National Grid sees spending allowances rise by £2.45bn  

National Grid has seen the baseline spending allowances for its electricity and gas transmission businesses rise by almost £2.45 billion as part of Ofgem’s final determinations for the RIIO2 price controls beginning in April next year.

The figure is just over half of the overall £4.8 billion in requested totex which the regulator disallowed at the draft determination stage in July.

Ofgem had previously rejected nearly £3.76 billion of the £7.09 billion of baseline totex allowances requested by National Grid for electricity transmission. It has now returned more than £2 billion, equating to 53 per cent of the rejected expenditure and an increase of 60 per cent when compared to the draft allowance of £3.33 billion.

The regulator disallowed £1.04 billion of the £2.6 billion requested by the gas transmission business at the draft determination stage but has now returned £451 million – an increase of 29 per cent on its draft allowance of £1.56 billion.

At the time of writing, National Grid shares had risen by around 5 per cent in response to the final determinations, which also included an uplift in the baseline profit margin for investors.

The other transmission networks received smaller but nevertheless large increases, with totex allowances rising by 34 per cent to £2.16 billion for SSE’s transmission business and by 25 per cent to £1.21 billion for Scottish Power’s.

Basline totex allowances

The gas distribution networks had a much lower proportion of their requested expenditure disallowed at the draft determination stage and so unsurprisingly received even smaller – although still significant – increases in their final determinations.

Ofgem said one of the main causes of the increases in totex allowances was the provision of further justification by networks, which together submitted 22,000 pages of additional evidence. It also made changes and corrections to its modelling and data, and in the case of the gas distribution networks, reduced the requirements for improvements in cost efficiency.

Overall, the regulator increased totex allowances across the transmission and gas distribution sectors by more than a quarter to £20.3 billion. For most companies, their average annual allowance for RIIO2 nevertheless remains below their actual and forecast yearly expenditure during the current regulatory period.

Yearly totex

Ofgem also gave final approval to £9.3 billion of expenditure outside of the baseline totex such as passthrough costs and other allowances, bringing the overall total for upfront spending to around £30 billion. It has identified a further £10 billion of investment which could be approved as part of reopeners during the price controls.

The increases in totex allowances fed through to the totex sharing factors and rewards and penalties for business plans, both of which are determined wholly or partly by the level of confidence Ofgem has in their approved costs. The maximum rewards and penalties under the Business Plan Incentive are also set at plus or minus two per cent of baseline totex.

Perhaps the most noteworthy change is for SSE’s transmission business, which was previously facing a £32.2 million penalty that would have been set at £47.3 million if it were not capped at the lower level.  Ofgem has now granted the company a £19.5 million reward after drastically reducing the penalty it previously intended to impose due to its level of confidence in the firm’s costs.

The other company facing the maximum possible penalty at the draft determination stage was National Grid Electricity System Operator, which would have been docked £196.3 million in the absence of the cap. Its penalty has fallen only slightly from £66.6 million to £65 million but is now significantly below its new maximum of £106.7 million. However, its sharing factor – the amount of any over or underspend it keeps – has fallen from 39 per cent to 33 per cent.

Scottish Power Transmission, by contrast, saw its sharing factor rise by 10 percentage points to 49 per cent, whilst also going from a £15 million penalty to a £3.7 million reward.