National Grid : NGET plc Annual Report and Accounts 2021/22

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National Grid Electricity Transmission plc Annual Report and Accounts 2021/22

Company number 2366977

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National Grid Electricity Transmission plc Annual Report and Accounts 2021/22
Contents
Overview - About National Grid Electricity Transmission plc.............................................................................................................	1
What we do - Electricity.....................................................................................................................	2
What we do - Regulation..................................................................................................................	3
Principal operations ...........................................................................................................................	6
Our purpose, vision, values and strategy.......................................................................................	8
Our strategic objectives ....................................................................................................................	9
Progress against objectives - key performance indicators..........................................................	11
Strategic Report ...............................................................................................................................................................................................	14
Our business environment................................................................................................................	14
Our commitment to being a responsible business........................................................................	16
Internal control and risk management ............................................................................................	20
Viability statement..............................................................................................................................	25
Financial review..................................................................................................................................	26
Our stakeholders................................................................................................................................	30
Corporate Governance......................................................................................................................	32
Business separation ..........................................................................................................................	37
Directors' Report ................................................................................................................................	38
Introduction to the financial statements ...................................................................................................................................................	39
Statement of Directors' responsibilities ..........................................................................................	40
Independent Auditor's report ............................................................................................................	41
Consolidated income statement ......................................................................................................	49
Consolidated statement of comprehensive income......................................................................	50
Consolidated statement of changes in financial position ............................................................	51
Consolidated statement of changes in equity................................................................................	52
Consolidated cash flow statement ..................................................................................................	53
Notes to the consolidated financial statements.............................................................................	54
Basis of preparation and recent accounting developments ........................................................	55
Company balance sheet ...................................................................................................................	102
Company statement of changes in equity .....................................................................................	103
Notes to the company financial statements...................................................................................	104
Company accounting policies ..........................................................................................................	104
Glossary and definitions....................................................................................................................	114

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National Grid Electricity Transmission plc Annual Report and Accounts 2021/22 1

Overview

About National Grid Electricity Transmission plc

National Grid Electricity Transmission plc (National Grid Electricity Transmission, NGET) is a subsidiary of National Grid plc (National Grid), based in the United Kingdom (UK). We own and operate the regulated electricity transmission network in England and Wales. We do not own the Scottish networks. Our networks comprise approximately 7,216 kilometres of overhead line, 2,551 kilometres of underground cable and 347 substations. We play a vital role in connecting millions of people safely, reliably and efficiently to the energy they use. See pages 6 and 7 for further details.

The governance of National Grid Electricity Transmission is the responsibility of its Board of Directors. Strategic direction is determined by our ultimate parent company, National Grid plc. Our Directors are listed on page 38.

More information on the management structure of National Grid can be found in the National Grid plc Annual Report and Accounts 2021/22 and on National Grid's website at www.nationalgrid.com.

The International Financial Reporting Standard (IFRS) as adopted by the UK technical requirements make reporting some of the performance measures that we use as a regulated business more complex due to differences in standards used in their generation. We provide additional information about both our assets and liabilities that do not form part of our audited accounts, to help our investors gain a fair, balanced and understandable view of our business.

Financial highlights

	2021/22	2020/21	Percentage
			change
	£m	£m
Revenue	2,036	1,975	3.1 %
Operating profit before exceptional items	1,058	1,079	(1.9)%
Exceptional items	(12)	(14)	(14.3)%
Total operating profit1	1,046	1,065	(1.8)%
Profit before tax	803	968	(17.0)%
Cash generated from operations	1,556	1,508	3.2 %
Regulated assets2	15,486	14,343	8.0 %

• See page 26 for further details.

• See page 29 for further details.

	2021/22	2020/21
	£m	£m
Return on equity 1	7.7%	13.9%

• See page 30 for further details.

Non-financial highlights

	2021/22	2020/21
Number of employees	2,888	2,911
Network reliability1	99.99993%	99.999966%

• See pages 11 to 13 for further details on our KPIs

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2	National Grid Electricity Transmission plc Annual Report and Accounts 2021/22

What we do - Electricity

The electricity industry connects generation sources to homes and businesses through transmission and distribution networks. Companies that pay to use transmission networks buy electricity from generators and sell it to consumers.

The UK electricity industry has five main sectors.

1. Generation

Generation is the production of electricity from fossil fuel and nuclear power stations, as well as renewable sources such as wind and solar. We do not own or operate any electricity generation facilities.

The UK is moving away from a historical reliance on large thermal power generation and there is now a greater diversity of supply and flexible demand than ever before. Therefore, the electricity transmission network has a pivotal role to play in the future energy mix, with evolving roles enabling a range of possible energy futures for the long-term benefit of consumers.

2. Interconnectors

Transmission grids are often interconnected so that energy can flow from one country or region to another. This helps to provide a safe, secure, reliable and affordable energy supply for citizens and society across the region. Interconnectors also allow power suppliers to sell their energy to customers in other countries.

Great Britain (GB) is linked via interconnectors with Ireland, Northern Ireland, France, Belgium, Norway and Netherlands. National Grid plc is continuing to work on developing additional interconnector projects, which we believe will deliver significant benefits to consumers. This includes another interconnector to link us with Denmark.

National Grid, through separate companies held outside of National Grid Electricity Transmission, sells capacity on its UK interconnectors (with France, Belgium, Norway and the Netherlands) through auctions.

3. Transmission

We own and operate the high-voltage electricity transmission network in England and Wales.

We are responsible for ensuring electricity is transported safely and efficiently from where it is produced, to reach homes and businesses reliably. We connect to industrial properties and distribution networks who deliver the electricity on to homes and commercial properties. We also facilitate the connection of generation assets to the transmission system.

Transmission systems generally include overhead lines, underground cables and substations. They connect generation and interconnectors to the distribution system.

4. Distribution

Distribution systems carry lower voltages than transmission systems over networks of overhead lines, underground cables and substations. They take over the role of transporting electricity from the transmission network, and deliver it to consumers at a voltage they can use.

National Grid, through separate companies held outside of National Grid Electricity Transmission, owns and operate the electricity distribution networks for the East and West Midlands, the South West and South Wales. The combined network of Western Power Distribution (WPD), which became part of National Grid in June 2022, makes it the largest electricity distribution network operator (DNO) group in the UK.

5. Supply

The supply of electricity involves the buying of electricity and selling it on to customers. It also involves customer services, billing and the collection of customer accounts.

We do not sell electricity to consumers.

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National Grid Electricity Transmission plc Annual Report and Accounts 2021/22 3

What we do - Regulation

Our business operates as a regulated monopoly. We have one economic regulator for our business, The Office of Gas and Electricity Markets (Ofgem). The regulator puts in place an incentive regime that ensures our interests are aligned with those of customers and society

The purpose of the regulatory regime

Ofgem's regulatory regime for the energy industry is titled RIIO, which stands for Revenue = Incentives + Innovation + Outputs. This title reflects the policy purpose of the regime. It is designed to encourage companies to invest in efficiency and innovation, creating value that is shared, through the regulatory mechanisms, between the company (hence creating the incentive) and the customer. It ensures that companies drive to deliver the outputs their customers want and also creates the opportunity for funding schemes with wider societal benefits.

How we manage our regulated assets

Our licence, established under the Electricity Act 1989, as amended (the Act) requires us to develop, maintain and operate economic and efficient networks . It also gives us statutory powers. These include the right to bury our wires or cables under public highways and the ability to use compulsory powers to purchase land so we can conduct our business.

Our network is regulated by Ofgem, which has a statutory duty under the Act to protect the interests of consumers. Ofgem also has responsibility to enable competition and innovation to drive down prices, resulting in the introduction of new products and services. To protect consumers from the ability of companies to set unduly high prices, Ofgem has established price controls that limit the amount of revenue our regulated business can earn. In setting price controls, Ofgem must also have regard to ensuring that licence holders are able to finance their obligations under the Act. Licensees and other affected parties can appeal licence modifications which have errors, including in respect of financeability.

The price control includes a number of mechanisms designed to help achieve its objectives. These include financial incentives that encourage us to:

• efficiently deliver by investment and maintenance the network outputs that customers and stakeholders require, including reliable supplies, new connections and infrastructure capacity; and
• innovate in order to continuously improve the services we give our customers, stakeholders and communities.

Since 1 April 2019, the electricity system operator (ESO) licence has been held by National Grid Electricity System Operator Limited (NGESO). NGESO is a separate legal entity from National Grid Electricity Transmission plc, but is currently a National Grid Group company. To further ensure appropriate ring-fencing between itself and the rest of the National Grid Group, NGESO is governed by its own Board of Directors including three independent directors.

On 6 April 2022, the UK government announced its intention to create an independent Future System Operator (FSO), that will, inter alia, take on the ESO operations currently within NGESO.

National Grid Electricity Transmission plc retains the electricity transmission licence.

RIIO Price Controls

The building blocks of the RIIO price control are broadly similar to the historical price controls used in the UK. However, there are some significant differences in the mechanics of the calculations.

How is revenue calculated?

Under RIIO, the outputs we deliver are clearly articulated and are integrally linked to the calculation of our allowed revenue, although some outputs and deliverables have only a reputational impact or are linked to legislation. We do not earn allowances if we do not deliver the associated agreed output. These outputs have been determined through an extensive consultation process, which has given stakeholders a greater opportunity to influence the decisions.

There are three main output categories for transmission under the current RIIO-T2 price controls:

• Meeting the needs of consumers and network users - using outputs and a range of incentives to improve service quality and to encourage the efficient operation of the transmission network. This includes incentives aimed at encouraging us to provide fast access to high quality connections and high network reliability
• Maintaining a safe and resilient network - by funding given to replace ageing assets while ensuring costs to consumers are kept as low as possible. We will allow funding for cyber resilience projects, as well as IT investments where the scope of work is well understood. We will use uncertainty mechanisms to fund further upgrades during RIIO-ET2 when there is more certainty around the scope of work required
• Supporting the delivery of an environmentally sustainable network - by providing funding or uncertainty mechanisms which will facilitate the connection of low carbon generation and by setting outputs and incentives to further reduce the harmful impact that the transmission network and related business activities can have on the environment. We are confident that the up-front funding we are providing, combined with our range of fast and flexible uncertainty mechanisms and incentives, will enable proactive work to deliver Net Zero.

Within each of these output categories are a number of primary and secondary deliverables, reflecting what our stakeholders want us to deliver over the remaining price control period. The nature and number of these deliverables varies according to the output category, with some being linked directly to our allowed revenue, some linked to legislation, and others having only a reputational impact.

Totex

Ofgem, using information we have submitted, along with independent assessments, determines the efficient level of expected costs necessary for these deliverables to be achieved. Under RIIO this is known as 'totex', which is a component of total allowable expenditure and is broadly the sum of what was defined in previous price controls as operating expenditure (opex) and capital expenditure (capex).

A number of assumptions are necessary in setting the outputs, such as certain prices or the volumes of work that will be