National Grid profits surge to £4bn

National Grid has seen its profits surge to almost £4 billion following its acquisition of Western Power Distribution, the commissioning of two new interconnectors to France and Norway, and accelerated investment in the electricity transmission network.

The group reported an underlying operating profit of £3,992 million for the 12 months to the end of March 2022 – an 11% increase on the equivalent pro-forma figure for 2020/21 of £3,608 million.

The latter includes the estimated hypothetical contribution from Western Power Distribution (WPD) for an equivalent nine-and-a-half-month period in the previous financial year after National Grid completed its acquisition of the distribution network operator in June 2021.

The figures do not include earnings from National Grid Gas Transmission which was classified as discontinued operations after National Grid agreed to sell a 60% stake in the business to Macquarie and British Columbia Investment Management Corporation for £4.2 billion at the end of March.

National Grid reported a more than doubling of statutory pre-tax profit from £1,664 million to £3,441 million.

Underlying operating profit from National Grid Electricity Transmission rose by 10% year-on-year to £1,152 million following a 21% increase in capital investment to £1,195 million. Its regulatory asset value grew by £1,158 million to £15,486 million.

The business achieved a return on equity of 7.7% over the first year of the RIIO T2 price controls – 140 basis points above the baseline return 6.3% but significantly below the previous year’s figure of 13.8%.

National Grid Gas Transmission achieved a return on equity of 7.8% – 120 basis points above the baseline return of 6.6% but down from 9.6% in the previous year.

Underlying operating profit from WPD for the nine-and-a-half months it was under National Grid ownership was £887 million – a 4% increase over the pro-forma figure for the previous year of £853 million. The distribution network operator reported a 13.6% return on equity compared to a baseline of 9.6%.

Earnings from National Grid Ventures and the group’s other non-regulated businesses swelled from £117 million to £307 million. This was primarily due to the commissioning of the North Sea Link interconnector to Norway in October and the first full year of operation for the IFA2 interconnector to France, which together accounted for an £80 million increase in operating profit.

National Grid said construction work on its 1.4GW Viking Link interconnector to Denmark is now over half-way through, meaning the £786 million project remains on tracks for commissioning in 2023/24.

The company said its original IFA interconnector with France is still operating at half capacity following a fire at the Sellindge converter station on the UK side in September 2021. After 1000MW was returned to service a month later, National Grid said it expects another 500MW to come back online in October 2022, with the final 500MW returning in December of this year.

Earlier this month, Ofgem approved an offer by National Grid to repay £200 million of excess interconnector revenues early under the Cap and Floor regime over the next two years to help bring down bills for consumers.

Towards the same end, some industry commenters have floated the idea of deferring a portion of network charges until later years.

But, speaking to Utility Week, National Grid chief financial officer Andy Agg pushed back against this suggestion, saying: “If you look at the overall element of the customer bill, we’re about £20 a year for electricity transmission, around about £100 a year for distribution. We need to do our bit but our impact on the bill is relatively limited.”

Agg said the company is focussing on cutting its own costs through efficiencies – savings that will be passed onto to consumers through sharing mechanisms – and delivering the investment that will be needed to achieve the government’s new energy security strategy. Over the long term, he said this will “help to manage customer bill impact as well.”

He welcomed the release of the strategy, saying: “There’s a lot of work still to do for it to feed through to both political and regulatory policy but we’re very pleased with the signals around offshore wind and the potential focus on new nuclear as well.”

“We’re working very hard with Ofgem, with stakeholders across government and the rest of the industry to determine precisely what’s required,” he added.

However, Agg said it is likely to have a limited impact on National Grid’s investment plans over the RIIO2 price controls: “In reality, we already include up to around a £1 billion of investment towards the back end of the five-year frame that we’ve already announced related to those types of projects.

“The likelihood is that the significant spend will be outside that five-year frame, likely towards the end of the current decade, but it’s needed there to take us to hit the 2030 ambition.”

Agg emphasised the size of National Grid’s investment commitments, stating: “We’ve reaffirmed the five-year frame that we’ve set out a year ago of £30-35 billion of investment next five years. And what we’ve announced this morning is that around £24 billion of that is into green capex that aligns with the new EU taxonomy.”

He said this makes National Grid “one of the largest investors in net zero in the FTSE.”