National Grid Plc Struggles with Regulatory Changes in 2023 – Is This Giant Powering Down?

London, England – National Grid Plc, operating in the UK and the US, has transitioned from the RIIO-ED1 compensation regime to ED2 and is now focusing on the RIIO-T2 regime for transmission networks. The company faces challenges as operators contest compensation adequacy under the new regimes, prompting National Grid to undertake a rights issue to address financial needs for grid improvements. Despite concerns about regulated costs impacting compensation rates, National Grid’s capital investments are driving growth on a constant currency basis.

Earnings for the past year reflect the impact of lower baseline compensation from the RIIO-ED2 regime on distribution, offset by investments and higher Regulatory Asset Base (RAB). The shift to the RIIO-T2 regime has seen operators expressing concerns, but indexation mechanisms have allowed for higher costs of capital, particularly in the UK transmission concessions.

Regulatory pressures in the UK have led to challenges, with National Grid facing a less volatile cash flow environment but limited excess returns on infrastructure investments. The US concessions, which account for around 40% of operating profit, offer a more favorable regulatory landscape. Ofgem’s decision to lower the cost of equity has affected the distribution business, with concerns about the effectiveness of broad indexation in compensating operators in the face of inflating costs.

National Grid’s ongoing investments in the UK, reflected in a rights issue and increasing share counts, highlight the company’s need for external financing amid peak debt capacity levels. While the company continues to grow assets at a high pace, focused mainly on the UK market, concerns about value creation persist. Comparisons with peers like Redeia Corporation in Spain underscore the different regulatory environments impacting returns on investments.

Overall, National Grid remains a growth-oriented business, but questions linger about its ability to generate substantial value in the UK concession landscape. Despite guided EPS growth and relative valuation metrics, the company’s challenges in the face of regulatory pressures and financing needs raise caution among investors.

Readers are advised to exercise caution when considering investments in stocks like National Grid, which may present unique risks due to their non-listing on major U.S. exchanges.