Leader: bidders flock as gas future looks bright

The race is on. News this week that Canadian pension funds OTPP and Borealis are lining up a bid for National Grid’s gas distribution businesses fired the starting pistol on a race that could end in a record valuation. As analyst Nigel Hawkins outlines on page 19, gas distribution assets may not be at the most glamorous end of the utility market, but they are prized by investors for their steady returns. With National Grid’s remaining gas distribution assets having a regulated asset value of £8.5 billion, a premium of 30 per cent could see a final valuation north of £11 billion (although National Grid is planning to hold on to a minority stake).

A few years ago, it all looked very different. With the imminent demise of domestic gas in favour of electrified heat expected, some market observers thought the networks wouldn’t have a future beyond the current regulatory control period. Two things changed. First, policymakers got real, with an understanding of the public attachment to gas-fired central heating, and the astronomical costs of a full-scale switch to electrified heat. Second, the sector launched an impressive fightback that has seen it transformed from the poor relation of the electricity networks to one of the most vibrant and exciting sectors of the market.

Could the gas networks be used to store hydrogen, and so effectively to store renewable energy? Could they transport shale gas? What role will domestic gas play in a blended energy system? These questions and more are now being asked, as the gas networks confidently prepare for the transformations they will see in the decades ahead. The sector’s leaders are to be congratulated on their part in changing the conversation: small wonder the buyers are lining up.

• Investors, and potential investors, in water will be watching National Grid’s auction process closely, because a high valuation of its gas businesses would likely ramp up the share price of the remaining three listed water companies. Water remains an attractive investment and as we report on p23, further deals are expected soon. Warning notes were sounded this week, however, with a Moody’s classification of Ofwat’s programme to 2020 as “credit negative”, and analysts warning that domestic competition could deter foreign investment. With the cost of capital remaining critical to water company finances, these are risks that Ofwat will seek to address in its review of the costs and benefits of domestic competition (news, p14).