Offshore renewable energy: decommissioning guidance for Scottish waters

8. Cost estimates

8.1 Decommissioning programmes must set out a comprehensive breakdown of cost by category. The standard format for this is set out in Annex C.

8.2 The programme must set out who provided the costings, and how the accuracy of the figures has been assessed (for example via third party verification or an internal assurance process).

8.3 Costs must be calculated according to present day methods and technologies and should not include any learning rate assumptions. (The responsible person may propose to modify the programme at a later date where methods and expected costs have changed over time).

8.4 The responsible person should ensure that they take account of the most up to date evidence in framing their estimates for the costs of decommissioning their devices.

8.5 The estimated decommissioning costs will inform the financial security levels that are required to be made available to the Scottish Ministers. The purpose of the financial security is to enable the Scottish Ministers to decommission should the owner fail to do so and where there are no other parties liable for decommissioning. This means that the cost estimate and financial security levels will need to cover the amount it would cost the Scottish Ministers to organise and fund decommissioning. This may not necessarily be the same cost that the responsible person would pay. For example, an owner of an OREI may be planning on reducing costs through use of their own vessel or via preferential rates from an existing commercial relationship but those options would not be available to the Scottish Ministers.

8.6 The following sections provide advice on how to calculate / set out costs:

Optimism Bias

8.7 HM Treasury Green Book guidance should be utilised in the calculation of optimism bias. Optimism bias should be applied to the full cost of security, including exchange rate and inflation rate costs. Varying optimism bias rates can be applied to the different elements of decommissioning, based on the extent to which contributory factors are mitigated.

Contingency

8.8 All decommissioning programmes should include a contingency sum to account for increased costs that arise from unforeseen circumstances. Calculation of contingency should be done in line with the Treasury Green Book^[11].

Re-use of Infrastructure

8.9 The Scottish Ministers would not be able to re-use infrastructure in the event that decommissioning fell to them, and to date it has not been common practice to re-use infrastructure after a project ends. Therefore, we do not expect the default position in the decommissioning programme submitted at the start of the project to be that infrastructure will be re-used. Cost estimates should therefore include any recycling or disposal costs. Should it later be confirmed that the project is to be refitted and extended, a proposal can be made to the Scottish Ministers under Section 108 of the Energy Act to revise the decommissioning programme and financial security levels to reflect this. Where the project is being sold, please refer to paragraphs 5.27 to 5.30, which sets out when the Scottish Ministers would confirm that the original owner no longer has a role under the Energy Act.

Vessels and lifting equipment

8.10 Cost assumptions must be based on equipment which is currently available and should not make assumptions on savings that might occur as a result of future improvements in design. However, the responsible person can write to the Scottish Ministers under Section 108 of the Energy Act proposing a review of the costs as and when changes in technology have reached the stage of commercial viability.

Value Added Tax

8.11 Unlike the responsible person, the Scottish Ministers have no ability to recover Value Added Tax ("VAT") should it fall to them to decommission. Therefore, to allow for the possibility of the Scottish Ministers having to decommission infrastructure in internal waters and/or the territorial sea, VAT will have to be factored into financial securities where the VAT regime applies.

8.12 The VAT regime only applies within territorial waters (i.e. up to 12 nautical miles from the shore baseline). Therefore:

• where all the OREI infrastructure is within 12 nautical miles of the shore baseline, VAT on all decommissioning elements should be factored into financial securities
• for sites fully outside of 12 nautical miles of the shore baseline (i.e. relevant offshore windfarms which have sold off their transmission network), no VAT should be factored into financial securities
• some projects (such as tidal arrays or OFTOs) may be partially or primarily based outside 12 nautical miles of the shore baseline but would need to conduct a portion of decommissioning within 12 nautical miles (for example to remove export cabling). In such cases, VAT must be factored into financial securities for all decommissioning activity that takes place within 12 nautical miles of the shore baseline and excluded from all decommissioning activity that takes place outside 12 nautical miles of the shore baseline

8.13 Any changes to VAT rates or their application to decommissioning activities must be identified in decommissioning programme reviews throughout the life of the project.

Inflation

8.14 The responsible person should ensure that inflation across the lifetime of the project is included within the security. The rate at which inflation should be assessed is the Office of Budget Responsibility's ("OBR") forecast for inflation as measured by the Consumer Price Index ("CPI"). This should be done in several stages:

a) the cost of decommissioning should be calculated in the present day value.

b) when submitting the pre-construction decommissioning programme, the responsible person should forecast inflation up to the expected point of decommissioning, using the CPI inflation rate.

c) if the current OBR forecast does not go up to the expected point of decommissioning then an average inflation figure should be assumed for the years not yet covered by OBR forecasts. The average inflation rate should be calculated via the average over the years published by the OBR (starting from the current financial year). Developers will be able to seek guidance from the Scottish Government when preparing costings.

d) after the end of any subsidy period, the responsible person should continue to review on an annual basis whether estimated decommissioning costs have changed. This may require modifications to the level of securities provided so that the total decommissioning fund matches the revised costs.

Scrappage

8.15 The responsible person cannot offset scrappage value from their total cost assumptions, as the Scottish Ministers do not own it. The Scottish Ministers do not consider that it is possible to rely on estimates of scrap value as a form of security because the value can fluctuate substantially and therefore is not reliable. Whilst the Scottish Ministers understand that the responsible person may wish to rely on an assumption of scrappage reducing net commissioning costs for their internal rate of return calculations, this is a private matter for the company and not a relevant consideration in respect of decommissioning costs that might fall to the Scottish Ministers.

OFTOs

8.16 This guidance applies the same rules on calculating the level of costs and securities to each technology. OFTO owners should therefore take care in early discussions with Ofgem to check that any agreements on revenue streams will take into account the full costs of decommissioning as required by any approved decommissioning programme.

Independent audit

8.17 Independent audit of estimated decommissioning costs (and of the financial security proposed or available to meet them) may be required, either directly of the responsible person or by the Scottish Ministers appointing independent third party experts. The need for, timing and frequency of such audits will be determined on the matters presented in individual cases.