Issue link: https://fhpublishing.uberflip.com/i/782355
NETWORK / 30 / FEBRUARY 2017 system operation A s plant margins remain at wafer-thin levels, the pivotal role of National Grid, currently capitalised at about £36 billion, has come under greater scrutiny. It is, a•er all, the electricity system operator and charged with keeping the nation's lights on. The task is complicated by the increasingly complex technical challenge, due mainly to the intermittent nature of renewable generation units, of balancing the system 24/7. Just as importantly, as a major investor in electricity interconnectors between other EU countries, National Grid faces potential conflicts of interest. If at times of power shortages it chooses interconnector-sourced electricity rather than domestic generation output to make up the shortfall, it stands to derive financial benefit from doing so. A•er all, in 2015/16, National Grid reported an operating profit of £123 million from its joint ownership of the French interconnector – chunky money indeed. It was no surprise that the House of Commons' energy and climate change select committee raised probing questions last summer about the potential conflicts of interest. The committee advocated a switch to an independent system operator (ISO), a model that has been used with some success in the US. Significantly, the committee did not make specific recommendations as to whether such an ISO should be publicly or privately owned. Subsequently, there have been various discussions between National Grid and Ofgem, which culminated in the recent key announcement of plans to force National Grid to legally separate its system operator (SO) role from the rest of the group. Although a consultation process is now under way, it seems set to produce a different outcome from that advocated by the select committee. However, National Grid has agreed, with Ofgem, to separate its system operator business from its many other activities as from April 2019. While it will have its own board, offices and employees, the ringfenced business will remain fully owned by National Grid – presumably, a non-negotiable issue for its leading shareholders. Not surprisingly, National Grid's chief executive, John Pettigrew, welcomed the agreement with Ofgem. He added: "We believe National Grid is best placed to deliver the role of system operator." For Ofgem, the new arrangements will let National Grid take a more proactive role in managing the system and working with others, while crucially – in Ofgem's words – "mitigating any conflicts of interest". The government also focused on the apparent benefits of this agreement. Business and energy secretary Greg Clark said: "Separating our system operator will give greater confidence to investors that Great Britain offers a level playing-field for companies wanting to be part of our clean, secure and flexible energy system." In recent decades, with a few exceptions, National Grid has eschewed generation- related investment. But its joint ownership of the 2GW French interconnector is pivotal – this business has proven to be a very nice little earner. National Grid is also investing heavily in new interconnectors, notably the £2 billion NorthSeaLink Norway project. Similar issues have been raised in other utility sectors, particularly telecoms, where BT's Openreach has a powerful hold over the last mile of connections. Its competitors have been pleading with Ofcom to compel BT to divest Openreach rather than undertake an internal separation; it's a plea that has so far fallen on deaf ears. Indeed, under the strongest of pressure, Ofcom's director-general, Sharon White, has resolutely declined to go down this route, partly due to EU legal issues. As its final card, BT could play its joker – the cost of its accursed defined benefit pension schemes, which currently have a massive £9.5 billion deficit. Arguably, a compulsory divestment of Openreach would raise fundamental questions about the solvency of BT's pension fund. Of course, Ofgem's latest National Grid announcement is small beer compared to the Openreach issue, but it raises fundamental questions about whether – and how – dominant utility market players should face constraints that implicitly benefit their competitors. A•er Ofgem's announcement, National Grid's share price barely moved. The reality was that virtually no-one expected a radical divestment decision from Ofgem. What's more, most of National Grid's UK earnings arise from its ownership of price-regulated electricity wires and gas pipes. Material changes to anticipated returns from those businesses are seriously price-sensitive. In fact, the company's share price is now more beholden to movements in bond yields, with the expectation of the Trump- led US raising interest rates, which would narrow the yield gap between US Treasuries and National Grid's own dividend yield. While National Grid will undoubtedly be relieved by Ofgem's statement, its focus – and that of its investors – will increasingly be on the planned 61% disposal of its gas distribution business, scheduled to complete this summer. Some £4 billion of net proceeds are earmarked for National Grid's shareholders. Crucially, last year's auction placed a formidable £13.8 billion valuation on the gas distribution business. That's well above market expectations, and it gave a boost to the share price. National Grid will be pleased that the ISO proposal put forward by the energy and climate change committee appears to have been unceremoniously rejected by both government and Ofgem. Nigel Hawkins, director, Nigel Hawkins Associates Despite "strong efforts" by National Grid and Ofgem, the potential for conflicts of interest is "intractable and growing", and could "dilute other efforts" to move to a low-carbon infrastructure. THE ENERgY ANd ClimATE CHANgE COmmiTTEE's lOW CARBON iNFRAsTRUCTURE REpORT, JUNE 2016 National Grid remains "well placed to advise on longer-term security of supply." THE NATiONAl iNFRAsTRUCTURE COmmissiON's smART pOWER REpORT, mARCH 2016 "If investors are looking for certainty about making investments, introducing an ISO and consequentially a large raft of market changes to make it work effectively does not seem the right timing." NATiONAl gRid's diRECTOR OF sO OpERATiON, pHil sHEppARd, ApRil 2016