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National Grid PLC Decision on Ofgem's RIIO FD and Dividend Update

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Whilst we welcome the significant movement in total expenditure ("totex") allowances and greater flexibility around future net zero investment for Electricity and Gas Transmission, we will be submitting a technical appeal to the Competition and Markets Authority (CMA) regarding Ofgem's proposed cost of equity and outperformance wedge.

 

The Board has reviewed the Group's dividend policy in light of this decision, and is announcing that from FY2021/22 onwards, the policy will aim to deliver annual dividend per share growth in line with UK CPIH inflation. The Board reaffirms the current dividend policy for FY2020/21, with growth at least in line with RPI.

 

RIIO-2 Final Determination

 

Having reviewed in detail Ofgem's Final Determination for the RIIO-2 price control, published on 8 December 2020, we are pleased to see the increase in allowances from the Draft Determination. This package will allow the critical investment required to maintain the resilience and reliability of our networks. We are also pleased to see greater flexibility in the mechanisms that will enable further investment required to deliver the energy transition.

 

We expect to invest around £10bn of capex through the course of the 5 year price control, across our electricity and gas transmission networks. At nearly £2bn per annum on average, investment will be substantially higher than the RIIO-T1 price control.

 

However, whilst Ofgem has increased the overall returns in the Final Determination for the Transmission owners as well as addressing other issues with the Draft Determination, the Board has decided on a technical appeal to the CMA focused on the cost of equity and outperformance wedge.

 

We believe that the methodology Ofgem used to set the cost of equity ignores evidence for higher total market return and risk-free rate levels. We also maintain the view that the outperformance wedge, a downward adjustment to allowed returns in expectation of future outperformance, is conceptually and practically flawed. We were disappointed it remained in the Final Determination.

 

If the CMA accepts to hear our appeal, the six-month process will begin from April. Based on timelines for similar processes, provisional findings would be expected around July with Final Determinations in early October.