National Grid has seen its profits rise to almost £4.6 billion due to the continued strong performance of its newly acquired electricity distribution business.
Underling operating profit for the year to the end of March was up 15% year-on-year to £4.58 billion.
The results are the first to include a full year of earnings from National Grid Electricity Distribution (formerly Western Power Distribution), which the group acquired in June 2021 as part of a strategic pivot towards electricity and away from gas.
The business reported an underlying operating of £1.23 billion, representing a 39% increase when compared to the £887 million of earnings from National Grid’s nine-and-a-half months of ownership during the previous financial year.
National Grid Electricity Distribution actually saw its return on regulatory equity (RoRE) dip slightly from 13.6% to 13.2%, although this was still 3.6 percentage points above of the nominal baseline return of 9.6%, including average long-run inflation of 3%.
Underspend against its totex allowances accounted for 0.9 percentage points of the outperformance, while other incentives such as for supply interruptions and customer service accounted for 2.7 percentage points. Both figures were down slightly on the previous year, the latter by 0.3 percentage points due to more stretching customer service targets.
Ofgem has significantly reduced the baseline return on equity for the RIIO2 price controls, which began in April for electricity distribution.
The group’s results were also boosted by higher earnings from its non-regulated business, National Grid Ventures, which reported a 68% increase in underlying operating profit to £490 million.
This was due to a number of factors including the first full year of earnings from its North Sea Link interconnector with Norway; increased revenues from its IFA and IFA2 interconnectors with France; an insurance pay-out from the fire at the Sellindge converter station for IFA in September 2021; and increased revenues from its Grain liquefied natural gas terminal.
Meanwhile, underlying operating profit from National Grid Electricity Transmission dropped by 4% year-on-year to £1.1 billion.
The business achieved a RoRE of 7.5% – a year-on-year reduction of 0.2 percentage points but 1.2 percentage points above the nominal baseline return of 6.3%, including long-run average inflation of 2%. Underspend against totex allowances accounted for 1.1 percentage points of the outperformance.
The electricity transmission sector has already entered its third year of RIIO2 price controls.
The results do not include earnings from National Grid’s remaining share in National Gas (formerly National Grid Gas Transmission). The group completed the sale of a 60% stake in the business to a consortium led by Macquarie Asset Management and British Columbia Investment Management Corporation in January 2023.
The consortium has an option to acquire the remaining 40% on broadly similar terms, which can be exercised in a three-month window from May to July of this year.
Commenting on the results, National Grid chief executive John Pettigrew said: “As we look to the future, there has never been a more exciting time to be at the heart of the energy industry. The strategic pivot we announced in 2021 is now complete, enhancing our critical role at the heart of the energy transition.”
The group reported a 12% rise in statutory operating profit to £4.87 billion and a 4% increase in pre-tax profit to £3.59 billion.
The surge in earnings comes as electricity networks find themselves in the spotlight over the extremely long wait times for new connections to the power grid.
Earlier this week, Ofgem launched a review of connection arrangements to prevent “stalled, unviable and often highly speculative ‘zombie’ projects” from clogging up the queue, noting that 60 to 70% of approved transmission projects never actually connect to the power grid. The regulator said a quarter of the applications approved in the last 12 months have been offered a connection date of 2030 or later.
Announcing the review at Utility Week Live on Tuesday (16 May), Ofgem chief executive Jonathan Brearley said: “The first-come, first-served system is like queuing for a bus where those in front of you don’t want to get on now, may never want to get on, but want a seat reserved without paying, just in case they change their minds.”
He said the regulator said is considering the introduction of “controlled access” queueing arrangements and even a fully centralised planning model.
Alongside the announcement, the electricity system operator (ESO) at National Grid also issued an update on its five-point action plan to speed up connection times, revealing it had received interest from 8GW of projects for its queue amnesty which closed in April.
It said battery storage projects would also be treated as a having a zero MW transmission entry capacity, allowing many projects to connect years sooner, although in exchange they would occasionally be subject to curtailment.
Speaking to Utility Week as National Grid released its full-year results on Thursday (18 May), the group’s chief financial officer Andy Agg said there has been a “huge ramp up” in the pipeline of renewable energy projects, which is now “multiple times” what will be needed to meet the government’s net zero targets.
Agg welcomed Ofgem’s decision in December to introduce a new Accelerated Strategic Transmission Investment (ASTI) framework to hasten the delivery of the onshore transmission projects necessary to meet the government’s target of deploying 50GW of offshore wind generation by 2050.
He continued: “We’ve stood up a new business unit, Strategic Infrastructure, in the UK to put us on the front foot to deliver the 17 projects that Ofgem have awarded us in the ASTI decision that came out in December. We’ve recruited Carl Trowell, a new executive director, to lead that new business unit. And we’re now at the point of starting to award work into the supply chain for both the onshore and offshore projects.”
Agg said one of the “biggest drag factors” for transmission construction is the length of time it takes to get planning consent: “It can be up to seven years for some of these major projects. The government recognises that; Ofgem recognises that; they’ve been very public about that.”
He said: “There’s been announcements about looking at the policy statement but I think it’s fair to say we’ve seen some progress but our view is it needs to go further if we’re really going to be able hit some of the stretching ambitions that we’ve all got.”