Providing Some Balance

[FB.]

hmm, you could be right, I'm not clear on the details, I was taking this from a presentation I'd watched last night by the head of OFgem where I'm sure he said 'WE are investing £20 billion in upgrading the national grid before 2020'.

As he works for Ofgem, I was assuming the we referred to funds Ofgem directly manages, but it looks like it's more like they regulate the charges the National Grid is allowed to make in respect to grid upgrades etc so effectively authorised the spending rather than actually funding it.

Yes, the "WE" actually means that OFGEM have declared that National Grid must invest a certain amount of money into the grid, for specific purposes, over the next several years.
National Grid have to find that money up-front. They are then allowed to earn about 10% return on that investment.
However, a very large amount of that investment will have to be borrowed - if they can - otherwise shareholders will have to cough up a lot more. If the money has to be borrowed, they will have to pay 5-6% interest on that. The remaining 4-5% will be their profit margin after interest costs.

Or, with the entire of National Grid "worth" about £25bn, for a literal doubling in the size of the company (assuming £25bn additional investment) they can ask the shareholders to "double-up" and pay an amount into the company equal to the current holding. So if I held £10k worth of National Grid shares and they could not borrow the money needed, I'd be looking at having to fork-out another ten grand to fund this expansion - and with the additional risks that the government or regulatory environment may change and end up losing that money if the government "did a railtrack" and seized the company.

As I've said a few times: if investment is required, there must be a reasonable rate of return allowed (what's the current ROI for solar?) and there must be a reasonably predictable outlook for the risk:reward.
Most of the UK's nuclear projects have been scrapped because the government has been dithering with publising a clear set of rules, expectations or allowed rates of return on investment.

 

[FB.]

Q/How does National Grid invest in the electricity and gas networks it maintains?
A/ With the assistance of money obtained from its shareholders AND Ofgem approved subsidies- paid for by UK consumers via increases in their respective energy bills which amounts to £22 billion from 2013 to 2021.
If I were a shareholder in an energy business receiving £22 billion in subsidies to enhance an energy network I maintained, I wouldnt feel so hard done by.
Stake holders in companies receiving significant external investment like National Grid aren't taking all the risks, so shouldn't expect all the returns.
It is the UK energy customers that are effectively underwriting a large proportion of the investment in the UK energy networks, not the shareholders as FB might like us to believe.

No.
National Grid is allowed to charge other companies - the gas/electricity retailers - a fee for the use of their networks. National Grid also have to ensure that sufficient power stations are operating at all times to maintain grid voltage within acceptable ranges.
The fee that National Grid is allowed to charge is based on a percentage of National Grid's asset value. The allowed rate of return is around 6%, inflation-linked to RPI-X.
So £100million spent on assets is allowed to make a profit of around £6m each year thereafter, for a "payback" time of about twelve years; worse than "investing" in domestic solar PV.

Hence National Grid have gross assets around £50bn, and make an annual profit from those assets of around £3.5bn (some of the assets are US-based, with a slightly different pricing structure).

 

[FB.]

Looking at SSE (Scottish & Southern Energy; Southern Electric).

Gross assets: £20bn
Annual post-tax profit: £1.1bn

Return on assets: 5.5%

Doesn't look so impressive, does it?

These companies really are operating on wafer-thin margins and low rates of return on investment.

Would you bother to invest in multi-year, multi-£billion projects - and run the risk of political mood swings - with only a 5.5% return on investment?

As I said in the National Grid example: try selling solar PV to people with a 5.5% ROI and see how many you sell.

 

[Vegelen]

SSE (Scottish & Southern Energy; Southern Electric).

Gross assets: £20bn
Annual post-tax profit: £1.1bn

Return on assets: 5.5%

Doesn't look so impressive, does it?

These companies really are operating on wafer-thin margins and low rates of return on investment.

Q/ Why invest in such a company then FB?

A/ The returns are stable, comparitively low risk and fairly predictable- Everyone will need power today, tommorrow, next week and beyond.

I accept your point about investment in National Grid v government regulation v rate of return. etc.

 

[FB.]

.
Article in the Telegraph:

Shell CEO throws weight behind Government’s 'dash for gas’ - Telegraph

.