by Nigel Hawkins
Whilst many UK politicians wax lyrical about the benefits of renewables generation – and how the Government offers very attractive subsidies to potential investors – relatively little regard is accorded to the activities of National Grid, whose key role is to provide and maintain the UK’s core electricity infrastructure. Quite simply, without National Grid providing the necessary transmission infrastructure, much of the UK’s renewables generation would be stillborn.
Ironically, when most of the electricity sector was floated in the early 1990s, ownership of the National Grid was split – almost as an after-thought – between the twelve regional electricity companies on a complex asset-based calculation.
Subsequently, National Grid was floated in the mid 1990s. And it has since prospered both in the UK and in the US, where it has expanded aggressively. Currently, National Grid is worth over £17 billion, way above the valuation of any other UK utility.
Given the shortfall of UK generation capacity and in expectation of many new plants being built, National Grid is now raising its UK investment levels very sharply. In particular, it is planning for a major extension of its network to accommodate both new renewables generation as well as preparing, perhaps optimistically, for new nuclear power plants.
In the latter case, new nuclear-build is unlikely to be operational before 2018 at the earliest. Furthermore, given the very complex processes involved – notwithstanding the near £35 billion of net debt of the two most likely investors, EDF and E.On – new nuclear-build is far from being a certainty.
In terms of linking up new renewables plant – designed, ironically, to be so environmentally friendly – National Grid will need to add substantially to the 22,000 pylons currently in operation. In part, this is due to many wind plants being located in remote coastal regions. Furthermore, if the ambitious plans to develop offshore wind prove successful, the grid network will also need strengthening in many areas.
There is no doubt that National Grid’s infrastructural investment over the next decade will be the largest since the 1960s; at that time, the Central Electricity Generating Board (CEGB) undertook a massive nationwide electrification programme.
To help finance its UK investment uplift, National Grid has just raised approximately £3 billion through a rights issue that attracted an impressive 94% take-up.
Nevertheless, in March 2010 National Grid had reported net debt of over £22 billion – a figure that not surprisingly, given today’s nervous markets, caused anxiety amongst some investors.
On the environmental front, there will be real concern about some of the sites in the West Country and East Anglia where National Grid seeks to erect new pylons. They include top tourist sites such as the picturesque Mendip Hills in Somerset. Most controversially, perhaps, there are proposals to erect pylons in the Dedham Vale area on the Suffolk/Essex border, which was once the stomping ground of John Constable and therefore the cradle of English landscape painting.
Of course, National Grid could undertake far more extensive undergrounding rather than erect pylons. However, there are substantial extra costs in pursuing this option. National Grid estimates that it costs £1.6 million per mile to erect pylons and wires: the comparable costs for undergrounding and tunnelling are more than twelve times as much – over £20 million per mile.
In fact, current transmission costs account for less than 5% of a domestic consumer’s bill, which is highly sensitive to generation costs. Clearly, if there were widespread undergrounding of transmission lines, this percentage would increase.
For some years, rural Britain has become increasingly unhappy with both the construction and the operation of wind turbines. With a large number of additional pylons due to be erected, this frustration may become deeper, especially in the areas directly affected.
Nigel Hawkins is a Director of Nigel Hawkins Associates, which specialises in the provision of investment and policy research.
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