What we said we’d do

Through our business planning process, including submission to Ofgem and the negotiation of the RIIO-T2 deal, we had value for money at the heart of it all. We want to deliver a clean, fair and affordable electricity network for all.

What we have done and what we forecast to do

The forecast expenditure for the whole of RIIO-T2 is £7.3bn against Final Determination Allowances of £5.4bn – a difference of £1.9bn. Since Final Determinations, there have been updates to allowances to reflect changes in the Load related plan, reopeners submitted and adjustments to allowances 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 £1.5bn of allowances over the price control period, resulting in a reported difference between spend and allowance of £0.4bn for the RIIO-T2 period. The following table shows a 5-year view of costs and allowances and is in £bn rounded to one decimal place.

Regulatory Financial Performance Reporting (RFPR)

This is our Regulatory Financial Performance Reporting (RFPR) submission to Ofgem. RFPR contains our financial performance for 21/22 under the RIIO framework. RFPR enables Ofgem to administer the licence conditions that relate to the price control. This includes monitoring the performance of licensees against Final Determinations, monitoring compliance with price control obligations and reviewing performance between price controls.

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Download the RFPR pack

Regulatory reporting - Spend and Allowance

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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.

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Annual accounts – spend and allowance

The overall performance that is reported in our Annual Accounts represents a different performance view and shows forecast costs below allowances of £0.9bn. There are several factors driving this divergence between the performance observed from those reported directly to Ofgem in the Regulatory Reporting Packs. The different views of the reporting are summarised in the table below:

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There are two categories of adjustments embedded into the position which are explained further below:

  • 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 £0.5bn

Adjustments to reflect timing of spend

When considering our performance against allowances, we have adjusted 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 £332m 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 FY22 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 revised with additional allowances of £475m being reported in the RIIO-T2 period.

Our ongoing efficiency ambition: we have stated our ambition to continue to seek additional efficiency through improving and innovating its approach to operating, maintaining, replacing and extending our transmission network. There are a number of initiatives currently being developed and implemented which has been estimated to deliver £500m of efficiencies.

Spotlight on year one and 5 year forecast

Financial Year 2021-22 view

In FY22, direct capex expenditure on the Load-Related portfolio was £301m which was £163m less than adjusted allowances of £464m. the table below shows the different types of load related works and where the costs

differ from allowances. The main reasons for these variances are the phasing of allowances, higher spend on Hinkley, and efficiencies in preconstruction:

  • When the allowance is a volume driven uncertainty mechanism output and the spend profile differs from the allowance profile, ie is longer or shorter than the four year allowance profile.
  • When we are delivering schemes in the first two years of RIIO-T2 that started in RIIO-T1 we see higher allowances than costs, especially in 2021/22
  • Some costs moved from the previous year into 2021/22 for the Hinkley-Seabankconnection as works movedforward
  • Some lessons learnt from other large schemes in early development have been implemented on other schemes so reducing forecasts for overall pre-construction spend

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Overall FY22 Performance

The difference between spend and allowance of £0.3bn in FY22 has been driven by a lower workload delivery than the position assumed in the Final Determinations. The majority

of this has resulted from a re-profiling of the non-load plan following Ofgem’sDraft Determinations in July 2020. The Draft Determination position did not provide funding for many of the projects included in our RIIO-T2 Business Plan and consequently much of this work was removed from the plan for the first couple of years of the RIIO-T2 period. Additional funding was subsequently provided in the Final Determinations and, although the plan was reviewed again in line with this increase, it created a delay in delivery as there is an inherent lead time to re-plan and re-commence work.

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 £1.89bn of direct capital expenditure, a variance of £586m from the Final Determination allowances of £1.3bn and £134m less than adjusted allowances of £2.02bn. The adjusted allowance position represents an increase of £720m from Final Determinations, driven by:

  • Increase to allowances of £823m, resulting from the considerable level of change in the future energy background, needed to reach Net Zero targets by 2050, driving an overall increase in the expected level of customer-related outputs we expect to deliver.
  • Decrease to allowances of £102m reflecting anticipated future adjustments by removing allowances for a baseline scheme no longer required and where allowances are amended to avoid double funding.

Asset Health Related 5-year view

TheRRP22assethealthrelated plan,whichtheworktoreplace or refurbish equipment on the transmissionnetwork,showsa forecastspendof£2.2bnoverthe RIIO-T2 period, which is £435m morethantheFinalDetermination baseline allowances of £1.8bn, and £296m more than adjusted allowances of £1.9bn. The adjustments reflect allowance reductions for work notnow forecasttobecompleted,balanced with additional allowances agreed throughreopeners.

The net £296m overspend has been predominantly driven by an increase in spend resulting from:

  • Spend on delivery of outputs outside of the RIIO-T2 submission. These are not RIIO-T2regulatoryoutputsand haveno baselineallowancesand thereforeappear as overspend.
  • Increased RIIO-T2 spend on delivery of certain outputs. This is mainly occurring in the circuit breaker category and London Power Tunnel phase 2 (LPT2) project.

Financial Year 2021-22 view

In FY22, direct capex expenditure on the Asset Health Related portfolio was £360m which is £68m less than adjusted allowances of £429m. This difference between spend and allowance is predominantly driven by the following;

  • uncertainty that existed between Draft and Final Determination at the time of planning the work for FY22. In general, the higher volumes of work allowed in Final Determination (compared to Draft) are planned to be delivered across the remaining years of RIIO-T2
  • difficulties with contractor availability in FY22
  • Covid-19 impacts

Non-operational Capex five-year and FY22 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 £397.3m. IT investment forms the majority of this spend, alongside a focus on developing EV charging capability. This will provide an integrated charger network with the capability to provide management data and real-time engineering support to electric vehicle drivers. This is offset by a reduction in the level of investment in Fleet purchases due to the uncertainty caused by the global supply challenges faced by manufacturers.

In 2021/22, costs were £66.5m which is £7.1m lower than allowances once the additional £3.1m of allowances following the three Reopener submissions is considered. This difference between spend and allowancereflects a combination of lower spend on IT and fewer vehicle purchases offset by a higher level of investment in Property and Electric Vehicle (EV) charging.

Spend on developing our main finance system, which will modernise and digitise systems to provide financial information to drive improvements in decision- making, cost management and efficiency, continues to be the largest component of IT investment; this will provide efficiencies in data management to transform and streamline finance processes.

Network Operating and Indirect Costs five-year and FY22 view

The Network Operating Cost (NOC) spend is the total spend on faults, inspections, repairs and maintenance, vegetation management and legal and safety. It is forecast to be £939m, which is £60m higher than the adjusted allowance position of £878m for the RIIO-T2 period. The £60m over-spend has been driven predominantly by above- inflationary cost pressures on electricity and pay levels which has been offset to a small extent from initiatives implemented to support our commitment to save £77m operating costs by 2024. In FY22, the total spend was £149.8m which was £7m more than allowances and was mainly due to the costs incurred in flood mitigation projects delayed from RIIO-T1 and incurring costs without specific allowances in FY22.

Our expenditure on indirects, that is the total costs for internal and external support staff for RIIO-T2, is forecast to be £1.5bn, £0.2bn higher than Final Determination allowances of £1.3bn.

Return on Regulatory Equity and Consumer Bill Impact

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 2021/22 and the RIIO- 2 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, £20.03 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. For RIIO-T2, we estimated that the bill impact would be £20 at the start of the period reducing to £19 by 2025/26 and therefore our current costs are in line with the forecast.