2019/20 OVERVIEW

Strong reliability maintained and record year for investment

In 2019/20, National Grid continued to deliver good operational progress across the Group with high levels of network reliability. In the UK, we experienced a rare and exceptional event with the 9 August power cut that caused significant disruption to many people. We welcomed Ofgem's technical report into the incident that found no link between National Grid's actions and the power cut. The report confirmed the initiation of a review into the structure and governance of the Electricity System Operator (ESO), which we were expecting. We are working and cooperating closely with Ofgem on this review.

 

This year, we achieved a Group Lost Time Injury Frequency Rate (LTIFR)^[2] of 0.12, slightly higher than the Group target of 0.1. The UK delivered its best ever year of safety with a LTIFR of 0.07, whilst National Grid Ventures (NGV) also achieved a record low LTIFR of 0.05. In the US, we saw an increase in the number of safety incidents with a LTIFR of 0.16. In response, we are reviewing safety controls across the business to ensure they are current and appropriate, and to ensure they are reflected in working methods and operating procedures.

 

Across the Group, capital investment increased by £858 million at constant currency to £5,405 million, an increase of 19% (or 20% at actual exchanges rates). This capital expenditure, when combined with RPI inflation, drove Group asset growth of 9%. In addition, we maintained a Return on Equity (RoE) of 11.7% for the Group which was driven by good performance across all our businesses.

 

National Grid has a critical role to play in enabling the energy transition to a low carbon future. We have strengthened our commitment to our net zero emissions aim with a tougher interim target. This is to reach an 80% reduction in our emissions, from a 1990 baseline, by 2030, and a 90% reduction by 2040. This follows the commitment we made in November to reach net zero for our own emissions by 2050.

Responding to an unprecedented challenge: COVID-19

Impact on our workforce

Throughout the COVID-19 crisis, National Grid's priority has been to keep employees safe whilst doing their job, and to ensure the safety and wellbeing of our customers and communities.

 

COVID-19 has had a significant impact on the way in which we work. At the end of March, as the crisis unfolded, we successfully implemented our business continuity plans in the UK and US. This included taking action to change working habits quickly and safely, including a risk assessment of all our operational projects. In addition, we issued new working guidance to our field force that included measures such as limits on team sizes, changes to rotas, revised cleaning arrangements, and single occupancy in vehicles. We have continued to work successfully with these 'lockdown' constraints and social distancing requirements since the end of March. For example, in April, our teams in Massachusetts rapidly restored power to 142,000 customers following a significant storm, with 95% of our affected customers reconnected within 24 hours.

 

Away from the field, our dedicated control room staff have worked tirelessly, some sequestered away from their families. In the UK, we set up sleeping pods and recreation centres on site for those staff in isolation, and this was replicated across our businesses in the US. Our digital infrastructure is also playing a key role in enabling new ways of working, as around half of our employees across the organisation have been successfully working from home.

Keeping electricity and gas flowing

Against this backdrop, we have been focused on maintaining reliable flows of electricity and gas. Demand has reduced across all our jurisdictions, with the increase in residential demand more than offset by lower levels of industrial, commercial, and business demand. In the UK, we saw record low levels of transmission system demand on the electricity network at 14.5GW over the recent Spring Bank Holiday weekend and again at the end of May. To ensure the ESO can continue to safely and reliably manage the system at these unprecedented low demand levels, it has put in place a suite of additional balancing services. It is continuing to work closely with Ofgem and industry on ways to ease pressures on customers from potential increases in balancing costs.

 

In the US, across our service territories, we have seen an 8% decrease in gas consumption between mid-March and the end of April. For electricity, we have seen a 6% decrease in consumption between mid-March and the end of May, although this is comprised of a 5% increase in residential usage, and a 9% decrease in Industrial and Commercial usage.

Supporting our communities

We are acutely aware of the impact COVID-19 has had on the communities where we operate. Our teams have stepped forward with multiple initiatives, including financial donations to help the most vulnerable. In the UK, we have made donations to support key charities delivering aid; in the US, we have provided funding for customers experiencing financial hardship and for community-based organisations. In April, we made a donation to the University Hospitals Birmingham Charity appeal in the UK that provides vital support to both patients and staff. The donation will be used to purchase almost 400 tablet computers that will be used by patients to help them speak to relatives while in isolation. In the US, our teams upgraded gas supply in record time to help turn a college gym into a 1,000-bed hospital on Long Island.

Supporting our customers

We are also providing support and assistance to our customers. In the US, where we collect directly from end consumers, we took several actions following discussions with regulators. We suspended debt collection and disconnections across all our US service territories. We deferred rate increases in our upstate New York business, Niagara Mohawk (NIMO), that were due to take effect on 1 April; and we delayed the NIMO rate filing, originally planned at the end of April, as we look to minimise the impact on bills when many customers are experiencing economic hardship. We have also offered flexible bill plans and arrangements for overdue bills, as well as eligibility discounts dependent on household income and size.

 

In the UK, we are working with other network companies and Ofgem to help suppliers address financial challenges caused by COVID-19, without imposing additional burdens on consumers. We have extended credit terms for eligible suppliers to help our most vulnerable customers, and we are also working with Ofgem to identify how we can help our customers bear increased balancing costs associated with securely managing the system.

Financial impact on our business

As lockdown measures began to take hold towards the end of 2019/20, incremental costs due to COVID-19 were limited on the Group. However, the help we are giving our customers, and the additional costs that COVID-19 has brought, will lead to a financial impact for 2020/21. We currently estimate the impact of COVID-19 on underlying operating profit to be around £400 million, with a potential impact of up to £1 billion on cash flow by the end of this financial year. We have seen only a small impact on our investment programme, and whilst we have slowed down some works given restrictions and working within new guidelines, we still expect to invest around £5 billion this financial year.

 

As we highlight in our Forward Guidance section below, these estimates assume a scenario of continued gradual easing of lockdowns across our territories, together with cost recovery mechanisms that continue to be based on regulatory precedent. If other scenarios play out through the course of the year, then this could have a range of impacts on cashflows and earnings, which could be different from our current assessment. However, whilst we expect to see a financial impact in the near term, ultimately we see limited economic impact from COVID-19 for the Group.

 

Of the £400 million underlying operating profit impact we expect to see in 2020/21, whilst we do expect to see some additional costs in the UK, and a limited impact in our NGV business, most of the impact will come from our US business. The impact in the US is driven by three, broadly similar, impacts: (1) the deferral of rate increases, (2) COVID-19 related costs, and (3) higher bad debt charges.

 

Higher levels of operating costs due to COVID-19 relate to areas such as higher IT costs, higher cleaning costs, costs to sequester critical teams to maintain system integrity, and PPE and health screening costs to enable return to work. The lower capitalisation of workforce costs related to an amendment in capital programmes also has an impact. In the US, we are working to recover incremental COVID-19 costs going forward.

 

With a weaker economic backdrop, we also anticipate bad debt costs to rise in 2020/21. This follows the £117 million additional provision for bad debts we have accounted for in 2019/20, and we currently estimate a slightly bigger impact in 2020/21. Whilst we receive allowances for bad debts across all our operating businesses, we expect forecast levels of bad debt to be above this allowance in 2020/21. We would anticipate recovering bad debts, above our regulatory allowances, through future rate plans.

 

The weaker economic backdrop is also likely to lead to lower customer revenue collections in the US by year end, impacting cashflow. This should be recoverable in time either as we fully resume our collection activity across our jurisdictions, or through recovery in future rate cases if receivables turn in to bad debts, as described above.

 

As well as potential lower US customer revenue collection affecting cashflow in 2020/21, we currently assume additional revenue shortfall in the UK and US due to COVID-19 that will impact both headline earnings and cash flow. These impacts come from areas where we have (or will have) regulatory mechanisms in place, thereby classified as timing impacts, such as, (1) lower demand in the UK and US, and (2) customer assistance programmes in the UK.

 

Lower levels of energy usage due to COVID-19 may impact our revenue collection within year, and therefore headline earnings, although we expect limited economic impact as almost all our revenues are decoupled from demand across the UK and US. This means that any under-collection is primarily a timing one and we expect to recover revenues through existing regulatory mechanisms in the medium term.

 

Similarly, in the UK, we are participating in a scheme that has been set up to help some of the smaller energy supply customers. This involves the relaxation of network charge payment terms for suppliers and shippers who are facing cash flow challenges as a result of COVID-19. We view these measures to strengthen and support the market positively. The open letter from Ofgem proposes all network charges are repayable in the current financial year and allows us to recover any unsettled amounts in the 2021/22 financial year.

 

In the UK, the ESO is also working with Ofgem and industry on ways in which it could help ease pressures on its customers from the potential increase in balancing costs. We would expect any programme to be put in place to be consistent with current regulatory practice, with any deferrals of costs to be recovered over time.

Operational and regulatory progress in FY2020

Throughout 2019/20 we continued to make progress in our US regulatory strategy as we align our rate filings and agreements with the environmental goals of the states where we operate. We have delivered comprehensive business plans as part of the RIIO-2 process in the UK, and we have continued to make significant progress on our interconnector portfolio. We also completed the acquisition of Geronimo, our first meaningful step into US renewable generation.

US business delivering continued growth and value

We achieved good performance across most of our US operating companies which resulted in an RoE of 9.3%. This represents 99% of our allowed returns, above our 95% expectation that we guided to at the beginning of the year.

 

Our US Regulated business invested $4.2 billion in the year which, coupled with a $380 million net transfer from Construction Work in Progress (CWIP), resulted in strong rate base growth of 12.2%. This was primarily driven by increases in Massachusetts Gas capex compared to prior year, and higher mandated and reliability capital investment in New York, such as City-State construction and Metropolitan Reliability Infrastructure projects. Across all our jurisdictions, we have continued to focus on modernising ageing networks and providing better safety, reliability and resilience throughout the year. An example of this is the additional 458 miles of leak prone pipe we replaced this year, bringing the total replaced to date to more than 10,500 miles, just over half of the 20,000 miles of pipe we have identified in need of replacing.

 

We have continued to make good regulatory progress during the year, with new rates agreed for Massachusetts Electric. The rate case order, effective October 2019, is for 5 years and included an allowed Return on Equity of 9.6%. It also included a new Performance Based Rate Mechanism (PBRM) that funds both capital and operational expenditure across the rate plan, ensuring inflation is factored into the cost base. In April 2019, we filed for new rates for KEDNY/KEDLI. We are resuming settlement negotiations in the KEDNY/KEDLI rate case in the interest of agreeing on a multi-year rate plan that mitigates bill impacts for our customers while allowing us to maintain safe and reliable service, advance our clean energy goals, and earn a reasonable return. If we are unable to reach a negotiated settlement, the rate cases will continue to a litigated outcome at which time we would then plan to file a new multi-year rate case proposal.

 

In downstate New York, we continue to work with all parties to find solutions to the gas supply constraints faced by the region. We took the difficult decision in May 2019 to stop processing applications for new or expanded gas service in our service territories. This followed further delays to permits for the Williams' Northeast Supply Enhancement Project (otherwise known as the NESE pipeline) which was the final piece of a series of long-term gas supply projects. Following an order issued by the New York Public Service Commission (PSC) requiring us to connect approximately 1,100 customer accounts, we implemented a plan to expand demand response and energy efficiency programmes, alongside sourcing incremental compressed natural gas.

 

In November, we agreed to lift the moratorium on all new connections until September 2021. Under the terms of the agreement, we committed to offering $7 million in customer assistance to address hardships arising from the moratorium; $8 million in demand response and energy efficiency programs; and an additional $20 million investment in clean energy projects and clean tech business investments. In addition, we committed to filing a report providing a comprehensive analysis of the gas capacity constraints affecting our downstate New York service territory, outlining all reasonably available options for meeting long-term customer demand. This report was filed and made available to the public on 24 February and was followed by a series of public and virtual meetings in March and April to solicit report feedback. The meetings were constructive and attended by over 800 people with more than 7,000 comments filed with the PSC. In May, we filed a supplementary report that focused on feedback from the meetings and two potential solutions to long-term constraints. The proposed solutions were (a) a portfolio including LNG vaporisation, gas compression enhancements, combined with incremental energy efficiency and demand response, or (b) the Williams' NESE pipeline. In mid-May, certain permits were denied in New York and New Jersey for the pipeline and therefore we are advancing the portfolio of solutions that were identified in the supplementary report.

 

Our US cost efficiency initiative continues to ensure we deliver our significant capital investment programme as efficiently as possible. We are streamlining operations, simplifying our supply chain, and rationalising our property portfolio. As a result, the programme delivered cost savings of over $30 million in 2019/2020, in line with the target set in 2018.

Consistent delivery across the UK

The UK has delivered another year of strong operational performance reflected in an RoE of 12.4%. The weighted average outperformance for the UK is within our forecast range of 200 to 300 basis points under RIIO-T1.

 

Our transmission networks in the UK have continued to deliver with £1.3 billion of investment in 2019/20, slightly higher than prior year. This was driven by increased investment for the Hinkley-Seabank connection, and for our London Power Tunnels 2 project, a 33km, £1 billion link from Wimbledon to Crayford which will provide significant resilience across south London when completed in 2028. We also completed the tunnelling of the Feeder 9 gas pipeline under the Humber estuary, a critical reinforcement of the gas network. This takes our total investment in RIIO-1 to over £11 billion, which has generated £767 million savings for customers^[3]. The benefits of this investment were evident during the early months of 2020 when the flood protection we had installed at our sites prevented flooding and enabled ongoing supply of electricity to our customers.

 

The UK cost efficiency programme that we announced in 2018 continues to deliver a more efficient and agile business ahead of RIIO-2. Through this initiative we have simplified ways of working with a leaner organisation and more efficient IT and back office activities. In 2019/20, the programme enabled us to deliver efficiency savings of £54 million in Electricity Transmission, and £19 million in Gas Transmission, above the target we set for the UK in 2018.

 

In September, we published a technical report on the loss of power event on 9 August. The power cut was a rare and exceptional event and, whilst we do not underestimate the significant disruption and inconvenience that it caused, we were able to restore power within 7 minutes. Both the ESO and transmission network operated as designed and in accordance with our license obligations. We published an interim and final report from the ESO setting out its findings. In December, we welcomed Ofgem's technical report that found no link between National Grid's actions and the power cut (its investigation was closed in June). The report also announced that it intended to undertake a review of system operation. This review had always been foreseen as likely for the ESO at the end of its first year of legal separation. It will enable broader thinking about the appropriate industry arrangements to assist the UK in its commitment to achieve Net Zero emissions by 2050.

 

In October, we welcomed Ofgem's minded-to position on the Hinkley-Seabank connection to use existing Strategic Wider Works (SWW) for the project. We had argued for the SWW mechanism as we believed the Competition Proxy Model did not include the financial parameters necessary to deliver a project of this complexity. We have continued to work with Ofgem to support our view of the efficient costs to complete the project, and last month we reached agreement on the final cost. The allowance for the project is £656 million and will use the SWW mechanism as the delivery model in the RIIO-2 price control. We are pleased with this outcome and the project remains on track to be ready for connection in 2025.

 

In November, we were pleased to reach the final commissioning stage of the Western Link, a high capacity cable over 400 kilometres long, and a joint venture between National Grid and Scottish Power. In January, testing was carried out following the detection of a cable fault with the link returning to service in February. Following this trip, Ofgem announced an investigation into the delivery and operation of the cable. We are currently working closely with Scottish Power and the cable manufacturer, the Prysmian-Siemens consortium, to provide Ofgem with the information it requires to conclude the investigation. The cable plays an important role in bringing renewable energy from Scotland to homes and businesses in England and Wales, helping the UK to meet its renewable energy targets and providing Scotland with additional resilience.

 

This has been the first year that the ESO has operated as a separate legal entity. The transition itself has been smooth and, operationally, the ESO has performed well.

RIIO-2 process continues

Ofgem has continued to progress its framework for the RIIO-2 price control, which will run for five years from April 2021. Achieving the right regulatory framework is vital to enable the necessary investments to maintain excellent safety and reliability levels we expect from our networks. It is also critical to ensure that the rapid decarbonisation of the UK energy system can continue, and ongoing investment in innovation to benefit consumers in the long term is encouraged.

 

In December, we published the outcome of the stakeholder group reports and submitted final business plans for our Electricity Transmission (ET) and Gas Transmission (GT) businesses, and for the ESO. Our plans cover a crucial period when rapid change is expected in the energy system to reduce carbon emissions and help achieve the UK's environmental goals. In delivering the plans, we engaged with over 25,000 households, businesses and energy consumers and were the first networks to set up independent stakeholder user groups.

 

The business plans propose £10 billion^[4] of totex over the five-year price control period for RIIO-2. This is split approximately £7.5 billion for ET and £2.5 billion for GT. For ET, the business plan seeks to connect over 15GW of capacity over the duration of the price control, providing the UK with clean power and flexible storage. In addition, it seeks to maintain network reliability, network availability, and increase resilience to cyber and physical attacks.  For GT, the plan aims to increase asset health spend to maintain levels of network reliability, replace two compressor units at our Wormington site, and increase system resilience to environmental and cyber challenges. These business plans represent a step change in investment from the RIIO T1 baseline and would see our part of the consumer bill reducing in real terms as we identified efficiency savings of 11%.

 

Looking forward, the next key date on the RIIO-2 timeline is initial determinations which are expected in July. Planned open hearings in March and April were cancelled as a consequence of the COVID-19 crisis and lockdown restrictions. However, we have continued our dialogue with Ofgem and stakeholders on the proposed parameters for RIIO-2, and we have continued to make representations on those areas we believe need to be addressed.

Further progress in National Grid Ventures

National Grid Ventures (NGV) delivered a good performance in 2019/20, broadly in line with the prior year. Capital investment increased significantly to £815 million pounds, mainly driven by the acquisition of Geronimo and higher investment in our North Sea Link, Viking and IFA2 interconnector projects.

 

Nemo Link, the electricity interconnector between the UK and Belgium, achieved over 96% availability in its first full year of operation. Availability on IFA reached 91% for the year, and 99% on BritNed. On IFA2, the AC connection from Daedalus to Chilling has been completed and successfully tested, and the 25km French land cable has also been constructed. Commissioning of IFA2 is on course for the end of the calendar year, whilst progress on both the North Sea Link (NSL) and Viking interconnectors remains on track. These links are due to commission in FY2022 and FY2024 respectively.

 

In July, we completed the acquisition of Geronimo^[5], our first meaningful step into US renewable generation, including a joint venture with Washington State Investment Board (WSIB). In December, we announced the start of commercial operations for the 200MW Crocker Wind Farm in South Dakota, with 100% of generation contracted under PPAs for 12 years. This was followed in February by signing a PPA agreement with Basin Electric Power Cooperative for the 128MW Wild Springs Solar Project, also in South Dakota, which is expected to commission in FY2023.

 

Our Grain LNG business contributed another good year to the business, with over 30% utilisation throughout FY2020, welcoming the 500th ship to the terminal in March. Legacy metering profits fell broadly in line with our falling meter population as the mandated smart meter rollout continues.

Property - first year of St William profits

Our Property business delivered another strong year. Our joint venture with St William Homes delivered a net profit to the Group selling approximately 370 homes of which over 20% were affordable. The business also sold another two sites into the joint venture, Hornsey and Poplar, and we exchanged contracts on a further four sites at Brighton, Worthing, Bromley by Bow and Kensal Green. Across the wider Property business, we sold another 34 sites in cities including St Albans, Manchester, Bristol and Chelmsford.

Group RoE of 11.7%

Group RoE of 11.7% was broadly in line with prior year (2018/19: 11.8%).

 

The UK regulated businesses delivered a combined return of 12.4%, including an assumption of 3% long-run average Retail Price Index (RPI) inflation. US RoE, at 99% of the allowed return, increased to 9.3% reflecting improved performance as a result of increased revenues from new rate allowances and efficiency measures to reduce operating costs.