Holliday’s Way

Nigel Hawkins sees mixed messages in National Grid’s interim results.

Although last week’s 2013/14 interim results announcement from National Grid contained no surprises, the mixed messages that it conveyed were of real relevance to the UK utilities sector.
First, group chief executive Steve Holliday announced a 7.7 per cent increase in National Grid’s UK operating profit, which was boosted by a sharp increase in revenues from the France Interconnector.
Importantly, both its UK electricity transmission and gas distribution profits were up, despite the fact that the first six months of 2013/14 were the first period of the recently concluded – and unprecedented in length – eight-year RIIO pricing review, which stretches out to March 2021.
Overall, National Grid’s UK regulated businesses accounted for over 75 per cent of its operating profit. Returns from electricity transmission were £614 million compared with £547 million in the comparative period in 2012/13. The gas distribution figures were £456 million and £408 million, respectively.
In terms of gas transportation, the out-turn was less impressive, with operating profit for the period at £133 million compared with £162 million previously.
For investors, the overall message was reassuring. There was no pronounced fall in regulated revenues, which used to be characteristic of the first period of a new pricing review.
Second, beyond National Grid itself, Holliday’s trenchant views on the current state of UK energy policy merit comment.
He confirmed that, whereas National Grid had been planning for new generation capacity of 6GW to be added by March 2016, the revised expectation had slumped to just 2.5GW. Indeed, given all the major uncertainties in the energy sector, this adjusted figure may itself prove optimistic.
In addressing the lack of potential investors in UK generation, Holliday pinpointed the key factor as being “a function of the fact that they haven’t got clarity around the framework in which they are investing at the moment”.
With all the ongoing discussions about tackling the sharp rises in energy bills, these doubts persist, especially in light of the pledge by Labour leader Ed Miliband to impose a 20-month freeze on energy prices were his party to win the next general election in 2015.
Furthermore, there are now real doubts as to whether the Energy Bill will be enacted in its present form because its drafting preceded the recent political wrangling over energy policy.
It remains the case, too, that crucial investment issues, such as capacity credit payments, remain undefined.
After all, any major potential investor in long-term power station projects, where revenues have to be modelled over a lengthy time-frame of perhaps 40 years needs clarity over such key issues.
For electricity customers, apart from the widely debated issue of rising prices, there is also deepening concern about security of supply.
Holliday himself identified the winter of 2015/16 as being particularly vulnerable to power cuts if the investment hiatus persists, as seems probable.
So while National Grid is prospering, the same can hardly be said of UK generation, where investment has stalled. Holliday’s warnings may well be prescient – and should be heeded.