The following graphic shows the five-year forecast and demonstrates how the price control mechanisms operate to adjust allowances from Final Determinations as requirements change. The graphic also demonstrates the corresponding impact on the overall difference between spend and allowance.

The overall performance that is reported in our Regulatory Financial Performance Report (RFPR) represents a different performance view and shows forecast costs to be below adjusted allowances by £1.3bn. There are several factors driving this divergence between the performance observed from that reported directly to Ofgem in the Regulatory Reporting Packs. The differences are summarised in the table below:
 

The categories of adjustment embedded into the RFPR position are:

• Adjustments to reflect timing of spend (phasing allowances and edge effects in the table above) of £0.8bn
• Our ongoing efficiency ambition not embedded at project level of £0.4bn
• Other adjustments totalling £0.3bn. This is a mix of output delivery incentive (ODI) performance and the effect of profits for the unlicensed work that we carry out for the benefit of our customers. 

Adjustments to reflect timing of spend

When considering our performance against allowances, we have adjusted the phasing of allowances to match the phasing of output delivery. This is in line with the reversal of enduring value adjustments we made during the RIIO-T1 period with allowances adjusted from the RIIO-T1 period falling into two categories:

Phasing of allowances

Allowances relating to Load-Related projects initiated in RIIO-T1 but completing in the first two years of RIIO-T2 (known as RIIO-T1+2) have been re-profiled for financial reporting purposes to recognise the performance when the output is delivered. This has resulted in an additional £331m of allowance being recognised in the RIIO-T2 period.
 

Edge Effects

This refers to the impact on performance of projects crossing price control periods and shows an apparent over or under spend in one price control period which is offset in the other price control period. 

The impact of edge effects has been exacerbated in 2022/23 due to the challenges imposed by Covid-19 in the RIIO-T1 period, which delayed some interventions into RIIO-T2. We plan to undertake these replacements during the RIIO-T2 period in addition to delivering the commitments made as part of the RIIO-T2 contract. Financial reporting has re-profiled allowances to reflect this with additional allowances of £444m being reported in the RIIO-T2 period.

Financial Year 2022-23 view

Load-Related 5-year view 

The Load-Related plan, that is the work to connect customers to the network and make wider network reinforcements, is forecast to deliver the outputs required to meet customer needs for £2.03bn of direct capital expenditure, £580m more than baseline allowances of £1.45bn and £294m less than adjusted allowances of £2.33bn. The adjusted allowance Below is the updated table position represents an increase of £880m from Final Determinations, driven by: 

• Increase to allowances of £1.2bn, resulting from the application of volume drivers for generation, demand and wider works reflecting the increased need for investment in response to changing customer needs and the application of the expected outcome of the closeout of RIIO-T1.  

• Decrease to allowances of £326m reflecting anticipated future adjustments for bridging allowances provided for the delivery of outputs beyond the second year of RIIO-T3 and adjustments relating to pre-construction funding through the Price Control Deliverable mechanism. In the Load-Related portfolio, we have analysed the differences between spend and allowance in order to categorise it as either:  

•  Efficiency or inefficiency - includes projects with specific examples where costs increased or decreased as a direct result of our action.  

• External factors outside of our control - will include projects where changes have resulted due to changing customer or ESO requirements  

• Assumptions made within the price control settlement that have varied against the actual position - will include cost changes resulting from changes in scope that has not been subject to a change in customer or ESO requirements, or where the allowance mechanism has changed  

Based on the above methodology, the £294m difference between cost and allowances has been allocated in the following manner (where a positive number is an underspend): 

Overall FY22 Performance

The forecast expenditure for the whole of RIIO-T2 is £7.5bn against Final Determination Allowances of £5.4bn – a difference of £2.1bn. Since Final Determinations, there have been updates to allowances to reflect changes in the Load-Related plan, re-openers submitted and adjustments for investment no longer required, as well as anticipated adjustments which will be enacted at the end of the price control through the relevant mechanisms. 

To understand our underlying performance, these updates have been included, adding a further £1.9bn of allowances over the price control period. This results in a reported difference between spend and allowance of £0.1bn for the RIIO-T2 period. 
 

Load Related 5-year view

The Load-Related plan, that is the work to connect customers to the network and make wider network reinforcements, is forecast to deliver the outputs required to meet customer needs for £2.03bn of direct capital expenditure, £580m more than baseline allowances of £1.45bn and £294m less than adjusted allowances of £2.33bn. The adjusted allowance position represents an increase of £880m from Final Determinations, driven by: 

• Increase to allowances of £1.2bn, resulting from the application of volume drivers for generation, demand and wider works reflecting the increased need for investment in response to changing customer needs and the application of the expected outcome of the closeout of RIIO-T1. 

• Decrease to allowances of £326m reflecting anticipated future adjustments for bridging allowances provided for the delivery of outputs beyond the second year of RIIO-T3 and adjustments relating to pre-construction funding through the Price Control Deliverable mechanism. 

Asset Health Related 5-year view

The 2022/23 asset health related plan, which is work to replace or refurbish existing equipment on the transmission network, shows a forecast spend of £2.1bn over the RIIO-T2 period, which is £310m more than the Final Determination baseline allowances of £1.8bn, and £187m more than adjusted allowances of £1.9bn. The allowance adjustments reflect reductions for work not now forecast to be completed, balanced with additional allowances agreed through re-openers. The net £187m overspend has been predominantly driven by:  

• Spend on delivery of outputs outside the RIIO-T2 submission. These are not RIIO-T2 regulatory outputs and have no baseline allowances and therefore appear as overspend.  

• Increased RIIO-T2 spend on delivery of certain outputs due to timing of spend. This is mainly occurring in the circuit breaker category and London Power Tunnel phase 2 (LPT2) project.  

• Offset by the efficiencies attained and forecast in delivering Price Control Deliverable outputs.

Financial Year 2022-23 view

An overview of year two and forecast RIIO-T2 performance Five-year expenditure is broadly in line with adjusted allowances.

The forecast expenditure for the whole of RIIO-T2 is £7.5bn against Final Determination Allowances of £5.4bn – a difference of £2.1bn. Since Final Determinations, there have been updates to allowances to reflect changes in the Load-Related plan, re-openers submitted and adjustments for investment no longer required, as well as anticipated adjustments which will be enacted at the end of the price control through the relevant mechanisms. 

To understand our underlying performance, these updates have been included, adding a further £1.9bn of allowances over the price control period. This results in a reported difference between spend and allowance of £0.1bn for the RIIO-T2 period. The following table reports these adjustments and resulting performance by RIIO category. 

Non-operational Capex five-year and FY22/23 view

Our Non-Operational capex is spend on IT, Property and Fleet. The current expectation is that total Non-Operational Capex in the RIIO-T2 period will be broadly in line with the post-reopener allowances at £395m. IT investment forms the majority of this spend, alongside a focus on developing EV charging capability for the NGET operational estate. The latter will provide an integrated charger network with the capability to provide management data and real-time engineering support to electric vehicle drivers. Our Non-Operational capex spend on IT, Property and Fleet in 2022/23 was £56.2m which is £23.1m lower than adjusted allowances. 

This reflects lower IT expenditure, which has largely been driven by re-phasing into future years. The remaining variance is made up of Property investment being lower than allowances, offset by higher vehicle purchases and EV charging investment. 
 

Network Operating and Indirect Costs five-year and FY22/23 view

Network Operating Costs (NOC) are the total spend on visual amenity, faults, inspections, repairs and maintenance, vegetation management and legal and safety. It is forecast to be £1.1bn, which is £159m higher than the adjusted allowance position of £951m for the RIIO-T2 period. For NOC categories excluding visual amenity, spend is forecast to be £780m, which is £135m higher than the adjusted allowance position of £645m for the RIIO-T2 period. The £135m overspend has been driven predominantly by above-inflationary costs on ownuse electricity (currently forecast as £109m compared to 5-year baseline allowances of £32m).  

In 2022/23, the total spend was £137m which was £9m more than allowances; this was mainly due to the increase in own-use electricity costs at substations offset by spend on the 'Repairs’ category (a being £8m less than allowances. For the visual amenity projects, our forecast is to spend £330m during RIIO-T2, a £24m overspend compared to adjusted allowances of £306m. This overspend is due to the phasing of costs and allowances crossing RIIO-T1 and this price control period; total spend is in line with total allowances across the two price control periods. 

Return on regulated equity (RoRE)

The Return on Regulatory Equity (RoRE) figure is a key measure by which Ofgem compares operational and financing performance across Network Operators. This encompasses the costs and allowances associated with a RIIO regulated business, including totex, financing, tax, incentive performance and company funded innovation costs. A key concept in the RoRE calculation is enduring value.

RoRE aims to show the full value earned by the regulated company during the price control period. This is based on the enduring value, being the true value of the regulated business over the course of the price control. The enduring value of the business factors in the financial impact of any decisions or future events, which have yet to be reflected in Revenue and RAV but are known at the time of estimation. Where possible forecasting is utilised to give a view of the true value of the regulated business, however this first reporting year does not accommodate all required adjustments. Therefore, several adjustments are applied after the completion of this first reporting year (RRP22). These adjustments either re-phase allowances in line with spend or release deferred allowances from RIIO-1 to ensure performance is recognised when outputs are delivered. The enduring value adjustments impact on the network’s return and RAV and ultimately RoRE. RoRE for 2022/23 and the RIIO-T2 period comprise the following components:

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Impact on domestic consumer bills

Our revenues are recovered through the Electricity System Operator charging our customers for the services we provide. Other costs (like wholesale costs, suppliers costs, tax and social and environmental obligations) make up the average consumer bill and network costs only make up a small part of it. Of this total bill, £19.70 is attributable to National Grid’s TO costs. The current increases in energy prices have not increased the network costs as the amount that we are able to recover is fixed. This means if consumer bills go up, the percentage applicable to us goes down. Ofgem’s RIIO-T2 framework ensures that two-thirds of any efficiency savings that we have delivered are passed onto customers resulting in lower network charges, and therefore lower electricity bills for the end consumer.