Current and future developments
External market developments
Market structure and ownership
There have been no significant changes in either the structure of the UK energy infrastructure market or in ownership during 2008/09.
In the northeastern US, there have been no significant structural or ownership changes to the electricity and gas transmission and distribution networks during the year other than the acquisition by Iberdrola of Energy East, a utility company operating in New York, Connecticut, Massachusetts and Maine in September 2008.
Energy market developments
Despite significant declines in wholesale energy prices since mid 2008, high consumer energy prices have been experienced in both the UK and US markets during the current year. This has led to significant increases in bills to consumers for their energy supplies. The combination of higher energy prices and the current economic climate has lead to a reduction in energy demand for both gas and electricity.
Both the UK and the US energy markets continue to undergo developments driven by the projected increased reliance on imported gas (UK) and unconventional gas sources (US), on new sources of electricity generation, including renewables, and increased focus on security of supply. In the UK, the energy sector faces significant challenges relating to the declining gas reserves in the North Sea, meeting the Government’s targets on renewable generation, and significant levels of retirement of the current power generation fleet.
As a consequence of the decline in gas production from the North Sea, our latest forecast is that the UK will import around 50% of its gas requirements by the end of the decade.
National Grid has led a major assessment of the UK electricity transmission system, and the changes needed to ensure that renewable targets can be met. The assessment considered the potential locations and volume of renewable generation and the network requirements to connect it. We identified a requirement for £4.7 billion of transmission investment by 2020.
March 2009 saw the completion of the competitive tender process for round three of the offshore wind leasing programme by The Crown Estate for the nine offshore development zones. These zones have the potential to deliver up to 25 GW of offshore wind renewable generation.
Illustration of the nine zones put forward by The Crown Estate for potential offshore wind projects in round three
This year has seen a significant increase in nuclear connection requests and in April 2009 the Government released its list of 11 potential sites for the development of new nuclear power plants.
During April 2009, the UK Government announced its commitment to the development of future carbon capture and storage networks.
These changes are expected to impact all our electricity and gas transmission networks. In particular, they will require significant investment in our UK electricity and gas transmission networks, while in the US asset replacement and renewable power developments will require increasing investment in our US electricity transmission and distribution networks.
In December 2008, phase II of our LNG import terminal on the Isle of Grain was commissioned. Progress is continuing on phase III with commissioning expected in 2010. Once fully commissioned, it is anticipated that our facility will have the capacity to import approximately 20% of the UK’s gas demand.
In the US, the administration change has brought an increased political desire to tackle the issues around climate change and security of supply. The development of smart grid technologies is expected to enable more efficient use of the transmission and distribution grid, lower line losses, facilitate greater use of renewables and provide information to utilities and their customers that will lead to greater investment in energy efficiency and reduced peak load demands.
Regulatory developments
UK and European regulatory developments
During the year ended 31 March 2009, there were a number of legislative changes in the UK including the introduction of new consumer arrangements, which incorporate an energy ombudsman scheme to deal with consumer complaints and a new Energy Act facilitating a roll out of smart meters in the UK by 2020.
In March 2008, Ofgem announced a review of the current RPI–X based regulatory framework. It is a two year assessment (RPI-X@20) of the current regulatory regime and its ability to address the challenges facing energy networks in the future. The outcome of this review is unlikely to impact our current regulatory settlements, but could influence future price controls from 2012.
In December 2008, the European Union approved a number of environmental proposals. Legally binding national targets have been established that dictate the proportion of energy production to be provided from renewable sources by 2020. For the UK the target is 15%. In order to achieve this, it is believed the proportion of electricity generated by renewable sources will need to rise to around 35%. At present, it is unclear specifically how these targets will impact National Grid, however, they will significantly influence the UK regulatory framework and UK price control reviews in the future.
The European Commission’s third package of legislative proposals for the European gas and electricity markets has been submitted for final adoption by the EU Council of Ministers, following approval by the European Parliament in April 2009. The new legislation consists of two directives on rules for the internal gas and electricity markets, two regulations on conditions for access to those markets, and one regulation establishing an Agency for the Cooperation of Energy Regulators. The original legislation, published in September 2007, contained measures to force energy companies to unbundle their transmission businesses from supply and generation activities. The revised draft proposals include alternatives to full unbundling. Adoption is expected in summer 2009.
US regulatory developments
The principal US regulatory policy developments continue to focus on reducing carbon emissions, involving the need for significant increases in energy efficiency and the development of renewable generation. State regulatory commissions and other policy makers in the various jurisdictions are taking different approaches, including the establishment of targets for reductions in electricity load growth, utility energy efficiency programmes, and renewable generation. There is also an ongoing debate about the potential for revenue decoupling mechanisms to address disincentives to implementing energy efficiency programmes. Massachusetts and New York regulatory bodies have instructed utilities to file decoupling proposals as part of their next rate cases. There is also an increasing interest in exploring the deployment by utilities of smart grid technologies.
At the federal level, the new administration and congress have focused new energy and environmental legislation in two main areas: the economic stimulus bill and emerging comprehensive climate and energy legislation. In February 2009, the $787 billion American Recovery and Reinvestment Act was passed. The Act, which covers all sectors of the economy, has significant provisions for the energy industry, including amounts for the expansion of the electricity transmission network with focus on smart grid development, a broad array of energy efficiency programmes, clean fuel transportation incentives, and research and development programmes.
There is also a high priority on passing comprehensive climate change and energy policy legislation in 2009, including a proposal for a cap and trade regime that would reduce carbon emissions over 80% by 2050.
Price controls, rate plans and other agreements
UK price controls
New price controls with respect to our role as owner of four of the eight gas distribution networks in the UK, covering the period from 1 April 2008 to 31 March 2013, came into effect and have been implemented successfully. The key elements are a 4.3% post-tax real rate of return (equivalent to a 4.94% vanilla return) on our regulatory asset value, a £2.5 billion baseline five year capital expenditure allowance and a £1.6 billion five year operating expenditure allowance. We were subject to one year system operator price controls for our electricity and gas transmission operations for 2008/09. One year system operator price controls for our electricity and gas transmission operations for 2009/10 have been agreed with Ofgem.
US rate plans
We were granted a $13.6 million (£9.5 million) gas distribution rate increase in Rhode Island, effective 1 December 2008. In New Hampshire, we reached settlement in our gas distribution rate application on all issues with the exception of the return on equity. The rate increase is dependent on the outcome of the litigation on the return of equity issue.
We have also filed, or are planning to file, rate plan applications that would increase gas distribution rates in upstate New York, increase electricity generation rates on Long Island and increase electricity distribution rates in Massachusetts and Rhode Island. We have also applied for deferred recovery of incremental investment, and deferred recovery of electricity related costs and revenue items in upstate New York.
Other agreements
We have agreements with the Long Island Power Authority (LIPA) for the period until 2013 with respect to our role as operator of their electricity transmission and distribution network on Long Island. Our agreements with LIPA also give them an option to purchase one generation plant that we own, and cover our provision of energy procurement and management services.
We also have a joint venture arrangement with TenneT to construct an electricity interconnector between the UK and The Netherlands and an agreement with Elia to explore the feasibility of constructing an electricity interconnector with Belgium.
Alliance contracts with various contractors have been entered into by the Gas Distribution businesses in the UK and Transmission businesses in the UK and US. These contracts establish a framework for contractors to carry out capital investment projects. Under the terms of the agreements our supply chain partners share in the risks and rewards, and are jointly responsible with us for work delivery.
We have contracts with E.ON, Iberdrola and Centrica for a further 6.7 billion standard cubic metres of long-term LNG importation capacity at our Isle of Grain LNG importation terminal in the Thames Estuary, this being phase III of our development of this facility. Work commenced during 2007 and a contract has been awarded to CB&I to deliver the second jetty, an additional 190,000 cubic metre storage tank and associated works (phase III). National Grid is planning to invest approximately £300 million (excluding capitalised interest and expenditure associated with gas blending) in phase III of Grain LNG.
Legal and related matters
An update on the ongoing Metering competition and KeySpan Department of Justice investigations that were reported in last year’s Annual Report and Accounts is provided under details of material litigation as at 31 March 2009. In October 2008, we informed and launched a joint investigation with Ofgem into the misreporting of gas distribution mains replacement activity, further details of this are also provided under details of material litigation as at 31 March 2009.