Analysis: National Grid repositions portfolio
National Grid has nailed its colours firmly to the electricity mast after buying Western Power Distribution (WPD) for £7.8 billion and announcing its intention to sell its majority stake in National Grid Gas as it strives to play a 'central role' in delivering UK net zero emissions by 2050.
In submissions to the London Stock Exchange yesterday detailing the proposed WPD acquisition and portfolio repositioning, National Grid said it will commence a process in the second of this year for the sale of a majority stake in National Grid Gas (NGG), the owner of the national gas transmission system. At 31 March 2020, NGG had approximately 7,630kms of pipeline and workforce of nearly 2,200 employees.
"The Board anticipates significant buyer interest given NGG's high-quality operations, proven delivery, the strategic nature of the business, its regulatory certainty following the RIIO-T2 determination and the key role that the network will have to play in the energy transition," it states. Reports have indicated National Grid could raise around £2 billion from selling a 51 percent stake.
With regards to the WPD acquisition, National Grid highlighted six benefits:
- It allows National Grid to bring together two complementary businesses
- WPD represents a "one-off opportunity" to establish a significant scale position in UK electricity distribution, enhancing National Grid's key role in the delivery of net zero carbon emissions
- WPD and electricity distribution will add significant growth potential to National Grid
- WPD has a high quality asset base with track record of performance
- WPD has a highly experienced management team and "excellent stakeholder engagement"
- The NECO sale is a key differentiator for the WPD acquisition
The renewed UK focus also coincides with National Grid selling its American business, The Narragansett Electric Company (NECO), to PPL Energy Holdings for £2.7 billion. NECO supplies electricity and gas in Rhode Island to around 780,000 customers.
John Pettigrew, Chief Executive of National Grid, said the transactions will be transformational for its UK portfolio.
"Establishing National Grid as the leading electricity transmission and distribution operator in the UK will strengthen our long-term growth prospects, enhance our role in the UK's energy transition and drive long term shareholder value," he said. "Following the completion of these transactions, we will continue to have a diversified portfolio of assets across the UK and US, with a strong asset growth profile that will further underpin our dividend policy for the longer term."
Given the strategic nature of its business coupled with its central position in a transition towards a hydrogen economy, NGG will continue to play a vital role in the UK's energy system, he added.
In another significant move, somewhat eclipsed by the financial deals, National Grid said it is exploring the development of a UK hydrogen ‘backbone’, which aims to join together industrial clusters around the country, potentially creating a 2000kms hydrogen network, connecting the Grangemouth, Teesside and Humberside clusters, as well as linking up with Southampton, the North West and South Wales clusters.
Repurposing around 25% of the current gas transmission pipelines, Project Union will build on the government’s 10-point plan to invest more than £1 billion to unlock the potential of hydrogen and support the establishment of carbon capture, utilisation and storage (CCUS) in four industrial clusters.
Antony Green, Hydrogen Project Director at National Grid, said hydrogen has a critical role to play as we transition to a cleaner energy future. "The potential is exciting and a hydrogen backbone to support the industrial clusters could accelerate the roll-out. But there is a lot of work to find the most economic way to repurpose our assets and how we might develop a phased conversion to develop a hydrogen network for the UK."
Ofwat allows retailers to raise prices from April
Retailers can recover a portion of excess bad debt by temporarily increasing prices from April 2022, according to an Ofwat statement.
The regulator confirmed its view that levels of bad debt costs across the business retail market are exceeding 2% of non-household revenue, thereby allowing "a temporary increase" in the maximum prices. Adjustments to price caps will apply for a minimum of two years to reduce the step changes in price that customers might experience.
Measures introduced since March 2020 to contain the spread of Covid-19 could lead to retailers facing higher levels of customer bad debt. Retailers’ abilities to respond to this are expected to be constrained by Ofwat strengthening protections for non-household customers during Covid-19 and the presence of price caps.
In April last year, Ofwat committed to provide additional regulatory protection if bad debt costs across the market exceeded 2% of non-household revenue.
Georgina Mills, Business Retail Market Director at Ofwat said: “These decisions aim to protect the interests of non-household customers in the short and longer term, including from the risk of systemic Retailer failure as the business retail market continues to feel the impacts of COVID-19. By implementing market-wide adjustments to price caps, we aim to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition.”
There are also three areas where Ofwat has not reached definitive conclusions and is seeking further evidence and views from stakeholders:
- Pooling excess bad debt costs – Ofwat proposes that the recovery of excess bad debt costs is pooled across all non-household customers, via a uniform uplift to price caps.
- Keeping open the option of not pursuing a true up – For example if outturn bad debt costs are not materially higher than the 2% threshold.
- Undertaking the true up – If a 'true up' is required, Ofwat has set out how it expects this to work in practice.
Further consultation on the proposed adjustments to REC price caps can be expected by December.
"While it’s great that regulators are helping the industry deal with bad debt in the wake of the pandemic, raising prices only treats the symptoms. Instead, water companies should head upstream, using customer data to identify and rectify the causes of bad debt, stop it at source and help prevent it from occurring in the first place," she said.
"While recouping costs is a must, water companies shouldn’t just rely on the regulator. Data can help companies segment customers, identify and assist customers that are struggling financially, avoiding penalising the entire customer in tackling the cause of the issue."
United Utilities picks up pipeline award
A race-against-time plumbing job to connect four huge water pipes into the large Haweswater Aqueduct in Cumbria saw United Utilities awarded Utility Project of the Year by Pipeline Industries Guild.
The Hallbank project, near Kendal, was completed within a tight eight-day deadline, in a storm and during the second COVID lockdown last November – and with three hours to spare. Principal construction manager John Dawson said the project helped boost the resilience of water supplies across the North West.
“I think what made us stand out was the scale, the use of future technology and the fact that we were really just one team, working collaboratively for a common goal," he said.
Camus Energy secures $16m funding
Camus Energy, which provides advanced grid management technology, has secured $16 million in a Series A round, led by Park West Asset Management and joined by Congruent Ventures, Wave Capital and other investors, including an investor-owned utility. Camus will leverage the operating capital to expand its grid management software platform to meet growing demand from utilities across North America.
As local utilities look to save money and increase their use of clean energy by tapping into low-cost and low-carbon local resources, Camus' grid management platform provides connectivity between the utility's operations team, its grid-connected equipment and customer devices.