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Statement by the President of the States' Trading Supervisory Board

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Wednesday 27 March 2019

Undersea electricity cable

Mr Bailiff, Members of the States,

I am grateful for this opportunity to update the Assembly today on Guernsey Electricity's submarine cable strategy and the steps it has been taking to secure the ongoing importation of electricity following the failure of the existing cable to Jersey - GJ1 - last year.

Members will be aware that the GJ1 cable forms part of the wider Channel Islands Electricity Grid, which also includes three submarine cables between Jersey and France. The Grid itself is a joint venture, with ownership shared between Jersey Electricity and GEL. The electricity we have imported from France since 2000 is contractually guaranteed to come from low carbon sources and over time has generally proven to be considerably cheaper than available local alternatives.

The benefits of the Grid are thrown into sharp relief when things go awry and, as we know, the GJ1 cable has suffered a series of significant failures. The most obvious consequences of a failure are substantial increases in operating costs and carbon dioxide emissions, both arising from the use of our on-island generators, which in turn rely on burning more expensive heavy fuel oil.

Offshore cable repair costs are also very significant and can range from between £5m and £10m depending on whether the repair is planned or reactionary and when it takes place. Repairs in the winter are generally more expensive, given the higher risk of poor weather disrupting the work of the cable laying vessels involved.

Members will recall that the cable first failed in 2012. This failure was completely unexpected. A subsequent forensic investigation of the failed section identified the cause and, importantly, the indicators that could be monitored from then on to identify future potential problems. As a result of that monitoring, GEL undertook a further pre-emptive repair to the cable in 2015. As we know, the latest failure was last year on 1st October, which came without warning, in spite of the improved monitoring arrangements in place.

Despite the repairs undertaken last year, I have to advise the Assembly that there remain significant concerns over the cable's integrity. Ongoing monitoring since the cable was re-energised has identified at least one further potential off-shore fault. The fibre optics that run through the cable have failed at the location concerned. These failures mirror the type of behaviour exhibited by the cable prior to the events in 2012 and 2015 and suggest that another failure is likely. For now, GEL is mitigating the situation by reducing import levels to preserve the cable and reduce the risk of another expensive repair, meaning it is only currently supplying one third of our requirements.

As such, our reliance on on-island generation continues. The impact on GEL's financial and environmental performance is significant. Prior to the current problems, GEL planned to meet over 90% of the Island's electricity requirements through low carbon imports, driven in part by the shareholder objectives set for the Company by the STSB to reduce the carbon intensity of electricity consumed in the Island. However, the reliance on local generation means that emissions have increased by around four fold and additional generation costs are running at between £800,000 and £1m per month. GEL is forecasting a financial loss of £5m for the current financial year.

By any measure, this is not a tenable position. However, GEL has kept the STSB fully and regularly briefed on the matter and we have been reassured by GEL's focus on the need not just "to keep the lights on"in the short-term, but also on ensuring that the Island has an affordable, secure and environmentally sustainable supply of electricity in the long-term.

So, today I am pleased to advise the Assembly that GEL has now entered into a contract for a replacement cable between Guernsey and Jersey that will restore very quickly a resilient supply of low-carbon and affordable electricity imports to the Island. As shareholder, the business case for this project has been approved by the STSB. The cable is now being manufactured and a cable laying ship has been secured. It is expected that the new cable will enter service this October.

At this point, it is worth remembering that in 2014, the States considered a policy letter on the funding arrangements for a new cable between Guernsey and Jersey following the cable failure in 2012. The estimated cost of that project at the time was circa £45m. The States agreed to finance the installation of a new cable by either guaranteeing any loans that GEL might need from third parties or by offering the company a loan direct from the States.

In the event, in 2015, GEL went on to make the pre-emptive repair to the cable that I have already mentioned. After completing its analysis of the cable's behaviour in the months thereafter, it was sufficiently confident in the longevity of GJ1 that it decided to defer progressing with the project and focus its attention on the development of a business case for a direct cable to France. I use the word "defer" deliberately because, with an expected life of at least 25 years, there was always going to be a need to replace the cable - it is a question of when, not if.

However, the scope of the project has been reduced since 2014. The expectation then was that the new cable would run independently of the old, in turn requiring costly land and buildings at both ends for the new sub-stations that would have been required to connect it. Now, it is planned to completely decommission the old cable, meaning that the new one can be connected to the existing onshore infrastructure without new sub-stations being required.

The replacement cable project is now expected to cost £30m. It will be funded by long-term loans, some of which will be provided commercially and some of which - approximately £15m - the Policy & Resources Committee has agreed to provide using the States' bond proceeds.

The new cable is to be manufactured and installed by NKT, a world leader in cable technology and installation. The original cable was installed in 2000 by ABB HVC, a company which was recently acquired by NKT. This is a point on which the STSB has particularly pressed GEL and the Company has provided the following assurances:

GEL has assured my Board that the post-tender negotiations that were undertaken with NKT included significant discussions about the existing cable and its performance, given its anticipated design life of 25 years. The manufacturer worked proactively with GEL to assess and understand these issues and the impact of the repairs that have been necessary. As a result, a commercial settlement agreement has been reached between GEL and NKT in lieu of the existing cable's historic performance as part of this contract.

The terms of this settlement agreement are confidential. I know that there will be Members of this Assembly who are uncomfortable with that, but this is a reflection of the commercial environment in which GEL operates. Without the pre-requisite confidentiality provisions in place, GEL would have been unable to secure the agreement it has. GEL has briefed the STSB, as shareholder, on the terms of the agreement. I can assure the States that my Board is satisfied that the GEL Board Members have approached those negotiations robustly and with the best interests of both the Company and the Island at the forefront of their minds. The STSB was also satisfied that the alternative, which most likely could have involved lengthy and expensive litigation with no guarantee of success, was not in the best interests of the community.

GEL's long-term plans had always included provision for the replacement of the GJ1 cable. The Company has brought forward this investment to ensure that the Island can maximise its imports of low-carbon and affordable electricity as soon as possible. I am conscious that this gives rise to questions on both the impact on tariffs and to GEL's longer term cable strategy.

In considering tariffs, we should remember the States has previously agreed as long ago as 2012 that GEL would need to borrow in future to fund its long-term major capital investment requirements. Funding such assets through borrowing means their cost is spread over the period they are available for both today's and tomorrow's consumers in a fair and equitable way. GEL's business case for the new cable is based on an assumed tariff cost increase of 2.7% to fund the capital and interest payments involved. To put this into perspective, this equates approximately to an additional £29 per annum for an average Economy 12 customer. Under the current regulatory legislation for GEL, any such tariff increases would be subject to the approval of CICRA. In the circumstances, the STSB's view is that there should be no expectation of a dividend payment by GEL to the States and that any surpluses the company does make should be available either to reduce the impact on customers or for reinvestment in the business.

Turning now to the longer-term impact on GEL's subsea cable strategy. GEL continues to develop a business case for a direct cable link from Guernsey to France, known as GF1. Much preliminary work is ongoing, but this project is not due to come to fruition until the mid-2020s. Both the company and the STSB believe that security of supply is of fundamental importance, not only to customers but also for the overall business confidence on which the Island depends. A second connection direct to France, together with a replacement cable to Jersey, would not only improve security of supply, but would also considerably reduce our dependence - and the amount we have to spend - on the on-island generating plant at the power station either for back-up purposes or to meet peaks in demand that a single cable cannot accommodate.

Members will be aware that GEL has been proactively developing renewable energy initiatives, the most tangible examples being the solar array at the power station and Guernsey Post's headquarters. GEL's research has concluded that a strategy based on two submarine cables will actually help to enable the further adoption of renewables locally.

However, there are many inter-dependent issues that need to be balanced here, including the security, affordability, sustainability and independence of our electricity supplies. A decision on a second cable direct to France cannot be taken in isolation and can only be considered once the States has updated its Energy Policy. This policy will be pivotal for setting the direction for such a significant investment decision. To that end, the STSB and GEL look forward to publication of the updated energy policy for discussion and debate by the States shortly.

Sir, Members of the States, in closing, I think it would be fair to characterise the last few months as having been very testing for GEL. It would be very easy to underestimate the substantial amount of work that has been involved for the Company, its Board and staff in accelerating by several years its plans to replace the GJ1 cable. Both I and my Board have been reassured by the resolute focus that the GEL team has shown in addressing the challenge and the commitment it has demonstrated to getting back on the right strategic, financial and environmental course. I commend the Company for the work done so far, which I am sure will stand it in good stead as it now moves forward with the project to install the new cable later this year.

 

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