National Grid is celebrating a reduction in the impact of COVID-19 on its underlying operating profits in a year with strong operational performance and the "transformational" acquisition of Western Power Distribution (WPD).
While COVID-19 left a £355 million hole in the company's underlying operating profits, National Grid was clear that this is actually above what it had first estimated the impact to be - £400 million – and it is therefore pleased with the result. Indeed, it has recognised £59 million as revenue recovery for the commodity portion of some of its COVID-19 bad debts, taking its year end underlying operating profit impact from COVID-19 down to £296 million.
Broken down, this figure is made of £120 million of residual bad debt, a shortfall of revenue under existing rate plans of £78 million, a £70 million impact from delays to agreeing a settlement for its filing of new rates in New York and net direct costs of £28 million relating to enabling safe working such as PPE and cleaning and costs associated with delays to planned capex works.
National Grid’s full underlying operating profit figure therefore stands at £3.3 billion, down 5% on the previous year.
It said that as its regions emerge from COVID-19 during FY2021/22, it continues to expect an impact to be felt from weaker demand, some lower revenues and lower cash collection from its US customers. It is, however, confident it will be able to recover a majority of these COVID-19 related costs either through existing regulatory mechanisms or through separate filings.
In the year, the UK recorded strong operational performance, which National Grid said was reflected in an "excellent" network reliability of 99.9999% for electricity transmission, and 100% for gas transmission.
It also achieved a Return on Equity (RoE) of 12.6% for the UK, meaning that the weighted average outperformance is within its forecast range of 200 to 300 basis points.
The company's UK electricity transmission statutory operating profit, meanwhile, was £289 million lower in the year. National Grid stated that there were £7 million of exceptional costs related to establishing a new operating model, while it recorded timing under-recoveries of £88 million compared to over-recoveries of £146 million the year before.
This was largely due to lower half-hourly volumes, a lower collection of prior year balances and under-recovery of balancing costs in National Grid ESO due to the Balancing Services Use of System (BSUoS) COVID-19 support scheme.
In June 2020, a £15/MWh BSUoS costs price cap was introduced following National Grid identifying an additional £500 million increase in the cost of managing the electricity transmission system because of the impact of COVID-19.
Adjusted operating profit for UK electricity transmission, meanwhile, reduced by £286 million (22%), driven mostly by £234 million adverse year-on-year timing movements. Underlying operating profit decreased by 4%, while net revenues - £2,018 million compared to £2,028 million the year prior - were relatively flat with higher incentives income, legal settlements, diversion income and RPI uplift being offset by lower re-opener allowances for cyber and data centres and funding for the legal separation of the ESO in 2019/20.
An area of the business that remained largely unaffected by COVID-19 was its capex programme, as National Grid worked closely with contractors and suppliers across all its projects to minimise delays, including major projects such as the London Power Tunnels 2, the IFA2 and North Sea Link interconnectors and the Hinkley-Seabank connection.
In 2020/21 National Grid invested £1.2 billion in the UK electricity and gas transmission networks, with this broadly in line with the previous year. Electricity transmission capex increased primarily through higher spending on the Hinkley-Seabank connection, the London Power Tunnels 2 project and Smart Wires.
The latter of these is to designed to ease network bottlenecks limiting renewable generation, freeing up 1.5GW of network capacity. The SmartValve modular power flow control technology - provided by US-based Smart Wires – is being deployed by National Grid Electricity Transmission at three substations across the north of England, Harker in Carlisle, Penwortham in Preston and Saltholme in Stockton-on-Tees near Middlesbrough.
Over the course of the upcoming RIIO-2 price control period, National Grid is expecting to invest around £10 billion of capex across both electricity and gas transmission. Of this, around £8 billion will be invested in electricity transmission asset health, system reinforcement to facilitate offshore renewable generation and other new onshore system connections.
Investment will be substantially higher than in RIIO-1, it said, at close to £2 billion per year on average for the transmission networks.
Over the next five years, National Grid also expects the WPD networks to invest £4-5 billion in asset maintenance, facilitating the infrastructure for electric vehicles and directly connected generation.
It announced it was to acquire WPD in March for an equity value of £7.8 billion, with it now expecting the transaction to complete by July.
John Pettigrew, chief executive of National Grid, praised the company for having successfully navigated the challenges of COVID-19, delivered over £5 billion of capital investment and "achieved a solid underlying financial performance".
He also lauded the acquisition of WPD, stating it will ensure National Grid is "at the heart" of the UK energy transition.
"National Grid has an exciting future, with numerous opportunities in the UK and US to provide energy security and support the delivery of net zero."