National Grid/UK energy: dark material

Digital technology depends on electricity for energy. National Grid, the UK transmission network, has a duty to ensure everyone has constant supply, assuming sufficient generation. It is now under investigation by energy watchdog Ofgem following a severe lightning strike on the network just north of London on August 9. The incident, which caused a million homes and businesses to lose power, resulted in another digital system taking over: finger-pointing. Who is to blame? Probably not the National Grid.

Energy is a political battleground in the UK. The opposition Labour party, if given the power, has promised to nationalise utilities such as the National Grid. Government must decide how much more redundant capacity is necessary to stop this kind of accident. National Grid is required to ensure extra capacity equal to the largest generator on the system at that time. On that day it was 1 gigawatt, less than the 1.38GW of lost generation that occurred. Asking more generation plants to remain on “just in case” sounds a good idea, but would cost more money. Or perhaps National Grid should build more interconnector cables to the Continent. Who will pay for that, customers, taxpayers or utilities?

Most likely, customers will, through tariffs or taxes, as some form of insurance. If the stock market has concerns about National Grid’s culpability, there is scant evidence of it. Its share price has held steady this month. Indeed, National Grid shares have far outpaced both the FTSE Utilities index and the All-Share index. A healthy 5.5 per cent dividend yield and steady, regulated earnings help.

Any discussion about requiring National Grid to prepare better for the next once-in-a-decade event — the last serious blackout was in 2008 — comes at a time when Ofgem is deciding on price controls for 2021-26. Most expect a cut to the allowed return on its electricity regulated-asset base which should reduce its profitability.

That risk has already taken its toll on the National Grid share price. This has declined by 30 per cent since hitting a peak three years ago. Even so, its valuation at 15 times forward earnings is at a premium to other UK-listed utilities.

Any finger-pointing at National Grid has so far made little impression. Do not expect that to change. Its shares will be well-supported so long as Mr Corbyn’s chances of gaining power remain slim.