Hornsea Offshore Wind Farm Transmission Assets

© 2020 Grant Thornton UK LLP | Hornsea Offshore Wind Farm Transmission Assets | 11 November 2020
Hornsea Offshore Wind Farm
11 November 2020
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2
Hornsea Offshore Wind Farm Transmission Assets
In accordance with our contract call off agreement dated 30 January 2019 and associated task order, we enclose for your attention our report detailing our findings arising from the
Ex-Post Cost Review of the Hornsea Offshore Wind Farm Transmission Assets.
Our conclusions and recommendations are included within the Executive Summary set out in section one, however for a full understanding it is necessary to read this in conjunction
with our detailed commentary set out in sections 2 to 3 and appendices A to G.
This report is confidential and has been prepared exclusively for Ofgem. Whilst other parties may be interested in receiving a copy of this report, we stress that, to the fullest extent
permitted by law, we cannot accept any responsibility whatsoever in respect of any reliance that these parties may place on our report in any decision that they may make in relation
to the Hornsea Offshore Wind Farm.
Yours faithfully
www.grantthornton.co.uk
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E14 4PU
© 2020 Grant Thornton UK LLP | Hornsea Offshore Wind Farm Transmission Assets | 11 November 2020 3
Glossary
Balfour Balfour Beatty plc
BBW02 Burbo Bank Extension
BCR Budget change request
Bladt Bladt Industries A/S
CAT Cost assessment template
EUR Euro
Global
Infrastructure
Partners
HOW01/the Wind
HOW02/HOW03/
HOW04
ICP Inter company payment
IDC Interest during construction
NGET National Grid Electricity Transmission plc
NKT NKT Cables A/S
OFR One Fixed Rate
OFTO Offshore transmission owner
OWP Ørsted Wind Power A/S
Glossary (continued)
RCS Reactive compensation station
Siemens Siemens A/S/Siemens AG
Tideway Tideway BV
VO Variation order
WBS Work breakdown structure
WFW Watson Farley & Williams
WTG Wind turbine generator
Contents
3. The HOW01 Ex-Post Cost Review 16
Appendices Page
A. Restrictions on circulation, disclosures of interest, forms of report and
information relied on 26
G. Movements between the cost templates 50
Section 1: Executive summary
03. The HOW01 Ex-Post Cost Review
Introduction
• This report relates to the Hornsea Offshore Wind Farm which is jointly owned by
Ørsted and Global Infrastructure Partners
• HOW01 is a 407km² Wind Farm. The centre of the offshore site is approximately
120km East of the Humber Estuary in East Yorkshire. HOW01 uses 174 WTG’s.
The Wind Farm is subdivided into three substation areas namely West, Central
and East
• The Wind Farm is primarily comprised of three offshore substations, a reactive
compensation station, three 220kV export cable circuits including interlinks between
the offshore substations, an onshore substation, and two 400kV export cable circuits
connecting the onshore substation to the National Grid Killingholme onshore
substation
• The construction of the Transmission Assets is complete and the Wind Farm is fully
operational, with full export capacity being achieved on 4 May 2020
Grant Thornton review
• Grant Thornton has been instructed by Ofgem to review the ex-post cost
assessments prepared by the Developer for the Transmission Assets of the Wind
Farm (Ex-Post Cost Review)
• The Ex-Post Cost Review has sought to determine whether the Developer has
procedures in place for managing directly and indirectly incurred costs, and to carry
out certain testing on whether the Developer’s latest assessment of the costs of the
Transmission Assets have been incurred as stated. The purpose of this review is to:
− establish the processes and policies undertaken by the Wind Farm for making
payments for directly and indirectly incurred costs
− in relation to directly incurred costs, for selected contracts, trace expenditure
through the purchasing and payments system and reconcile to the costs included
on the invoice schedule to the 28 February 2020 CAT
− in relation to indirectly incurred costs, for a sample of transactions, trace
expenditure through the accounting system, and confirm the amount allocated has
been correctly applied in accordance with the stated allocation methodology, using
appropriate metrics in respect of the costs between transmission and generation
− compare the costs included in the 28 February 2020 CAT to the ITV at
21 November 2019, and obtain explanations for significant variances arising
between the costs at the two dates
• Our review and this report is based upon the cost template submitted to Ofgem dated
28 February 2020 and incorporates information and explanations provided regarding
the costs in this version of the cost template, both from an online meeting with
Ørsted on 14 May 2020 and in correspondence with the Developer, up to
6 August 2020
• The Developer has prepared costs templates setting out their assessment of the costs
of the Transmission Assets throughout the development of the Wind Farm.
We reviewed an earlier version of the cost template dated 31 January 2019 (the Ex-
Ante Cost Review) which culminated in the submission of our draft report dated
31 July 2019. Our report was considered by Ofgem in establishing the project’s ITV
Executive summary
Executive summary
Breakdown of Transmission Assets costs
CAT
Reference
Onshore substation CR5
• The 28 February 2020 CAT is summarised below:
• The 28 February 2020 CAT reflects a net increase in the cost of the Transmission
Assets of £13.71 million from the 21 November 2019 ITV. Capital costs decreased by
£ , but this was more than off-set by an increase in interest during
construction of £ . The principal movements which result in the net
decrease in capital costs are:
− the removal of unrealised remaining budgeted costs and certain actual costs being
lower than forecast
− the release of contingency provisions no longer required at FTV (£ )
− certain costs, which were disallowed by Ofgem at ITV, have been resubmitted by
the Developer in the 28 February 2020 CAT (£ )
• The full analysis of the variances summarised in the table opposite is presented at
Appendix G
The Wind Farm’s payment processes
• Ofgem has instructed us to establish the Wind Farm’s processes for making payments
to suppliers for directly and indirectly incurred costs
• The Developer has confirmed that all large value contracts for the Wind Farm have
been subject to a competitive tendering process. Based upon our review it appears
the Developer has suitable systems in place for the approval and payment of invoices
to contractors, including contract variations, and has further systems in place to
ensure that, where appropriate, the allocation of costs between the Transmission and
Generation Assets is properly recorded
Directly incurred costs
• Ofgem has instructed us to carry out certain procedures on the costs payable by the
Wind Farm to:
− ABB/NKT
− NKT
− Tideway
− Bladt
• The procedures have been carried out as required and our testing has included the
main contract costs for all four contracts and the variation orders for NKT and
Tideaway
• The OFTO allocation of the costs tested in relation to the four contracts totalled
£ and represent % of the total capital costs. A summary of
findings is set out on the next page
£
Executive summary
Summary of direct costs testing
Inv oices paid
Bladt - main contract
Summary of findings (continued)
Directly incurred costs (continued)
• We have verified that all costs tested, totalling £ , have been invoiced
and paid. However, we note that this is £ higher than the contract costs in
the 28 February 2020 CAT due to the following amounts not being submitted in the
28 February 2020 CAT:
− VO to the NKT contract for EUR (£ ) in relation to
abortive jointing works
to the additional scope of rock placement at array cables
− EUR (£ ) relating to six Tideway invoices (as detailed in
Appendix D) that have not been included in Tideway costs in the 28 February
2020 CAT. The Developer has confirmed that this is because EUR
relates to Generator costs and EUR which has been included in the
28 February 2020 CAT but in construction at the allocation rate of %
− four amendments to the Bladt contract totalling EUR (£ )
which were disallowed at ITV and have not been resubmitted in the 28 February
2020 CAT. Amendments (totalling £ ) are for acceleration
payments to maintain the fabrication schedule for the three offshore substations.
Executive summary (continued)
Executive summary
Summary of supplier confirmations Paid per
supplier confirmation
• We note that the Bladt contract costs include £ of costs that were
disallowed by Ofgem at ITV. This is further detailed in Appendix G
• In addition, due to the size and value of HOW01, we have been instructed by Ofgem
to send supplier confirmation emails to verify the costs payable by the Wind Farm to
a further three suppliers (Siemens, J Murphy & Sons and Balfour) as detailed in the
table below which sets out a summary of our findings
Executive summary
e
11
Function
• The OFTO allocation of the costs tested in relation to the above three contracts
totalled £ and represent % of the total capital costs
• With the exception of £ , all of the costs have been confirmed as paid by
the supplier. Of this, amount:
−
−
• SCADA costs are allocated at a rate of % to the Transmission Assets and therefore
of the total amount in relation to the Siemens, Metering – Auxiliary System costs of
£ , only £ have been included in the 28 February 2020 CAT
(and £ are non-OFTO amounts)
• £ in relation to VO to the Siemens, RP 220kV reactor contract and
£ in relation to VO to the Balfour contract were disallowed by Ofgem at
the ITV and have not been resubmitted in the 28 February 2020 CAT
• We note that J Murphy & Sons costs in the 28 February 2020 CAT include over
£ of costs relating to VOs which were disallowed at ITV. These are
further detailed in Appendix G
• In total, we have verified direct costs payable by the Wind Farm in relation to seven
contracts, totalling £ ( % of the total capital costs) in relation to the
Transmission Assets
Indirectly incurred costs
• Ofgem has instructed us to carry out certain procedures in relation to a sample of
indirect costs payable by the Wind Farm
• We have been provided with a breakdown of project management support services
costs, employee rates according to area of work and verified a sample of these costs
to underlying records. The breakdown is in the form of a time registration report,
ICP hours report and an invoice which creates the costs based on the time
registration reports. The time registration report lists all personnel and project roles,
durations and actual rates
• Costs have been allocated to the Transmission Assets based upon the time spent
between the transmission and generation businesses by Ørsted’s staff and the external
contractors who worked on the Wind Farm development. Shared resource costs have
been allocated to the Transmission Assets using the updated Capex allocation rate of
% (previously %). This is further detailed in Section 3
• Our testing in relation to indirect costs (on a random sample of five employees) is
summarised below
Executive summary
Conclusion
• Our review of the Wind Farm’s processes and procedures has indicated that the
Developer has suitable policies for the approval and payment of goods and services
received, including for the allocation of costs where appropriate between the
Transmission and Generation Assets
• On the basis of our review of the information and the explanations received to date
in relation to the sample of directly and indirectly incurred costs that we have been
asked to review, we can confirm:
− that they are supported by invoices, ledgers and bank statements that indicate that
they have been incurred or are due; and
− that the relevant cost is included within the 28 February 2020 CAT
• This is subject to the following five proposed adjustments to the cost of the
Transmission Assets:
− to increase for additional amounts paid for the testing of
land transition joints
and therefore not reflected in the 28 February 2020 CAT
− to decrease to reflect the actual costs incurred in relation
to crossing agreements
− to decrease the to reflect the final amount
paid under the contract
These adjustments (a net decrease of £ ) would result in a revised cost of the
Transmission Assets (excluding IDC) of £
Recommendations for follow up
• In addition, we recommend that Ofgem should follow up the below with the
Developer:
− several costs disallowed by Ofgem at ITV have been resubmitted by the
Developer in the 28 February 2020 CAT. We recommend that Ofgem should
review these previously disallowed costs to consider whether the grounds for
exclusion at ITV are still applicable
− the Developer has only provided us with a high level calculation for the Capex
allocation rate and not a detailed calculation of this allocation rate and therefore
we are unable to comment further on the reasonableness of the rate. As such, we
recommend that Ofgem should consider this further and see whether it is able to
obtain a more detailed calculation from the Developer
− we also recommend that Ofgem should discuss the WFW legal costs and OFTO
transaction costs (totalling £ ) included in the 28 February CAT further
with the Developer. These estimated costs relate to external consultancy costs,
costs associated with undertaking the cost assessment and legal costs relating to
the transfer of the asset to the OFTO
Executive summary
Section 2: Introduction and background
01. Executive summary
CAT
Reference
Onshore substation connection CR5
Reactiv e substation CR6
Introduction
Instructions
• Grant Thornton has been instructed by Ofgem to prepare a report on our review of
the cost information and 28 February 2020 CAT for the Transmission Assets of the
Wind Farm, prepared for Ofgem by the Developer (the Ex-Post Cost Review). This
review is limited to the procedures set out below, and in particular to a sample of
costs which have been selected by Ofgem
• This report reflects the 28 February 2020 CAT together with information and
explanations received by Grant Thornton up to and including 6 August 2020. Our
report does not therefore reflect any information, or the outcome of discussions held
after that date
Introduction and background
• Throughout the development of the Wind Farm, Ofgem has required the Developer
to submit cost templates which set out both the estimated and actual costs that will be
or have been incurred in relation to the Transmission Assets
• At the beginning of 2019, we conducted reviews of the cost template for the
Transmission Assets, based upon the cost template submitted to Ofgem dated
31 January 2019 (the Ex-Ante Cost Review). At this stage, although construction of
the Transmission Assets was well under way, as there remained a degree of
uncertainty over a number of costs, a contingency provision of £ (which
equated to % of the pre-contingency capital costs) was included in the Grant
Thornton ex-ante report. The contingency cost remained unchanged at ITV
• Further to the Ex-Ante Cost Review, Ofgem set the ITV in November 2019. This
was based upon the Transmission Assets costs included in our draft report (dated
31 July 2019), and adjusted for particular issues that had been highlighted in our
report and through Ofgem’s review as follows:
Introduction (continued)
• The main purpose of the Ex-Post Cost Review of the Wind Farm's Transmission
Assets is to determine whether a sample of costs, selected by Ofgem, which have
been included within the 28 February 2020 CAT prepared by the Developer for the
Transmission Assets, are appropriately stated, and whether selected costs not directly
attributable to either the generation or transmission businesses have been allocated to
the Transmission Assets on a reasonable basis. In particular we have been asked to:
− establish the processes and policies undertaken by the Wind Farm for making
payments to suppliers for directly and indirectly incurred costs
− in relation to directly incurred costs, for four selected contracts, trace expenditure
from the cash flow schedule to the contract, the invoice and the accounting
ledgers of the Wind Farm, and to bank statements, and reconcile the costs
included on the invoice schedule to the 28 February 2020 CAT, and for a further
three selected contracts, reconcile costs provided by supplier confirmation emails
to the 28 February 2020 CAT
− in relation to indirectly incurred costs, for a sample of transactions, trace from the
28 February 2020 CAT to journal entries made on the accounting system, and
confirm the amount allocated has been determined as prescribed in the stated
allocation methodology, using appropriate metrics in respect of the allocation of
costs between transmission and generation
− compare the costs at 28 February 2020 to the ITV, and obtain explanations for
variances between the costs at the two dates
• If further information is produced and brought to our attention after service of this
report, we reserve the right to revise our opinions as appropriate
• This work does not constitute an audit performed in accordance with Auditing
Standards
• Except to the extent set out in this report, we have relied upon the documents and
information provided to us as being accurate and genuine. To the extent that any
statements we have relied upon are not established as accurate, it may be necessary to
review our conclusions
• The figures and tables in this report have been prepared using Microsoft Excel. The
report may therefore contain minor rounding adjustments due to the use of
computers for preparing certain calculations
Background
• HOW01 is part of the wider Hornsea development zone, which has a total planned
capacity of up to 5.4GW and is divided into four sub-projects; HOW01 (1,218MW),
HOW02 (up to 1,386MW), HOW03 (up to 2,400MW) and HOW04 (approximately
1,000MW). HOW01 is the first project to be built in the zone
• HOW01 is a 407km² Wind Farm. The centre of the offshore site is approximately 120km East of the Humber Estuary in East Yorkshire. HOW01 uses 174 WTG’s. The Wind Farm is subdivided into three substation areas; West, Central and East
• The Transmission Assets primarily comprise three offshore substations, a reactive compensation station, three 220kV export cable circuits, an onshore substation, and two 400kV export cable circuits connecting the onshore substation to the National Grid Killingholme onshore substation
• Following the divestiture of 50% of Hornsea 1 Holdings Ltd on 26 November 2018,
ownership is now shared between Ørsted and funds managed by Global
Infrastructure Partner
• The construction of the Transmission Assets is complete, with offshore works being
completed in November 2019. The Wind Farm is fully operational and full export
capacity was achieved on 4 May 2020
Introduction (continued) and background
Introduction and background
Section 3: The HOW01 Ex-Post Cost Review
01. Executive summary
CAT
Reference
Ex-Post Cost Review
• The main purpose of the Ex-Post Cost Review is set out in Section 2
• The 28 February 2020 CAT for the Transmission Assets of the Wind Farm is
summarised below:
Accounting systems
• The Developer has confirmed that there have been no changes in the accounting
system since our Ex-Ante Cost Review
• All costs of the Wind Farm are posted to a WBS code in the SAP accounting system.
Costs have been grouped dependent on the cost activity that they relate to and
whether they relate entirely to the Transmission or Generation Assets, or to the Wind
Farm as a whole (shared costs)
Cost allocations
• Where project costs are not fully attributable to the Transmission Assets, ie they relate
to the Wind Farm as a whole (shared costs), estimates have been made of the
proportion of the costs that should be attributed to the Transmission Assets based on
the nature of the indirect costs
• Shared costs are typically indirect costs which are for the general benefit of the overall
project and include:
− project support functions eg procurement, cost control, health and safety
− general consultants eg legal/environment and consent
− offices – London, Denmark and on site
− SCADA equipment benefitting both the Transmission and Generation Assets
• The Developer has used two rates for the allocation of shared costs between the
Transmission Assets and Generation Assets
− most shared costs have been allocated to the Transmission Assets based upon
Transmission assets capital costs as a percentage of total Wind Farm capital
expenditure. The Developer has calculated the rate at %.
− SCADA costs have been allocated to the Transmission Assets at a rate of %
• We note that at ITV the general allocation rule for shared costs between Generation
Assets and Transmission assets was % and % respectively, based on the Capex
split at FID. This has been updated to % and % at FTV
• This allocation rate is than we have seen on previous projects. The
Developer has only provided us with a high level calculation and not a detailed
calculation of this allocation rate and therefore we are unable to comment further on
the reasonableness of the rate. As such, we recommend that Ofgem should consider
this further and see whether it is able to obtain a more detailed calculation from the
Developer
The HOW01 Ex-Post Cost Review
Process for making payments
• The main process used by the Developer for making payments for both directly and
indirectly incurred costs is set out below:
− as identified in our ex-ante report, one of the tools used by the Wind Farm in
achieving value for money is a competitive tendering process which was reviewed
in that report
− once the contract has been signed, a purchase order is set up by either the
Package Manager or the Contract Manager
− when a contract milestone has been met, the contractor sends a payment
certificate for approval by the Contract Manager
− after the payment certificate has been approved, the contractor submits an invoice
− the invoice is scanned and sent to the SAP co-ordinator who sends the invoice to
the purchase order raiser, the first approver
− after first approval has been completed, the invoice is sent automatically by SAP
to the second approver
− the approval thresholds for contracts and invoices are as follows:
− up to DKK can be approved by the Project Manager and Contract
Manager
Contract Manager approval
− over DKK requires approval from the Chair of the Steering
Committee
− if, at either stage, the invoice has not been approved SAP will send automatic
reminders to the approvers. Additionally, the SAP co-ordinator performs manual
checks of the status in workflow
− once the invoice has received second stage approval, it is released for payment to
the payment department. For the purposes of recording the costs in SAP, any
invoices not raised in UK sterling, are translated using the monthly average
exchange rates (from Oanda.com) applicable to the month they are released for
payment;
− the payment terms are inputted into SAP by the SAP co-ordinator when the
invoice is received and this drives the date on which the payment is made. No
further approvals are required at this stage, as approval of the invoice is deemed
to be approval of the payment. However, even if an invoice has been approved,
the payment can be stopped if required. Any invoice not raised in UK sterling,
will be paid on the spot rate on the date of payment and therefore this is likely to
differ from the amount per SAP which, as noted above, was calculated using the
monthly average exchange rate
Contract variations
• The Developer has confirmed that the process for payment of contract variations is
the same as for the general invoice system set out above
The Wind Farm’s financial processes (continued)
Summary of directly incurred costs selected for testing
CAT
Reference
J Murphy & Sons
Review of directly incurred costs
• Ofgem has selected the following contracts of directly incurred costs for review:
• Ofgem has directed that our work in relation to four of these contracts (ABB/NKT,
NKT, Tideway and Bladt) covers the following:
− trace expenditure from the cash flow schedule to the relevant contract or other
source record, and from the contract trace to an invoice(s) or journal;
− trace the invoice through the purchasing system;
− trace the invoice through to the payment system; and
− trace the payments through to the bank account
• In addition, due to the size and value of HOW01, we have been instructed by Ofgem
to send supplier confirmation emails to verify the costs payable by the Wind Farm to
a further three suppliers (Siemens, J Murphy & Sons and Balfour)
• Our testing in relation to these contracts is further detailed below, and our findings
are summarised in the tables on the following pages
Direct costs testing - Invoices paid
• For each of the four contracts selected by Ofgem, we obtained a schedule of all
invoices paid under the contract and agreed the invoices recorded on the schedules to
the underlying invoice. In addition, we agreed all amounts to the purchase ledger
(with the exception of the Tideway costs detailed on page 21 and Appendix D) and
the payment of each to bank statements
• The detailed testing of invoices paid for each of the four contracts is set out in
Appendices B to E
• During our review, the Developer provided us with two additional Tideway invoices,
totalling EUR (£ ) which have not been included in the 28 February
2020 CAT as these were received in 2020, ie after the cut off date for the FTV CAT.
As such, we propose an adjustment to increase costs included in the 28 February
2020 CAT by £
• Our review of invoices paid by the Developer, relating to the four contracts selected
by Ofgem, confirmed payment to the contractor and raised no areas of concern
Review of directly incurred costs
Review of directly incurred costs (continued)
Direct costs testing - Amounts not submitted in 28 February 2020 CAT
• Amounts not submitted in the 28 February 2020 CAT comprise
− VO to the NKT contract for EUR (£ ) in relation to
abortive jointing works
− VO to the Tideway contract for EUR (£ ) in relation to
the additional scope of rock placement at array cables
− costs totalling EUR (£ ) relating to Tideway invoices. Our
direct cost testing identified six Tideway invoices, each with total invoice costs
greater than the invoiced amounts included in the Tideway costs in the
28 February 2020 CAT (and ledger). The Developer has confirmed that this is
because EUR relates to Generator costs and EUR has
been included in the 28 February 2020 but within construction costs, allocated at
the Capex allocation rate of %. Details of the invoices, with the additional
amounts identified in blue text, are set out in Appendix D.
− four amendments to the Bladt contract totalling EUR (£ )
which were disallowed at ITV and have not been resubmitted in the 28 February
2020 CAT
Supplier confirmations – Amounts disallowed at ITV
• Amounts disallowed at ITV represent amounts that were disallowed by Ofgem at the
ITV and have not been resubmitted in the 28 February 2020 CAT, being
£ in relation to VO to the Siemens, RP 220kV reactor contract and
£ in relation to VO to the Balfour contract
Summary of direct costs testing
Inv oices paid
Supplier confirmations – Non-OFTO amounts
• Amounts not related to the Transmission Assets represent amounts paid to
contractors which related to the Generation Assets
• SCADA costs are allocated at a rate of % to the Transmission Assets and therefore
only £ in relation to the total Siemens, Metering – Auxiliary System costs
of £ have been included in the 28 February 2020 CAT (and £
are non-OFTO amounts)
• A further EUR (£ ) has been invoiced by in relation
to the Reactive Plant 220kV. This was not confirmed in the supplier confirmation
email as the amount was on a different PO. We have agreed this amount to the
invoice and agreed payment to a screenshot from the system
• £ was included in the 28 February 2020 CAT for additional amounts to be
invoiced in relation to the contract. However, the Developer has confirmed
that this is no longer required and therefore an adjustment is proposed to remove this
cost from the 28 February 2020 CAT
Costs disallowed at ITV
• We note that the 28 February 2020 CAT includes £ of Bladt contract
costs and over £ of costs relating to VOs to the J Murphy & Sons
contract that were disallowed by Ofgem at ITV and have been resubmitted at FTV.
These amounts are further detailed in Appendix G
Summary of supplier confirmations Paid per
supplier confirmation
CAT
Reference
Function
Project management costs
• Ofgem has directed that our work in relation to project management costs covers the
following:
− agree costs from each individuals timesheet to the system
− agree corresponding payment from the project
• Our detailed testing in relation to project management costs is set out in Appendix F,
and our findings are summarised in the below table:
• Our testing of project management support services costs demonstrated that costs
have been paid as stated
• For the avoidance of doubt, we have not verified the suitability of the hourly rates (as
set out in the Construction Agreement between Hornsea 1 Ltd and OWP) charged to
the project by Ørsted
Movements in the cost assessment
• The movements between the ITV set on 21 November 2019 and the most recent cost
assessment of 28 February 2020 are summarised in the following table:
• The 28 February 2020 CAT reflects a net increase in the cost of the Transmission
Assets of £13.71 million from the 21 November 2019 ITV. However, interest during
construction has increased by £ whilst capital costs have decreased by
£ . The principal reasons for the £ net decrease in capital
costs are detailed below
− an overall decrease of £ in relation to offshore site preparation and
electrical components costs (CR2) as a result of actual costs being lower than
estimated and the removal of remaining budgets
Review of indirectly incurred costs and movements in the cost assessment
Movements in the cost assessment (continued)
£
− a £ decrease in electrical component costs ( ) due to actual costs
incurred being lower than forecast
− a £ decrease in
SCADA resources costs due to efficient execution of the SCADA package
− the removal of £ of costs ( ), all of which have been
removed from the 28 February 2020 CAT
− £ release of contingency provisions no longer required at FTV
− £ of costs, disallowed by Ofgem at ITV, have been resubmitted by
the Developer in the 28 February 2020 CAT
The full analysis of the variances is presented at Appendix G
Impact of Cost Assessment Review
• Following our review of the 28 February 2020 CAT, as detailed above, we propose
the following adjustments to the 28 February 2020 CAT:
− an increase of £ for additional amounts paid to ORE Catapult
Development Services Limited for the testing of land transition joints
− an increase of £ to the Tideway contract costs included in for two
invoices received in 2020, ie after the cut-off date for the 28 February 2020 CAT
and therefore not included
− a decrease to costs by £ to reflect the actual costs incurred for VPI
Immingham LLP invoices in relation to crossing agreements
− a decrease of £ to the LS Cable costs for VOs included in
− a decrease of £ to to reflect the final amounts paid for the Balfour
contract
• These five adjustments would result in a net decrease of £ and a revised cost
of the Transmission Assets (excluding IDC) of £
• We are aware that Ofgem has agreed further adjustments to the 28 February 2020
CAT, for example, in relation to disallowed costs. We note that we have not sought
additional explanations from the Developer in relation to such adjustments nor
included them in this report
Recommendations for follow up
• As highlighted above and further detailed in Appendix G, several costs disallowed at
ITV have been resubmitted in the 28 February 2020 CAT. We recommend that
Ofgem should review these previously disallowed costs to consider whether the
grounds for exclusion at ITV are still applicable
• The Developer has only provided us with a high level explanation for the Capex
allocation rate of % and not a detailed calculation of this allocation rate and
therefore we are unable to comment further on the reasonableness of the rate. As
such, we recommend that Ofgem should consider this further and see whether it is
able to obtain a more detailed calculation from the Developer
• As detailed in Appendix G, included in CR9 “Transaction costs” are £ of
estimated legal costs and £ of estimated OFTO transaction costs relating
to external consultancy costs, costs associated with undertaking the cost assessment
and legal costs relating to the transfer of the asset to the OFTO. We recommend that
Ofgem should discuss these costs further with the Developer
Movements in the cost assessment and Impact of Cost Assessment Review
Appendices
A. Restrictions on circulation, disclosures of interest, forms of report
and information relied on
B. ABB/NKT invoice review
C. NKT invoice review
D. Tideway invoice review
E. Bladt invoice review
F. Indirect costs review
G. Movements between the cost templates
Restriction on circulation
• Grant Thornton does not accept or assume responsibility, duty of care, liability or
other obligation to any third party other than Ofgem who, as a result, either directly
or indirectly, of disclosure of the whole or any part of this report by Ofgem, receives,
reads or otherwise obtains access to this document. Any party relying on this report
does so entirely at their own risk
• In the preparation of our report, Grant Thornton has been provided with material by
Ofgem (and by third parties at Ofgem's request) relating to third parties. We have
relied upon warranties and representations provided by Ofgem that it is fully entitled
to disclose such information to us for inclusion within our report, free of any third
party rights or obligations, and that Ofgem will only permit circulation of this report
in accordance with any rights to confidentiality on the part of any third party. Any
objections to the inclusion of material should be addressed to Ofgem. Accordingly,
Grant Thornton acknowledges no duty or obligation to any party in connection to
the inclusion in the report of any content referring to any third party material or the
accuracy of such material
Disclosures of interest
• To the best of our knowledge, we have no connections with any of the parties or
advisors involved in this matter, beyond normal commercial relationships, which
would influence our report in any way
Forms of report
• For your convenience, this report may have been made available to recipients in
electronic as well as hard copy format. Multiple copies and versions of this report
may therefore exist in different media and in the case of any discrepancy, the final
signed electronic copy should be regarded as definitive
Information relied on
• Grant Thornton has relied upon the following information in reviewing the cost
assessment for the Wind Farm’s Transmission Assets:
− the 28 February 2020 CAT, which includes actual costs incurred up to
31 December 2019 and accrued costs that will be incurred from that date up to
the closing out of all contracts
− schedules of invoices prepared for the contracts selected for review by Ofgem,
together with copies of invoices, bank statements and ledgers showing payments
of the invoices recorded
− schedules providing supporting information for the internal project management
costs with copies of invoices and bank statements showing payments of the
related invoices
− information and explanations provided to us by the Developer. This included an
online meeting with Ørsted on 14 May 2020 to discuss the Transmission Assets,
and subsequent email correspondence, up to 6 August 2020, with staff responsible
for the preparation of the 28 February 2020 CAT
A. Restrictions on circulation, disclosures of interest, forms of report and information relied on
Appendices
Inv oice no. Description Currency Inv oice date
Net inv oice v alue
EUR Date paid Agreed to inv oice Agreed to ledger Agreed to bank
B. ABB/NKT invoice review
Appendices
Net inv oice v alue
EUR Date paid Agreed to inv oice A
B. ABB/NKT invoice review (continued)
Appendices
Net inv oice v alue
Total
Appendices
Main contract
Total
Appendices
VOs
Net inv oice v alue
C. NKT invoice review (continued)
Appendices
VOs (continued)
Inv oice Agreed to inv oice Agreed to ledger Agreed to bank
Total
Appendices
Main
Appendices
Main
Appendices
Main
Appendices
Main
Appendices
Main contract (continued)
Net inv oice v alue
EUR Date paid
Appendices
VOs
Appendices
ce
39
VOs
Appendices
VOs
Appendices
VOs
Appendices
VOs
Appendices
VOs
Appendices
VOs
Inv oice n
Net inv oice v alue Net inv oice v alue Agreed to
inv oice
Appendices
VOs (continued)
Net inv oice v alue
EUR
GBP Date paid
Appendices
Net inv oice v alue
EUR Date paid Agreed to inv oice Agreed to ledger
Agreed to bank
Appendices
Net inv oice v alue
Agreed to bank
Appendices
Net inv oice v alue
Agreed to bank
Appendices
Project management costs
• The Developer has outlined the process for allocating project management costs to
the Transmission Assets. The process is as follows:
− employees register their time, usually on a monthly basis, in SAP. Each posting
has a document number
− the document number is linked to an invoice
− the invoice is paid as part of the total monthly payment to the vendor
− the total monthly vendor payment is shown on the bank statement/IHC
statement which notes the payment document number
• As instructed by Ofgem , we selected a sample of five individuals for us to test the
above process
• The Developer has provided details from these five employees' timesheet records. We
have traced these to the invoices being raised, posted on the system and paid as set
out in the table below
• We note that registers her
time in cost element (ie the cost element of ),
. Further, no payment is made
F. Indirect costs review
March 2019 cost
bank
CAT
Reference
Total 1,216,676,508 1,230,391,279 13,714,771
• We have been instructed to compare the total Transmission Asset costs as set out in
the 28 February 2020 CAT with the total Transmission Asset costs included within
the ITV at 21 November 2019, and to obtain explanations for cost variances between
the two dates. The movement is summarised in the table below:
Offshore substations
• Offshore substation costs have increased by a net amount of £ , primarily
as a result of:
− £ of costs disallowed at ITV have been resubmitted by the Developer
in the 28 February 2020 CAT
− a £ increase to correct the double-counted disallowed helideck costs
− the release of the £ contingency provision no longer required at FTV
− an overall decrease of £ in relation to offshore site preparation and
electrical components costs as a result of actual costs being lower than estimated
and the removal of remaining budgets
• Further explanations for all of the significant movements are set out in the table on
pages 53 and 54
Submarine cable supply and installation
• Submarine cable supply and installation costs have decreased by a net amount of
£ , primarily as a result of:
£
− the removal of £ for “Tideway pending VO”
− £ of NKT ABB HV Cables design costs disallowed at ITV have been
resubmitted by the Developer in the 28 February 2020 CAT
− costs totalling £ had been reallocated from CR8
pages 55 to 57
Appendices
• We have sought explanations from the Developer for the reasons for the significant
movements in each of the cost categories and these are summarised below
Project common costs
• Project common costs have decreased by a net amount of £ , with costs
totalling £ being reallocated to CR3 (submarine cables) and CR4
(onshore cables)
page 52
Land cable supply and installation
• Land cable supply and installation costs have decreased by a net amount of
£ , primarily as a result of:
− £ of connection cable costs being reallocated to CR7
pages 58 and 59
Onshore substation
• Onshore substation costs have decreased by a net amount of £ . The three
significant movements (totalling a decrease of £ ) within this cost
category are:
− a £ decrease in electrical component costs due to actual costs incurred
being lower than forecast
− a £ decrease in SCADA resources costs due to efficient execution of
the SCADA package
page 60
Reactive substation
• Reactive substation costs have decreased by a net amount of £ , primarily
as a result of:
− additional Semco Maritime A/S costs of £ for finalisation of the RCS
− the removal of £ of Babcock costs, all of which have been removed
from the 28 February 2020 CAT
− the removal of remaining Bladt budgeted costs of £
page 61
Connection costs
• Connection costs have increased by a net amount of £ , with grid
connection modification costs being reallocated from CR4. £ of these
costs were included at ITV and an additional £ has been incurred
since ITV
page 62
Transaction costs
• Transaction costs have increased by a net amount of £ , of which the only
significant movement relates to . Resource costs have increased by
£ as a result of delay to the transaction, such that the forecast hours have
increased from to hours
• We note that WFW legal costs have increased by £ (to £ ) for
the preparation of additional transaction documents. The Developer confirmed that
these cost estimates are based on previous projects and are yet to be incurred
• The 28 February 2020 CAT also includes an estimate of £ for costs
associated with the OFTO transaction for which no supporting documentation or
calculations are available. This estimate has been based on the spend on previous
projects and scaled up due to the size of HOW01
Interest during construction
• Interest during construction has increased by £ . As this is outside the
scope of this review no further work has been performed in this area
G. Movements between the cost templates (continued)
Appendices
Project common costs
Appendices
Offshore substations
Appendices
Offshore substations (continued)
Appendices
Submarine cables supply and installation
21 Nov ember 2019
Appendices
Submarine cables supply and installation (continued)
21 Nov ember 2019
Appendices
Submarine cables supply and installation (continued)
21 Nov ember 2019
Appendices
Onshore cables supply and installation
21 Nov ember 2019
Appendices
Onshore cables supply and installation (continued)
21 Nov ember 2019
Appendices
Onshore substation
Appendices
Reactive substation
Appendices
Connection costs
Appendices
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or more member firms, as the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms
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