the project’s cap and floor levels. What our assessment shows The cap and the floor levels are set based on building blocks of development costs, capital costs, operating costs, replacement costs, decommissioning costs, tax and allowed return. 1 The terms “Ofgem” and “the Authority,” “we” and “us” are used interchangeably in this document. 2 “NGVL” and “Viking Link” are used interchangeably in this document. 3 Decision on the Initial Project Assessment of the FAB Link, IFA2 and Viking Link interconnectors. 4 Cap and floor regime: An update on ‘Window 1’ interconnector projects. 5 The updated analysis took into account updated market conditions and Window 1 projects only. 4 Decision - Final Project Assessment of the Viking Link interconnector to Denmark NGVL submitted the incurred and forecasted project costs to Ofgem in December 2019. We have assessed whether or not these costs are economic and efficient and have concluded that the majority of the project’s firm costs are reasonable. We have considered the procurement process that was followed for the major contracts (primarily the cable and converters), and decided that this was competitive and generally efficient. The provisional cap and floor levels set out within this decision include a provisional value to cover project risks and uncertainties. This reflects an economic and efficient estimate for the additional costs likely to be incurred by Viking Link between the FPA and the PCR. We will undertake a detailed assessment of any cost changes since the FPA as part of our PCR, and we will update our final cap and floor levels to reflect our economic and efficient allowance for such cost changes. Based on our assessment, we have set Viking Link’s development and capital costs at £786.7m, a reduction of approximately 4% from the submitted £817.8m.6 As part of this decision we have confirmed the financial parameters that will apply to the Viking Link project. These are based on methodologies set out in our cap and floor regime policy. The financial parameters have predominantly been set based on the date of Viking Link’s final investment decision (26 September 2018). We have also decided to set a target of 93.4% for Viking Link’s availability incentive, based on our review of the project’s technical design. The cap level can increase or decrease by up to 2% based on performance against this target. Our provisional cap and floor levels are £111.5m and £61.7m respectively, based on our allowed costs and relevant financial parameters