National Grid’s Rate Hike: A Prudent Investment in Climate-Resilient Infrastructure

The energy sector is at a crossroads. As climate pressures mount and infrastructure ages, utilities like National Grid face a critical dilemma: raise rates to fund modernization or risk grid instability. The company’s proposed 20% rate hike—though met with political and public opposition—presents a compelling opportunity for investors to capitalize on a strategic necessity. This article argues that regulatory approval is probable, positioning National Grid as a stable, undervalued play in regulated utilities.

The Necessity of Infrastructure Investment: A Climate-Driven Imperative

National Grid’s proposed rate increases, if approved, will unlock $1.75 billion in annual infrastructure investments by 2025. This funding is earmarked for:
- Grid modernization: Upgrading aging substations and transmission lines to handle renewable energy integration.
- Climate resilience: Reinforcing systems against extreme weather, a critical need in regions like Upstate New York, where severe storms have caused prolonged outages.
- Affordability programs: $290 million in low-income bill discounts and weatherization initiatives, addressing equity concerns while ensuring broad public buy-in.

The stakes are existential. Without these upgrades, National Grid risks grid failures, regulatory penalties, and reputational damage. The company’s 9.5% return on equity (ROE) hinges on these projects, which will secure predictable cash flows for decades.

Regulatory Approval: A Probable Outcome, Backed by Stakeholders

The Public Service Commission (PSC) has already endorsed the compromise proposal negotiated with labor unions, clean energy advocates, and major businesses. Key points of support include:
1. PSC Staff Endorsement: The PSC’s staff unanimously backed the deal, citing its balance of affordability, grid reliability, and climate goals.
2. Precedent: The PSC approved a similar rate plan for National Grid’s downstate gas operations in late 2023, signaling alignment with phased increases tied to infrastructure.
3. Stakeholder Consensus: Groups like IBEW Local 97 (representing 10,000 workers), the New York Solar Energy Industries Association, and Walmart signed off, recognizing the strategic necessity of modernization.

While Governor Kathy Hochul has criticized the hikes as “not OK,” her political leverage is limited. The PSC operates independently, and its final ruling—expected by summer 2024—will likely mirror its prior approvals.

Risks to Consider—and Why They’re Manageable

No investment is risk-free. National Grid faces two primary headwinds:
1. Public Backlash: Over 200,000 Upstate customers are already behind on bills, and protests have erupted. However, the proposed affordability programs—$72 million in Year 1 discounts—mitigate this risk.
2. Delays or Modifications: The PSC could reduce hikes or demand cost-cutting. Yet the commission’s track record shows a preference for long-term infrastructure over short-term affordability, given the existential threat of underinvestment.

A deeper risk lies in the broader market’s skepticism. National Grid’s stock has underperformed peers amid rate-hike uncertainty:

But this creates a buying opportunity. Once the PSC approves the hikes, NGG’s valuation will likely rebound, driven by stable cash flows and a 1.8% dividend yield—above the sector average.

Why Invest Now: A Stable, Undervalued Utility Play

National Grid’s 9.5% ROE and regulated utility model offer insulation from economic volatility. With climate resilience becoming a global priority, its infrastructure investments align with $1.6 trillion in U.S. federal climate spending over the next decade.

The path forward is clear:
- Approve the rate hike: Secure capital for upgrades and maintain ROE.
- Execute on projects: Deliver on grid modernization and renewable integration, attracting green investors.
- Strengthen shareholder returns: Use stable cash flows to grow dividends and buy back shares.

Final Call to Action: Act Before the Greenlight

National Grid’s stock is undervalued by 15–20% relative to its peers, given the pending rate hike’s approval. Investors should:
1. Buy now: Capitalize on the discount ahead of the PSC’s decision.
2. Hold for the long term: Benefit from a decade of regulated cash flows and dividend growth.

The risks are real, but the strategic necessity of infrastructure investment—and the PSC’s likelihood of approval—make National Grid a must-own utility in a climate-conscious world.

Act before the rate hike becomes a catalyst.