National Grid’s shares plunge: watershed or warning sign for energy financing?

In this week’s edition of Smart Energy’s Power Playbook, Yusuf Latief revisits National Grid’s £66 billion ($76.5 billion) networks investment plan as shares plunge and whether it will serve as a watershed for future energy sector financing schemes.

Last week I was pleased to report that National Grid, who have continued to impress with their financing and initiatives to prop the power grid for the energy transition, announced a massive investment for their network operations in the US and the UK.

Specifically, £66 billion was promised for the power networks to enable digitalisation and decarbonisation of the power system.

What really strikes interest is not in the promise itself, but rather in the how.

To guarantee that the financing meets its mark, the utility giant simultaneously announced £7 billion ($8.9 billion) in a fully underwritten rights issue, whereby existing shareholders are offered more shares, guaranteeing that the funds will be raised.

A tag line far less frequent

For utilities, investment plans have become part and parcel of media headlines. But a solid plan to raise funds is a tagline far less frequently seen.

The rights issue is also being called the biggest equity offering of the year and the largest since the Lloyd’s Bank 2009 rescue rights issue, demonstrating just how significant National Grid’s surprise move is for energy financing.

According to Financial Times reporting, the rights issue is equivalent to 17% of its pre-announcement market capitalisation. Counting its intention to sell an LNG terminal in east England and its US onshore business, this places the company on a sound footing to fund its long-term growth plan.

However, while for us in the energy sector the announcement comes as a boon, National Grid’s pledge should also be seen as a double-edged sword.

While these critical funds will be raised, the move was not met with the same enthusiasm from its investors as from industry.

Rather, states private financing company The Motley Fool, National Grid’s announcement came as a surprise to investors, causing shares to plunge by 10.8% the day of, and another 11.5% the day after.

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What will the funds be used for?

In the UK, National Grid expects £23 billion ($29.3 billion) of investment to be directed towards electricity transmission for asset health and anticipatory system reinforcement as increasing levels of offshore and onshore generation connections come online.

In electricity distribution, they expect to invest around £8 billion ($10.2 billion) to 2028/29 in asset replacement, reinforcement and new connections, facilitating the infrastructure for EVs, heat pumps, and directly connected generation.

In the US, £17 billion ($21.7 billion) is planned for investment in New York and £11 billion ($14 billion) in New England.

60% of the investment in the US is planned for the electricity networks, as the company aims to step up investment for renewable connections, transmission network upgrades, and digital capabilities to enable the energy transition.

In essence, the move aims to bring National Grid’s business strategy to full effect, placing them as a “pre-eminent pureplay networks business.”

An overreaction?

Reportedly, states Proactive Investors, Swiss investment banking company UBS has decried the market response to National Grid as an overreaction, saying they were punished too harshly.

The share issue hasn’t permanently changed the business, said the bank, rather reset the balance sheet back to 2010, when it was “sufficient to fund the business for fourteen years”.

UBS continues to look favourably on National Grid, saying that energy networks are an essential facilitator for green growth; a sentiment I think we can all agree on.

The billion-dollar figures needed for grid investment to reach net zero are no secret.

Just last week Eurelectric, both in a report and during their annual Power Summit in Athens, estimated that €67 billion ($72.5 billion) will be needed annually for Europe’s distribution grids until 2040.

The price tags may be high, but the money is there, and so too are the means to attain it. National Grid’s strategy proves it.

But while I don’t think any of us can fault National Grid’s financing intentions, investor response should also serve as a warning sign for the future. What do you think?

Reach out and let me know.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

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