hornsea offshore wind farm transmission assets

© 2020 Grant Thornton UK LLP | Hornsea Offshore Wind Farm Transmission Assets | 11 November 2020

Hornsea Offshore Wind Farm

Transmission AssetsEx-Post Cost Review

11 November 2020


Chartered Accountants

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2

11 November 2020

Dear Sirs

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

Grant Thornton UK LLP

Grant Thornton UK LLP

30 Finsbury Square

London

EC2P 2YU

T +44 (0)20 7184 4301

www.grantthornton.co.uk

Office of Gas and Electricity Markets

10 South Colonnade

Canary Wharf

London

E14 4PU

© 2020 Grant Thornton UK LLP | Hornsea Offshore Wind Farm Transmission Assets | 11 November 2020 3

Glossary

ABB ABB AB

Babcock Babcock Marine (Rosyth) Limited

Balfour Balfour Beatty plc

BBW02 Burbo Bank Extension

BCR Budget change request

Bladt Bladt Industries A/S

CAT Cost assessment template

Capex Capital expenditure

CR Cost reporting

Developer Ørsted/Ørsted A/S

DKK Danish Krone

EPC Engineering, procurement and construction

EUR Euro

FID Final investment decision

FTV Final transfer value

FX Foreign exchange

GBP Great British Pound

Generation Assets The generation assets of HOW01

Global

Infrastructure

Partners

Global Infrastructure Management, LLC

GIS Gas insulated switchgear

Grant Thornton Grant Thornton UK LLP

HOW01/the Wind

Farm

Hornsea Project One Offshore Wind Farm

HOW02/HOW03/

HOW04

Hornsea Project Two/Three/Four Offshore Wind Farm

ICP Inter company payment

IDC Interest during construction

IHC In-house cash

ITV Indicative transfer value

J Murphy & Sons J. Murphy & Sons Limited

LS Cable LS Cable & System UK Limited

NGET National Grid Electricity Transmission plc

NKT NKT Cables A/S

Ofgem The Office of Gas and Electricity Markets

OFR One Fixed Rate

OFTO Offshore transmission owner

ONSS Onshore substation

Ørsted Ørsted A/S

OSS Offshore substation

OTM Offshore transmission modules

OWP Ørsted Wind Power A/S


Glossary (continued)

PO Purchase order

QHSE Quality, Health, Safety & Environment

RCS Reactive compensation station

SCADA Supervisory control and data acquisition system

Siemens Siemens A/S/Siemens AG

STDL Siemens Transmission and Distribution Limited

Tideway Tideway BV

Transmission

Assets

The transmission assets of HOW01

VO Variation order

WBS Work breakdown structure

WFW Watson Farley & Williams

WTG Wind turbine generator


Contents

1. Section Page

1. Executive summary 6

2. Introduction and background 13

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

B. ABB/NKT invoice review 27

C. NKT invoice review 30

D. Tideway invoice review 33

E. Bladt invoice review 46

F. Indirect costs review 49

G. Movements between the cost templates 50


Section 1: Executive summary

01. Executive summary

02. Introduction and background

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

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£

Project common costs CR8

Offshore substations CR2

Submarine cable supply and installation CR3

Land cable supply and installation CR4

Onshore substation CR5

Reactiv e substation CR6

Connection costs CR7

Transaction costs CR9

Total capital costs

Interest during construction

Total 1,216,676,508 1,230,391,279 13,714,771

Transmission Assets cost summary

• 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

Summary of findings

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

• We note that the 28 February 2020 CAT includes variation orders totalling

£

Executive summary (continued)

Executive summary


Summary of direct costs testing

Inv oices paid

€

Inv oices paid

£

Total inv oices paid

£

Amounts not submitted in

28 February 2020 CAT

£

Immaterial difference

£

Total per


£

ABB/NKT - main contract

NKT - main contract

NKT - v ariation orders

Tidew ay - main contract

Tidew ay - v ariation orders

Bladt - main contract

Total

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

− VO to the Tideway contract for EUR (£ ) in relation

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


Summary of supplier confirmationsPaid per

supplier confirmation

€

Paid per


£

Amounts

disallow ed at ITV

£

Non-OFTO

amounts

£

Immaterial

difference

£

Total per


£

Total



• 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

Summary of indirect costs testing

Function

March 2019

cost

DKK

March 2019

cost

£

Agreed to

timesheet

/inv oice

Agreed to

ledger

Agreed to

bank

Total



• 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

− to increase for invoices received in 2020

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 costs in relation to

− 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






CAT

Reference

31 July 2019

Grant Thornton

ex -ante report

£

Adjustments per

Grant Thornton

ex -ante report

£

GT Adjustments not

applied at ITV

£

Ofgem

ex -ante

adjustments

£

21 Nov ember 2019

ITV

£





Onshore substation connection CR5




Total capital costs


Total 1,351,818,026 (6,510,349) 4,770,888 (133,402,058) 1,216,676,508

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

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






CAT

Reference

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£









Total capital costs


Total 1,216,676,508 1,230,391,279 13,714,771

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:

− general project management and administration

− 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 Wind Farm’s financial processes

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

− over DKK requires EPC Director/Programme Director and Lead

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

28 February 2020

CAT

£

% of total

Transmission Asset

capital costs

Direct costs testing


NKT - main contract





Supplier confirmations

Siemens

GIS 220kV

GIS 220kV VO

RP 220kV reactor

Reactiv e Plant

Reactiv e Plant 220kV

Metering - Aux iliary Sy stem

J Murphy & Sons

Balfour

Total

Total capital costs per CAT 9

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

• Amendments (totalling £ ) are for

. Amendment

(£ ) was created to close the outstanding dispute

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

€

Inv oices paid

£

Total inv oices paid

£

Amounts not submitted in


£

Immaterial difference

£

Total per



NKT - main contract





Total





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)

Supplier confirmations – Additional 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 confirmationsPaid per


€

Paid per


£

Amounts

disallow ed at ITV

£

Non-OFTO

amounts

£

Immaterial

difference

£

Total per


£

Total






CAT

Reference

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£









Total capital costs


Total 1,216,676,508 1,230,391,279 13,714,771

Summary of indirect costs testing

Function

March 2019

cost

DKK

March 2019

cost

£

Agreed to

timesheet

/inv oice

Agreed to

ledger

Agreed to

bank

Total

Review of indirectly incurred costs

Project management costs

• Ofgem has directed that our work in relation to project management costs covers the

following:

− select a random sample of five employees

− 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)

− the removal of remaining budgets in relation to the supply of cable ( ) totalling

£

− the removal of £ for “Tideway pending VO” ( )

− 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

B. ABB/NKT invoice review (continued)

Appendices


Main contract

Inv oice Agreed to inv oice A

Total

C. NKT invoice review

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

C. NKT invoice review (continued)

Appendices


Main

Inv oice

Agreed to

inv oice

A

D. Tideway invoice review

Appendices


Main

Inv oice

Agreed to

inv oice

A

D. Tideway invoice review (continued)

Appendices


Main

Inv oice

Agreed to

inv oice

A


Appendices


Main contract (continued)


Net inv oice v alue

EUR Date paid

Agreed to

inv oice

Agreed to

ledger

Agreed to

bank

Total


Appendices


VOs

Inv oice

Agreed to

inv oice

A


Appendices


ce

39

VOs

Inv oice

Agreed to

inv oice

A


Appendices


VOs

Inv oice

Agreed to

inv oice

A


Appendices


VOs

Inv oice

Agreed to

inv oice

A ed to

bank


Appendices


VOs

Inv oice n

Net inv oice v alue Net inv oice v alue Agreed to

inv oice

Agreed to Agreed to


Appendices


VOs (continued)


Net inv oice v alue

EUR

Net inv oice v alue

GBP Date paid

Agreed to

inv oice

Agreed to

ledger

Agreed to

bank

Total


Appendices



Net inv oice v alue

EUR Date paid Agreed to inv oice Agreed to ledger

Agreed to bank

statement

E. Bladt invoice review

Appendices



Net inv oice v alue


Agreed to bank

statement

E. Bladt invoice review (continued)

Appendices



Net inv oice v alue


Agreed to bank

statement

Total

E. Bladt invoice review (continued)

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

Appendices

Employ ee Function Actual hours

March 2019 cost

DKK

March 2019 cost

£

Agreed to

timesheet

/inv oice

Agreed to

ledger Date paid

Agreed to

bank



CAT

Reference

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£









Total capital costs


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 remaining budgets in relation to the supply of cable totalling

£

− amendments to decrease the Tideway contract costs by £

− 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

G. Movements between the cost templates

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 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

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£ Ex planation prov ided

)


Appendices


Offshore substations

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement



Appendices


Offshore substations (continued)

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement



Appendices


Submarine cables supply and installation

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£ Ex planation


Appendices


Submarine cables supply and installation (continued)

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£ Ex planation


Appendices


Submarine cables supply and installation (continued)

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£ Ex planation

Total


Appendices


Onshore cables supply and installation

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£ Ex planation


Appendices


Onshore cables supply and installation (continued)

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£ Ex planation

Total


Appendices


Onshore substation

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£ Ex planation

Total


Appendices


Reactive substation

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£ Ex planation

Total


Appendices


Connection costs

21 Nov ember 2019

ITV

£

28 February 2020

CAT

£

Mov ement

£ Ex planation

Total


Appendices


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hornsea offshore wind farm transmission assets

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