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National Grid: A Beacon of Resilience in the Energy Transition

Philip CarterThursday, May 15, 2025 3:05 am ET
184min read

The global energy landscape is undergoing a seismic shift, driven by decarbonization mandates, aging infrastructure, and rising demand for reliable power. In this environment, National Grid stands as a pillar of stability—a company uniquely positioned to capitalize on the £60 billion infrastructure boom reshaping energy systems across the UK and US. Despite near-term volatility, its fortress balance sheet, regulatory tailwinds, and dividend discipline make it a rare gem for income-focused investors seeking long-term growth.

The £60 Billion Gamble: A Smart Bet on the Future

National Grid’s five-year £60 billion investment plan is not merely a financial commitment—it’s a strategic masterstroke to dominate regulated energy networks during the transition to net-zero. Over half of this capital is allocated to the UK, funding projects like the Viking Link interconnector (the world’s longest HVDC cable) and the ASTI program, which aims to modernize transmission grids to handle renewable energy surges. In the US, the $4 billion Upstate Upgrade in New York—modernizing a grid untouched for a century—exemplifies the scale of this vision.

Crucially, 80% of this capital is directed at EU Taxonomy-compliant projects, ensuring alignment with global decarbonization standards. The equity raise—£7 billion via a rights issue—has been instrumental in de-risking this expansion, reducing reliance on debt while maintaining an investment-grade credit profile.

Regulatory Tailwinds: A Shield Against Uncertainty

The UK Energy Act 2023 transforms National Grid’s operating environment, creating structural advantages for its strategy. The establishment of the National Energy System Operator (NESO) streamlines grid planning, prioritizing projects like multi-purpose interconnectors and hydrogen backbone infrastructure. This framework accelerates approvals, reduces bureaucratic drag, and ensures National Grid’s investments are backed by policy certainty.

For instance, the Act’s hydrogen levy mechanism and CCUS licensing reforms directly underpin projects like the East Coast Cluster, where National Grid is a core partner. These policies not only reduce execution risk but also secure long-term revenue streams through regulated asset bases. As the NESO’s Clean Power 2030 Plan takes shape, National Grid’s role as a “system integrator” becomes indispensable, linking offshore wind farms, hydrogen hubs, and smart grids into a cohesive network.

Dividend Discipline: A Foundation of Trust

Despite headlines about near-term headwinds—delays in wind projects, share dilution from the rights issue—the dividend narrative remains compelling. The interim dividend of 15.84p (a 18% dip YoY) masks the reality: when rebased for the equity raise, the payout increased by 6%, maintaining National Grid’s 35% dividend payout ratio.

With a projected 6–8% CAGR in underlying EPS through 2029 and regulatory gearing falling to the low-60% range, the dividend’s safety is underpinned by two facts:
1. Regulated returns: 90% of earnings come from rate-based assets, insulated from commodity price swings.
2. Capital recycling: Divesting non-core assets (e.g., Grain LNG, National Grid Renewables) generates £1.5 billion in proceeds, further fortifying liquidity.

Navigating Near-Term Storms

Skeptics cite risks: wind project delays, inflation pressures, and the £1 billion+ cost overrun at the Western Link project. Yet these are transient hurdles in a decades-long transition. National Grid’s “First Ready, First Connected” reform cuts queue backlogs by 50%, while its Great Grid Partnership—a £9 billion supply chain initiative—ensures projects stay on track.

The Investment Case: A Decade-Long Growth Story

National Grid is not a speculative play on renewables—it’s a regulated utility with a moat. Its infrastructure is the nervous system of the energy transition, critical to integrating wind, solar, and hydrogen into grids. With a 5.2% dividend yield (versus the FTSE 100’s 3.8%) and 25 years of dividend growth, it offers income and inflation protection in a volatile market.

Buy now while the yield is rich. The regulatory tailwinds of 2023–2029 ensure National Grid’s projects will flow into earnings, while its disciplined capital management shields investors from overreach. This is infrastructure investing at its best: low risk, high reward, and a dividend that works for you.

Action to Take: Add National Grid to your portfolio at current yields. The energy transition isn’t a fad—it’s a multi-decade shift, and National Grid is building the roads to get there.

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