Eight Scottish Hydro Electric Transmission projects - Early Construction Funding and proposed licence modification

What this is about

Ofgem is consulting on whether to approve early construction funding (ECF) for eight transmission reinforcement projects proposed by Scottish Hydro Electric Transmission (SHET). The mechanism is the Accelerated Strategic Transmission Investment (ASTI) reopener — a tool Ofgem created to speed up strategic network build by letting transmission owners recover costs *during* construction rather than waiting until assets are commissioned and added to the regulatory asset base.

The context is straightforward: Scotland has a massive and growing mismatch between renewable generation capacity and transmission export capability. The constraint costs are already eye-watering — consumers pay hundreds of millions annually to curtail Scottish wind because the wires cannot carry the power south. These eight projects are part of the ASTI programme designed to close that gap. The question is not whether the projects are needed (that was settled when ASTI was established) but whether SHET should be allowed to draw down funding before construction is complete, and whether the proposed licence modification to Special Condition 3.41 is appropriate.

The £1.8bn price tag covers reinforcements across Scotland's transmission network. Early construction funding changes the cash-flow profile: instead of SHET financing the full build from its own balance sheet and recovering costs once the asset is in service, consumers begin paying during construction. This reduces SHET's financing risk and cost of capital — but it also means consumers start paying for assets that do not yet exist and may face cost overruns they have limited ability to challenge after the fact.

Options on the table

#### Approve early construction funding for all eight projects

This is the only substantive option on the table. Ofgem's consultation presents its assessment of all eight SHET applications and a proposed licence modification to give effect to the funding. The framing is "do you agree with our assessment" rather than "should we do this at all" — the principle of early construction funding under ASTI is already established policy.

Under this option, SHET's licence is modified to allow cost recovery through Transmission Network Use of System (TNUoS) charges during the construction phase. The money flows from all GB electricity consumers (TNUoS is a national charge, not a local one) to SHET's regulated revenue. The projects proceed on an accelerated timeline because SHET faces lower financing costs and reduced balance sheet pressure.

Who wins: SHET gets de-risked cash flow and lower cost of capital. Renewable generators in Scotland benefit if the projects reduce curtailment and enable earlier connections. Consumers benefit *eventually* if the projects are delivered on time and reduce constraint costs that currently inflate wholesale prices.

Who loses: Consumers bear construction-phase cost recovery risk. If projects are delayed or costs escalate, consumers are already paying for assets that are not delivering value. The mechanism also creates precedent: once early construction funding is normalised for transmission, it becomes harder to resist for other capital-intensive regulated activities. The Regulated Asset Base (RAB) model for Sizewell C operates on a similar logic — consumers pay during construction — and the political resistance to that model shows how contentious pre-completion cost recovery can be.

The deeper issue: This is a structural shift in who bears construction risk in regulated networks. Traditional price control regulation puts construction risk on the company: build it, commission it, then recover costs. ECF reverses that. The justification is speed — SHET can move faster if it is not constrained by its own financing capacity. But speed purchased with consumer risk needs to be matched by robust cost controls, and the consultation should be read carefully for what accountability mechanisms exist if costs exceed allowances.

Questions being asked

#### Early construction funding assessment

- Do you agree with our assessment of the eight SHET Early Construction Funding applications? [Ofgem is asking whether its evaluation of need, cost estimates, and delivery timelines for each project is sound. This is the substantive question — respondents with views on individual project costs or delivery assumptions should focus here.]

- Do you have any comments on our proposed licence modification? [This is about the legal mechanism. The modification to Special Condition 3.41 is the instrument that enables cost recovery. Respondents with views on the drafting, scope, or conditions attached to the modification should address this question. In practice, this is where arguments about consumer protection, cost caps, or clawback provisions would sit.]

The question set is notably narrow. Ofgem is not asking whether early construction funding is the right approach — that decision is already made. It is not asking whether alternative financing structures could achieve the same acceleration at lower consumer risk. The consultation is scoped to "do you agree with how we have applied the existing framework to these eight projects." This is typical of reopener consultations: the policy is set, and the consultation is on the application.

Respondents who want to challenge the principle of pre-completion cost recovery will find no question that invites that challenge. They would need to use the licence modification question as a vehicle for broader arguments about the ASTI framework itself.

How to respond

- Deadline: 27 April 2024 (now closed) - Status: Closed with decision - Contact: James Santos-Mansur, RIIOElectricityTransmission@ofgem.gov.uk - Decision document: [Eight Scottish Hydro Electric Transmission projects - Early Construction Funding and licence decision](https://www.ofgem.gov.uk) (linked from the consultation page)

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`★ Insight ─────────────────────────────────────` Early Construction Funding and the risk transfer pattern. ECF is one of several mechanisms (alongside the RAB model for nuclear and the ASTI framework generally) that shift construction-phase financial risk from regulated companies to consumers. The economic logic is that consumers benefit from lower cost of capital — SHET's weighted average cost of capital falls when it does not need to finance £1.8bn from its balance sheet. But lower cost of capital only benefits consumers if the savings are passed through, and if cost discipline is maintained when the company is spending someone else's money during construction.

TNUoS as a national levy. These are Scottish transmission projects, but TNUoS charges are socialised across all GB consumers. A factory in Cornwall pays the same transmission charge uplift as a business in Inverness. This is the "postage stamp" principle in transmission charging — and it is precisely what Ofgem's ongoing Transmission Access Reform and connections reform programmes are debating. Every ASTI approval reinforces the current cost-socialisation model. `─────────────────────────────────────────────────`