National Grid in good shape with restructure, but warns on RIIO-2

Transmission System Operator (TSO) shapes up for the future based on solid profits, but remains wary about cost of equity in RIIO-T2 Framework.

With electricity transmission adding £566m (actual exchange rates) in underlying operating profits at the halfway point of 2018/19 – a slight increase on the same period for the previous year – National Grid is looking to a £127m restructuring programme to help strengthen its position into the next decade.   

Boosted by an increase in capital investment of £136m (at constant currency) for the first six months of this financial year, to just over £2.1bn, the additional restructuring costs are aimed at making the organisation leaner and more responsive to consumer demands.

A sunny NG outlook

According to the TSO’s financial report, it sees: “Strong growth prospects across the Group. There are a wide range of growth drivers for the US, UK and NGV businesses, which are expected to deliver high quality asset growth of at least 7% for the next two years, and at the top end of our 5-7% range in the medium term.”

More importantly, the restructure is set to deliver operating expenditure savings of around £50m in the next financial year and is predicted to deliver £100m in ongoing annual savings from 2020/21. Much of this will come from more efficient IT systems and processes, along with advantage gained from economies of scale.    

Clouds on the RIIO horizon

Now into its sixth year under the RIIO-T1 Framework, National Grid is also turning its attention to RIIO-T2, which remains under consultation. While continuing its overall support for the new Framework, in particular it’s format as a stakeholder-engagement-led process, the TSO still remains cautious about backing the second stage completely.

In particular, it highlighted its continued concerns with Ofgem’s proposed cost of equity, which National Grid believes is too low.  Commenting on this particular issue in its Half Year financial briefing, National Grid stated: “We aim to achieve a fair return that is reflective of the level of risk in transmission networks, together with incentive opportunities to outperform that deliver benefits to customers and shareholders…Overall, we believe that RIIO-T2 must deliver a total financial package that can fund the necessary investment as well as fairly remunerate shareholders for this investment.”