The 820,000km of electricity cables criss-crossing Britain have proved a solid investment for those who swooped on the electricity network sector post-privatisation in 1990.
International investors including Warren Buffett, Li Ka-shing and major global infrastructure funds have enjoyed the comfort of owning regulated monopolies in a relatively sleepy sector that attracts less of the political heat than those producing or selling energy.
They are in for a sharp awakening. The sector’s crucial role in delivering the UK government’s legally binding targets to cut carbon emissions requires growth and investment on a scale not seen in decades, putting them at the centre of difficult decisions over bills and community rights.
The exact shape of the future system is unclear. But the direction of travel is the “electrification” of the economy using clean energy, with wind turbines, electric cars and heat pumps taking the place of coal-fired power stations, petrol cars and gas boilers.
This could require more than 460,000km of new onshore electricity cables by 2050, transporting up to 200 per cent more power from far more diverse and complex sources, according to the top end of industry and government projections. The onshore network alone could require total investment of as much as £350bn by 2050, the government has said.
“It’s mind-boggling,” says Sir John Armitt, chair of the UK’s National Infrastructure Commission, of the scale and pace of the new infrastructure required. “These are big challenges.”
The transition has endured a bumpy start, with mounting complaints about new power projects waiting years to connect to electricity networks. In Britain these are now owned by six groups including FTSE 100 giants SSE and National Grid, Buffett’s Berkshire Hathaway Energy, and Li’s CK Infrastructure Holdings.
About 330 gigawatts of new electricity generation or storage projects are currently waiting to connect to the system, according to Lawrence Slade, chief executive of the Energy Networks Association, the industry body. That far outstrips current installed capacity and projections for future need, although not all projects are likely to come to fruition.
About 2GW has been connected at the local distribution level so far this year, while about 33GW is set to join the transmission level over the next two years, Slade adds. “Things are moving,” he says.
Industry points to outdated queue rules and slow planning timeframes holding up work. The average time taken for big infrastructure projects to get a planning decision has climbed from 2.6 years to 4.2 years over the past decade, according to the NIC, with 58 per cent now challenged in the courts through judicial review. “The whole system just gets bogged down if you’re not careful,” says Armitt.
A flurry of reviews are under way or have concluded to try and speed things up, with Nick Winser, the government’s first “electricity networks commissioner”, to publish his within weeks.
“We need a national conversation,” says Keith Anderson, chief executive of Scottish Power, warning of the risks of any perception of “riding roughshod” over local concerns.
Yet even if non-financial barriers are cleared, there remains the thorny question of investment and bills. The watchdog, Ofgem, regulates how much networks can spend and charge their customers. It has recently approved investment of £31bn over the next five years, down from the £37.4bn invested in the previous price-control round, cutting investors’ returns to try and protect consumers in the cost of living crisis. It accepts that customer costs have previously been “higher than expected”.
In a sign of tensions, Ofgem’s move has prompted Berkshire Hathaway’s Northern Powergrid to launch an appeal with the UK Competition and Markets Authority over what it claims is the regulator’s “irrational and illogical” approach. Citizens Advice, the legal rights group, has intervened in the case and warns a win would be against consumers’ interests.
Ofgem is exploring changes to the price-control framework over the long-term to try and drive investment, although there is a risk reforms make investors nervous.
“The key thing we need is more certainty,” says Rob McDonald, managing director at SSEN Transmission, which owns networks in Scotland.
Addressing questions over the effect on bills, the government argues the cost of the network per unit of electricity is not expected to rise significantly due to net zero, as higher costs will be spread across greater electricity usage.
Stronger networks should help reduce wholesale costs overall by enabling more renewable electricity to be deployed. But the shape of future bills is highly uncertain, and any surges could cause political pushback.
“Do [network owners] really want to invest these sums, given the political risks in front?” asks Sir Dieter Helm, a professor of economic policy at Oxford university who has regularly advised the government. “My real fear is that what will give is the [net zero] targets: it will all take longer.”
Politicians and networks hope one measure that can keep network costs down is “demand-side response”, in which businesses and households are encouraged to shift electricity usage outside of peak times. This could mean charging the car or running the washing machine overnight, for example. Government analysis suggests this could shave up to 15GW from peak demand, potentially saving as much as £50bn in network costs by 2050.
Take-up and feasibility are uncertain, however, and it all requires much greater management of the system. To help with that, the government is prising from National Grid its role as electricity system operator, effectively renationalising part of its business, to create a “future system operator” under public ownership and with a wider remit.
The sector still draws significant interest from investors despite such intervention. In November, SSE sold a 25 per cent stake in its transmission business to investors including the Ontario Teachers’ Pension Plan board, for £1.5bn.
Last year, a consortium led by KKR and Australia’s Macquarie reached late-stage discussions to buy UK Power Networks from CKI, but pulled out at the last minute amid rising inflation. UKPN has paid out dividends of £2.2bn since it was bought in 2010 for £5.5bn.
CKI has not commented on whether it is still seeking a sale. Any buyer will need to have a strong stomach for the rapid changes required.
“The government has big decisions to make,” says Armitt. “If we don’t take those decisions, if we don’t accept the reality of the challenge, then we will not make it [to net zero]. We are not going to get there by wishful thinking.”
