STRATEGIC OVERVIEW

A period of good regulatory progress and continued growth

National Grid has reported a solid financial performance for the first six months of the year, underpinned by continued operational progress across the Group and record half-year investment in our regulated network businesses.

Safety performance

In August 2023, one of our UK Electricity Distribution employees tragically lost his life at a site in Ludlow, Shropshire, after falling from height whilst performing overhead line work. This tragic loss of life was felt acutely across the Group, and we have worked closely with the individual's family, friends and colleagues to support them. As a Group, we are firmly committed to our staff and contractors returning home safely at the end of each day. With the incident investigation in progress, we are taking actions in Electricity Distribution and across the Group to prevent reoccurrence, enhance safety leadership engagement, and proactively learn from both actual and potentially severe incidents.

During the half year, we recorded a Group Lost Time Injury Frequency Rate (LTIFR) of 0.09, compared to 0.11 at year end and against our Group target of 0.1.

Half-year operating financial performance

Our statutory operating profit is presented on page 4 which includes the impact of exceptional items, remeasurements and timing, and a reconciliation to our APMs is presented on page 65.

We achieved solid underlying operating profit on a continuing basis of £1.8 billion. Whilst this performance is in line with expectations, non-recurring items reported in 2022/23 explain why underlying operating profit is down 15% at actual exchange rates (14% at constant currency) versus the prior period. These items in the prior half year included: St William property land sales (£201 million); a two month contribution from the Narragansett Electric Company (NECO) (£53 million); and insurance proceeds received at our IFA1 interconnector following a fire in September 2021 (£70 million).

1.  Excluding UK Gas Transmission which is held as a discontinued operation. 'Underlying results' and a number of other terms and performance measures are not defined within accounting standards and may be applied differently by other organisations. For clarity, we have provided definitions of these terms and, where relevant, reconciliations on pages 63 to 67.

For the half year, Group capital investment for continuing operations reached £3,868 million, £70 million higher than the prior period at constant currency (£15 million lower at actual exchange rates). Of this total, capital investment in our regulated networks reached a record £3,529 million, up 10% on the prior period at constant currency (7% at actual exchange rates).

Group capital investment was principally driven by higher connections spend and early investment relating to ASTI in our UK Electricity Transmission business; increased spend on our new transmission projects in New York, such as our Smart Path Connect project; higher asset condition and Grid Modernization spend in New England; partially offset by lower investment in NGV compared to the prior period due to lower spend on the IFA1 Sellindge converter station rebuild, Isle of Grain expansion and Viking interconnector as these projects near completion.

Positioning National Grid for the future - our strategic pivot

The strategic pivot that we announced in 2021 will enable the Group to play a key role at the heart of the energy transition, drive long-term shareholder value and deliver affordability for our customers. It included the acquisition of UK Electricity Distribution (June 2021), the sale of NECO (May 2022), and the sale of a majority stake in UK Gas Transmission (January 2023, when the company began to operate under a new name, National Gas Transmission).

On 19 July, we announced the sale of a further 20% in National Gas Transmission to a consortium led by Macquarie Asset Management. The equity sale is on equivalent financial terms to the original 60% transaction (acquired by the same consortium) that was completed in January 2023. Completion of the sale of this further 20% is subject to the same National Security and Investment (NSI) clearance process as the initial 60% tranche and, subject to such clearance, will complete in the same way. This will take the consortium's equity stake in National Gas Transmission to 80%.

As part of the same announcement, National Grid confirmed that it had entered into a new option agreement with the Consortium for the potential sale of the final 20% shareholding in National Gas Transmission. The Consortium has the option, exercisable between 1 May 2024 and 31 July 2024, to acquire the remaining interest. If the option is partially exercised by the Consortium, National Grid will have the right to put the remainder of its equity interest in National Gas Transmission to the Consortium, which can be exercised by National Grid between 1 December 2024 and 31 December 2024. If one or both of these options are exercised, the consideration for the remaining interest is expected to be paid in cash to National Grid on equivalent financial terms to the original 60% transaction, subject to certain adjustments.

National Grid's asset base will move to around 75% electricity (up from 60% in 2021) once the 20% equity sale in National Gas Transmission (that we announced in July) completes.

Supporting our customers and communities

Over the half year, we have made good progress on making sure our economic and social role has the greatest impact on the communities we serve. We have continued to see a tough economic backdrop for our customers and communities as inflation, and rising energy prices, have contributed to the cost-of-living crisis. As a responsible business, our focus remains on delivering the energy transition in the UK and the US to help move towards a clean energy future that is affordable for customers.

As part of this, we announced last year our winter funding packages to help our most vulnerable customers and communities in the UK and US. Of the $17 million we committed to help customers in New York and Massachusetts, around $9 million has already been distributed in the past year through our network partners to assist over 35,000 households with high energy costs. The remaining funds will be distributed across the forthcoming winter months in 2023/24.

In the UK, we have £11 million remaining of the original £50 million support fund that we established last year, and we plan to distribute it this coming winter across a number of areas. This will include expanding our UK Electricity Distribution Community Matters Fund that offers grants to customers struggling with fuel poverty; continuing our support for home visit, customer advice and fuel vouchers through the National Energy Foundation and Fuel Bank Foundation; and supporting Citizens Advice by funding an additional 15 full-time caseworkers, delivering support to an additional 2,400 people with specialist advice.

We also continue to work with Ofgem on the early return of £200 million of interconnector revenues to UK consumers that we announced in May 2022. We also plan to return a further £100 million of revenues to customers, as we announced in May 2023, subject to Ofgem's consent.

UK regulatory progress and Winter Outlook

We have seen good regulatory progress in the UK across a number of policy and regulatory areas. From recommendations made to accelerate transmission investment, through to the Energy Act 2023 receiving Royal Assent, the progress we have seen this year will support the UK's drive for decarbonisation, greater energy affordability and increased energy security, goals for which National Grid is wholly aligned and supportive in delivering.

Energy Act 2023 and Future Systems and Network Regulation (FSNR)

At the end of October, we welcomed the Energy Act receiving Royal Assent and passing into legislation. The Act is a crucial next step in delivering a secure and affordable clean energy network and establishes important policy and governance foundations to deliver on the UK's net zero ambitions. The Act enables the separation of the Electricity System Operator (ESO) from National Grid and the formation of an Independent System Operator and Planner (ISOP). The ISOP, formerly referred to as the Future System Operator, will have a critical role in delivering strategic, whole system energy planning and oversight as we continue to invest in and transform the UK's energy infrastructure. We expect the ISOP to be established as a public entity in 2024 with responsibilities across both the electricity and gas systems.

We also welcomed the introduction of a net zero duty for Ofgem within the Act, which widens the regulator's remit to consider net zero targets as part of its decision making. The inclusion of marine grids in the legislation's definition of offshore wind associated infrastructure is also welcome and will assist in simplifying the consenting process.

Also in October, we welcomed Ofgem's publication of the FSNR Framework Decision. This sets out the overarching framework for the network price controls for electricity and gas transmission, and gas distribution, which will run from April 2026, known as 'RIIO-3'. For electricity transmission, the main points from the FSNR Decision included:

■  the continuation of five-year price controls, including the setting of returns and assessment of financeability (to ensure that necessary capital is attracted to support expansion needed in the grid);

■  evolution of a RIIO-style framework, with the introduction of a major projects regime for significant network investments identified in the Centralised Strategic Network Plan (see below);

■  the need for streamlining of the regulatory framework, recognising the requirement for companies to propose investments that are anticipatory; and

■   a focus on the need to accelerate digitalisation.

The detail of the frameworks will now be developed through the sector specific methodology phase which will be managed through a combination of working groups and a consultation to be published in December 2023. The final methodology decision will be made in Spring 2024. The Decision also confirmed that the overarching RIIO-3 framework will provide a foundation for the Electricity Distribution price control which will start in April 2028. The precise framework and process for Electricity Distribution will be consulted on separately in late 2024.

Further progress on ASTI

On 25 August, Ofgem published transmission licence modifications which formally place the ASTI projects into Transmission Operators' licences. This includes the 17 ASTI projects that Ofgem awarded to National Grid in December 2022 to upgrade the East coast transmission network in support of the UK government's 50 GW 2030 offshore wind target. We are pleased with progress, and we have continued to engage with Ofgem on the profile and timing of the required ASTI investment. We expect the majority of this investment to be deployed towards the end of this decade.

The 17 ASTI projects will be delivered by our Strategic Infrastructure (SI) business unit which ensures efficient and effective delivery. As each project completes, it will be transferred to UK Electricity Transmission which will then be responsible for the ongoing operation and maintenance of the infrastructure when in service[3].

We have made good progress on our ASTI projects over the half year, including: signing JVs with ScottishPower for Eastern Green Link 1 in August, and with SSE for Eastern Green Link 2 in June; selecting the preferred suppliers for converter stations and cables at Eastern Green Links 1 and 2; completing the 'examination' stage of our Development Consent Order (DCO) application for the Yorkshire Green project; and launching the procurement process for the 'Great Grid Upgrade Partnership', the contractual model that will be used to deliver the majority of our onshore projects. The model has been designed on industry best practice with contracts expected to be awarded early in the new year.

Transforming the network - reforming the pace of the energy transition

In May, National Grid published 'Delivering for 2035: Upgrading the grid for a secure, clean and affordable energy future'. The paper outlines five priority areas where action is required by the UK government and Ofgem to ensure electricity networks can fully play their part in decarbonising the power sector by 2035. These priority areas are:

■   reforming the planning system, centred around a strategic spatial energy plan;

■   ensuring the regulatory and governance framework is set up for delivery;

■   transforming how clean energy connects to the grid and accelerating net zero projects;

■   putting communities and consumers at the forefront of the transition; and

■   developing supply chain capacity and a skills pipeline across the country.

The recommendations we made in the publication are critical to reforming the scale and pace of the energy transition needed over the next decade, particularly in transmission, to enable the decarbonisation of the UK power sector by 2035. Whilst significant progress has been made towards transforming the UK's power system in recent years, full decarbonisation will require more urgent action from industry, the UK government and Ofgem. We are pleased to see a number of positive developments in this half year that support our call for urgent reform.

In August, we welcomed the publication of the Electricity Networks Commissioner's (ENC's) report and its recommendations aimed at significantly reducing timelines for delivering onshore and offshore transmission network infrastructure. Many of the recommendations align with our priority areas. In particular, we support the ENC's recommendation for a strategic spatial approach to planning energy infrastructure and the robust need case this would provide. The UK government has committed to publishing an Action Plan in response to the ENC report by the end of 2023, setting out future actions for government, Ofgem and industry.

Key proposals by the ENC also link with Ofgem's consultation published in June on proposed arrangements for the Centralised Strategic Network Plan (CSNP). The CSNP will be a new transmission network planning approach that will be delivered by the ISOP. The Ofgem consultation covers the first stage of the CSNP regulatory framework setting out how it expects the ISOP to model future supply and demand (currently the Future Energy Scenarios, or FES) that will inform future network investment need. National Grid fully supports the creation of a CSNP and agrees with the direction of the proposals in the Ofgem consultation. As with the ENC recommendations, the aims of the CSNP align with our five priority areas in our 'Delivering for 2035' paper.

Connections reform across our transmission and distribution networks

National Grid has launched a new reform initiative to accelerate grid connections across our transmission and distribution networks.

During the half year, the ESO has continued to work with stakeholders, including UK Electricity Transmission, to improve and reform the connections process to the transmission network. We have been working on two major aspects, the shorter term Five Point Plan, and a longer full connection reform process. The transmission connection queue now stands at over 400 GW for Great Britain which represents a significant oversubscription of what is required to meet the scenarios in the ESO Future Energy Scenario publication.

The Five Point Plan has been worked through with all transmission owners and customers. Progress is being made with around 5 GW of connection contracts being rescinded through the Transmission Entry Capacity (TEC) Amnesty, and our change of the treatment of batteries has accelerated over 10 GW of connections by at least four years. Work is being undertaken by the transmission owners to assess the full impact of the implementation of the Five Point Plan. One of the key changes will be the introduction of Queue Management clauses into connection agreements so that if connecting customers miss key milestones in their development then the ESO will have the right to terminate the connection. It is expected that Ofgem will decide on the code modification required to enable this in November this year.

For longer-term reform, the ESO published a consultation in the summer, and we are responding with a recommended solution at the end of November. We are working with Ofgem to understand a way forward that can expedite the implementation and delivery of the benefits of the proposed connection reform.

We have also taken further action on connections reform across our UK Electricity Distribution network. In September, we announced plans to release 10 GW of grid capacity for the connection of renewable generation assets to our network. This follows engagement since the beginning of the year with the ESO, Ofgem and the UK government to find solutions to speed up the connection of low carbon technologies. Through a new agreement with the ESO, projects that require additional transmission network reinforcement will be offered the chance to connect under an interim, non-firm connection arrangement. In return for an earlier connection, the interim arrangements would mean some projects could be curtailed when there is too much generation on the system, such as on some of the windiest and sunniest summer days.

In the long term, these interim arrangements will be replaced with firm connections as network capacity increases. In addition, from September we have started to replace the current 'first come, first served' connection model with a 'first ready, first connected' approach on our UK Electricity Distribution network. This updated approach, which will apply on a non-firm basis to a subset of supply points, will accelerate the connection of 'shovel ready' projects to allow more low carbon projects to connect faster. As a result, these changes will allow customers to accelerate their connection dates and provide a more agile approach to managing connection requests.

We also continue to work with members of the Energy Networks Association (ENA) on reforming the connection process to distribution networks. This includes promoting mature projects that are closer to delivery above those that may be 'blocking' the queue; and changing how transmission and distribution networks coordinate connections, improving their interactivity.

Ofgem inflation consultation

On 1 August, Ofgem published a 'call for input' on the impact of high inflation on network price controls. This was expected as it was raised by Ofgem as part of the Electricity Distribution Draft Determinations in summer 2022. There are five policy considerations that Ofgem have asked stakeholders to comment on, namely: no action; reporting and transparency; future price control design; true up; and voluntary submissions. The document recognises the importance of stable regulation and the risk of changing how regulation works.

We have worked with the ENA to put forward our views and, given the timeline, we believe this is best discussed as part of the RIIO-3 price controls. Ofgem is expected to publish an informal consultation in late 2023 which will provide more detail around whether it intends to launch a standalone consultation or whether it will wait for the next price control period.

UK Winter Outlook

In September, the ESO published the electricity Winter Outlook for the upcoming winter in Great Britain.

Despite the ongoing conflicts in Ukraine and the Middle East, the broad European energy market has improved since last year. The market has bolstered European gas storage and supplies, and the French nuclear fleet capacity is back to pre-pandemic levels. The ESO has built on the experience of the 2022/23 winter and continued to build resilience and minimise the potential impact of risks and uncertainties in the energy markets. As such, the System Operator's Base Case scenario is that there will be adequate margins (4.4 GW/7.4%) through the forthcoming winter to ensure Great Britain remains within the reliability standard[4].

Alongside the Base Case, the ESO has stress tested the impact of credible Great Britain and EU energy market events on the system against available operational tools. As a result, it plans to reintroduce the Demand Flexibility Service for this winter to incentivise customers to reduce consumption during periods when margins are tightest. This measure, alongside the robust set of tools already deployed by the ESO, will contribute to maintaining adequate margins and mitigate impacts to customers.

US regulatory progress

We have seen good momentum on regulatory progress across our US jurisdictions during the half year.

New York rate filings

On 1 September, New York Public Service Commission (PSC) Staff responded to our rate filing that we made for our downstate gas business, KEDNY-KEDLI, in April. The response proposed a Return on Equity (ROE) of 9.1% (compared to our request for 9.8%), revenue increases of $389 million for KEDNY and $220 million for KEDLI (compared to our request of $466 million and $277 million respectively) and a 7.5% reduction on our request for capital expenditure in 2024/25. In addition, PSC Staff also recommended increasing Leak Prone Pipe (LPP) replacement targets for both KEDNY and KEDLI (for example, 55 miles of pipe replacement at KEDNY in calendar year 2024 against our request for around 40 miles; and 125 miles of pipe replacement at KEDLI in calendar year 2024 against our request for around 110 miles). PSC Staff supported future Renewable Natural Gas (RNG) connections to the gas network, recognising that projects are at an early stage; the regulator also expressed support for advancing and funding an opportunity to use an existing green hydrogen facility for blending in a closed system on Long Island. National Grid responded to the PSC Staff position on 22 September, and we plan to move forward in settlement negotiations, hoping to reach a Joint Proposal with stakeholders in the first quarter of calendar year 2024.

We also remain on track to file for new rates at our Niagara Mohawk (NIMO) electric and gas business (upstate New York) in summer 2024.

New York transmission investment

In July, we received Federal Energy Regulatory Commission (FERC) approval for cost recovery on our Smart Path Connect transmission rebuild and refurbishment project in upstate New York. The order included a 10.3% ROE with a 50:50 debt:equity ratio, with cost recovery effective from 1 April 2023. The project, to develop 110 miles of transmission lines in partnership with the New York Power Authority (NYPA), will unlock more than 1,000 MW of existing renewable resources, deliver significant production cost savings and emissions reductions, and will decrease transmission congestion. The project is on track to be completed by 2025.

Massachusetts - Electric Sector Modernization Plan submitted

On 1 September, we filed our Electric Sector Modernization Plan (ESMP) in Massachusetts. The plan outlines the investment required in our electric distribution network over the next five years and beyond to help the State meet its clean energy goals under the 2050 Clean Energy and Climate Plan (CECP). Under the plan, we have proposed to invest up to $2 billion over the next five years across the following areas:

■   Network infrastructure: upgraded power lines, transformers, substations, to make the network more resilient, connect clean energy and plan in advance for growth in electric demand;

■   Technology and platforms: new planning tools for smarter decision making, including new data and monitoring systems to ensure system stability, and new IT infrastructure; and

■   Customer programmes: help customers reduce carbon footprint, drive smart energy use.

Customers and all other interested parties will be able to provide their feedback through public and technical workshops that National Grid will conduct jointly with other electric distribution companies. We will use feedback to inform the formal filing of a Future Grid Plan to the Department for Public Utilities (DPU) in January 2024, after which the DPU will consider the Plan and direct the company on how to proceed. The proposed investment under the ESMP is not currently part of any rate order for our service territory.

We remain on track to file for new rates for our Massachusetts Electric business in mid-November 2023, and we will propose a mechanism for recovery of the ESMP investment as part of that filing.

Twin States Clean Energy Link

In October, the Twin States Clean Energy Link was selected by the US Department of Energy (DOE) as one of three projects in the US to enter capacity contract negotiations through the DOE's Transmission Facilitation Program. Twin States is a bidirectional transmission project being proposed by National Grid and Citizens Energy Corporation. If built, the line will deliver 1,200 MW of hydro-sourced generation from Canada to New England when it is needed and will allow for excess power from offshore wind in New England to be delivered to Canada. Moving forward, we will continue working with local, state and federal stakeholders to progress the project which has the potential to create significant savings for customers in New England.

Community Offshore Wind (COSW)

On 24 October, the New York State Energy Research and Development Authority (NYSERDA) announced three successful projects that will receive Offshore Renewable Energy Certificates (ORECs) as part of New York's third large-scale offshore wind solicitation. COSW, our JV with RWE, was selected as one of the successful projects with a provisional offtake award of 1.3 GW. The project would be located within COSW's 3.2 GW seabed lease in the New York Bight.

In August 2023, COSW also submitted an offtake bid for up to 1.3 GW in response to the New Jersey Board of Public Utilities (BPU) solicitation. We await selection decisions in the first or second quarter of calendar year 2024.

Further progress on Group efficiency savings

As part of our Group efficiency savings programme, we achieved a further £53 million of savings in the first half of the year[5]. This is in addition to the £373 million reported at the end of 2022/23 and takes our cumulative efficiency savings under the programme to £426 million. This exceeds our £400 million savings target that we announced in November 2021 and that we committed to deliver by the end of 2023/24.

Of the £53 million savings achieved this financial year, almost £40 million has been in New York and New England. This has principally been through property rationalisation and implementing a more strategic approach to National Grid's sourcing and contract management strategies, enabling the business to reduce its external spend. It has also been driven by the use of digital solutions such as OnMyWay (which digitises National Grid's paper-based work for electric line crews, enabling more efficient job coordination), FutureNow (which digitises our electric network investment planning), and Vegetation Management Optimization (which optimises our vegetation management strategy and execution for value, cost and reliability). The continued roll out of new customer initiatives, including the use of lower cost service providers supporting our front office teams, and increased use of e-billing and self-service options for customers has enabled further cost reduction.

In our field operations, we have identified ways to reduce the workloads of our maintenance teams whilst maintaining the safe and reliable operation of the network. For example, we have maximised resource capacity through combined training for teams, more efficient coordination with external partners to reduce completion time, and optimising crew sizes where it is safe to do so. In addition, we have improved productivity through combining projects where appropriate and making them more efficient to deliver.

Throughout the rest of our business, we have driven efficiencies following the 2020/21 Business Unit reorganisation, enabled by new digital capabilities, contract renegotiations and procurement strategies. We will continue to drive further efficiencies, and we would expect a similar level of savings in the second half of this year compared to the first half.

Updating our responsible business commitments to reflect our repositioned portfolio

National Grid believes that all businesses need to stand for more than just profits. We have a critical role in enabling net zero and ensuring that the benefits of the energy transition are shared with everyone, with nobody left behind. This responsibility is integral to our core strategy and underpins our Responsible Business Fundamentals - ensuring safe and reliable operations, living our values, whilst influencing, and expecting the same of our partners and supply chain.

Progress against our Responsible Business commitments

Our 2022/23 Responsible Business Report, released in June, sets out the progress we have made against our commitments in 2022/23. These included:

■   a 70% reduction in Scope 1 and 2 emissions versus a 1990/91 baseline, representing a 7.5% reduction versus the prior year;

■   maintaining our CDP Climate Change 'A list rating' for the seventh consecutive year;

■   achieving 60,096 employee volunteering hours. This means that, since 2020, we have achieved a cumulative 100,000 employee volunteering hours versus our target of 500,000 to be reached by 2030; and

■   integrating our responsible business commitments within our performance management frameworks.

Underpinning this progress against our commitments is the record level of investment we have made across our networks in the past year, making us one of the FTSE's biggest investors in the delivery of net zero.

Updating our Responsible Business Charter

Since we launched our first Responsible Business Charter three years ago the external environment has continued to change, and our business has evolved significantly with the repositioning of our portfolio. To reflect these changes, we updated the Charter in September following engagement with stakeholders and with a focus on three core pillars: our environment; our customers and community; and our people. Each of these pillars is underpinned by our Responsible Business Fundamentals, with the previous pillars of economy and governance now embedded within these new focus areas.

New SBTi aligned targets

On environment, our new aim is to reduce scope 1 and 2 emissions by 60% by 2030, from a 2018/19 baseline[6], whilst remaining committed to reducing scope 3 emissions by 37.5% by 2034. These near-term emission targets across the Group align National Grid to a 1.5 degrees pathway and have been verified by the SBTi. We have also updated our emission reduction ambitions for our supply chain, adding clarity on how we will target our suppliers to reduce Scope 3 emissions across the company. Achieving these targets is subject to a number of external dependencies, including policies in our jurisdictions which deliver the energy transition. We are engaging actively with policy makers to enable these.

On our customers and communities, we aim to support an affordable, and fair, energy transition, where nobody is left behind. We will continue to mobilise hardship funds and energy efficiency measures, and improve our reporting, on the benefits that these initiatives provide. We will also continue to provide meaningful skills development for 45,000 people by 2030 with a focus on communities facing socio-economic disadvantage, and report on the progress of our Grid for Good employability programmes. We will deliver 500,000 hours of volunteering by the same date.

On our third pillar, people, we are investing to build the skills needed to deliver the clean energy future. Building a diverse, equitable and inclusive organisation that reflects the communities we serve, is key to our success. Whilst we have made good progress here, we will move forward with goals that include: achieving 35% gender diversity and 20% ethnic diversity in our management population by 2025, representing a 1.5% and 3% increase, respectively, compared to today; aiming for 50% female representation and 40% ethnic diversity in our new talent population by 2025; aiming to lead the industry on wellbeing, with metrics above the prior year level; and we remain committed to making sure pay is equitable for all our colleagues.

Board changes

On 17 May, we announced that Thérèse Esperdy will step down from the Board as a Non-Executive Director on 31 December 2023 after serving more than nine years.

On 21 September, we announced that Ian Livingston will succeed Thérèse Esperdy as the Senior Independent Director on 31 December 2023.