National Grid’s Shares Drop 2.3%

on Jul 16, 2012

In a statement released on Monday (July 16), the National Grid PLC (NG), Britain’s energy network operator, said that the proposals made by energy regulator Ofgem on funding upgrades to Britain’s gas and electricity transmission network do not give enough incentive for companies to make the necessary investment. And while full details of Ofgem’s proposals will be published later this month, National Grid said that it is already clear that the group’s business plan “differs substantially” from Ofgem’s proposals.

Ofgem proposes a £22 billion investment into the electricity and high pressure gas networks for the eight-year period from 2013 to 2021. This is substantially less, by at least 20%, than what National Grid believes is required over the period, to update Britain’s energy network to a suitable level. The investment plan aims to overhaul Britain’s aging energy infrastructure through updates, including the funding of new sub-sea electricity cables linking England and Wales with Scotland. An extra £7 billion would also be used to “ensure that our low pressure gas networks, which deliver gas to homes and businesses, remain safe and reliable”, Ofgem said in a statement.

!m[](/uploads/story/179/thumbs/pic1_inline.png)Ofgem lowered the investment figure that was initially discussed by reducing National Grid’s proposed return on investment from upgrade work, in a bid to safeguard consumer interests by limiting the impact on household energy bills. Ofgem said its plan is intended to drive, “improvements in company performance [and] to ensure costs are kept as low as possible for consumers.” In addition, recent heavy investments in liquefied natural gas terminals and pipelines have greatly increased the UK’s import capacity. These, however, have also increased the country’s dependence on gas imports, which according to Ofgem, exposes Britain to supply disruptions from unstable energy-rich regions in the Middle East.

On the other hand, National Grid argues that the investment proposed by Ofgem does not provide enough incentive for companies such as themselves to allocate resources to the large scale investments required in the coming years. The network operator, which puts the cost of renewing the country’s ageing energy transmission networks over the next eight years at £31 billion, said Ofgem’s plans did not adequately reflect the increased scale of investment associated with building an energy system for the future.

“We believe that these initial proposals will not appropriately incentivise the essential investments necessary to provide safe, reliable networks for the UK consumer and avoid delays to the achievement of the UK’s environmental targets,” National Grid said in a statement on Monday. National Grid also said that they will propose their own investment programme and present further support for the group’s position in response to Ofgem’s proposals.

This will be the first time National Grid is treated under Ofgem’s new eight-year price control system, which is intended to give fairer pricing to consumers. The energy regulator’s proposals are not final yet and will go out for consultation with interested parties after July 27. The company’s share price fell by 2.3% in the wake of the public spat and presumably investor fears that the regulator’s proposal would be financially harmful to the operator.