Utility Week

UTILITY WEEK | 9TH - 15TH FEBRUARY 2018 | 17 Finance & Investment Analysis W hile Carillion's demise hogged the financial headlines, it was – in financial terms – quite a small com- pany. However, it was a leading player in the controversial private finance initiative space. Importantly, as the Treasury's infrastruc- ture pipeline document of 2016 showed, there are major projects in the five-year period between 2016/17 and 2020/21 total- ling £426 billion. Most of these projects are not financed by private finance initiatives. Around 60 per cent of the total value is energy related while much of the remainder involves transport and, specifically, Network Rail's £7 billion annual rail improvement programme. Within the energy sector, the c£20 billion 3.2GW Hinkley Point C accounts for almost 5 per cent of the total cost. While it is many years late, the first concrete-pour has taken place, albeit in the power station gallery rather than for the reactor platform. Whether other new nuclear plants pro- ceed is very doubtful, given the massive costs and the munificent long-term subsidies that are being paid. But other generation projects will be undertaken even if recent investment in major gas-fired plants – Car- rington excepted – has been minimal. With all coal-fired plants planned to close by 2025, it seems inevitable that some "parked" gas-fired projects will leave the drawing board – and eventually become reality. Aer all, baseload capacity is now wafer thin and, although some existing nuclear plants may secure life extensions, the reality is that no new nuclear plants will be operational by 2025 at the earliest. Following the recent offshore auction for new wind capacity, which produced winning bids of just £57.50/MWh compared with the inflation-linked 35-year £92.50/MWh contract for difference (CfD) for Hinkley Point C out- put, it seems inevitable that heavy invest- ment will be directed towards offshore wind generation. Substantial energy investment has also been earmarked for the electricity distribu- tion system, much of which was built in the 1950s and 1960s. Hence, the system is now ripe for replacement. Its expansion is also needed, with both a far higher population and greater electricity use, boosted in part by the plethora of modern appliances. In the RIIO-ED1 periodic review for the electricity distribution companies, various investment assumptions were made to reflect these developments. Similar comments are applicable to the gas distribution network, whose ownership is now more widely dis- persed compared with the days of the inte- grated Transco monopoly. The UK's largest utility is National Grid, which – despite a recent sharp fall in its share price on regulatory and political concerns – is still valued at c£27 billion. National Grid's core UK investment equates to around £1.4 billion a year, with the lion's share being earmarked for upgrades to the electricity transmission network. For many years, the water and wastewa- ter sector has been investing c£4 billion a year. This scenario seems set to continue as the ongoing periodic review is implemented, albeit with markedly lower financial returns for the companies. Part of this investment reflects new housing developments while much of the remainder is the familiar infra- structure renewals expenditure that has characterised the sector since privatisation. Encouragingly, there have been few major delays or cost overruns. With one exception, water and wastewater projects are all rela- tively modest compared with constructing a large baseload power station. Nonethe- less, the controversial £4.2 billion Thames Tideway Tunnel has the capacity for serious problems – it is arguably the biggest water sector project since the London ring main scheme of the late 1980s/early 1990s. On the telecoms front, broadband invest- ment is the major issue. In fact, much of it has already been undertaken. Nonetheless, BT still faces real challenges in honouring its pledge to roll out broadband services nationwide at a minimum 10Mbit/s. Stricken by flat underlying earnings and an estimated £14 billion pension deficit, BT's finances are under considerable strain. Similar criteria apply to Network Rail, whose investment programme has faced serious delays and overruns, most notably on the Great Western electrification scheme. Network Rail presents the government with real challenges given the serious under- investment for many decades. Furthermore, passenger numbers have more than doubled over the past 20 years. By far the most expensive scheme is the highly controversial £56 billion HS2 project, between London and Birmingham initially and thence to Manchester and Leeds. Assum- ing it proceeds, it will be a vast undertaking – and seems certain to be beset by a mix of technical, construction, political and finan- cial problems. In analysing where UK infrastructure investment is falling short, it is fair to iden- tify the lack of new non-nuclear baseload plants, inadequate broadband coverage and Network Rail's poor delivery programme, albeit in very challenging circumstances. Despite these failings, it is self-evident that prodigious infrastructure investment is being undertaken – with the utility sector being at its core. Nigel Hawkins, director, Nigel Hawkins Associates Infrastructure uncertainty Following the collapse of Carillion, formerly one of the UK's major infrastructure players, there has been renewed interest – and concern – about infrastructure investment. By Nigel Hawkins. National Grid share price, one year Severn Trent share price, one year 1,200 1,100 1,000 900 800 700 Mar 17 May Jul Sep Nov Jan 18 2,400 2,200 2,200 2,000 1,800 Mar 17 May Jul Sep Nov Jan 18

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