National Grid's Strategic Position Amid Ofgem's RIIO-ET3 Price Control Framework

The UK's energy transition is accelerating, driven by net-zero commitments and the urgent need to decarbonize electricity systems. At the heart of this transformation lies National Grid, whose £60 billion network modernization plan—aligned with Ofgem's RIIO-ET3 regulatory framework—positions the company as a linchpin in the global energy transition. This article evaluates National Grid's ability to secure an investable return and drive long-term value, while navigating the complex interplay of regulatory alignment, supply chain dynamics, and decarbonization imperatives.

Regulatory Tailwinds: RIIO-ET3 and the Path to Decarbonization

Ofgem's RIIO-ET3 framework, spanning 2026–2031, is designed to catalyze investment in electricity transmission infrastructure while balancing affordability for consumers. Key mechanisms include the Centralised Strategic Network Plan (CSNP), which will identify priority projects for grid expansion, and the CSNP Funding Mechanism (CSNP-F), which provides pre-construction funding to mitigate supply chain bottlenecks. These tools are critical for National Grid's £35 billion UK transmission investment plan, which includes 17 Accelerated Strategic Transmission Investment (ASTI) projects and the replacement of 3,500 km of overhead lines.

Ofgem's proposed allowed return on capital for National Grid Electricity Transmission (NGET) is 4.49% (real, at 60% gearing), a rate intended to attract capital while ensuring cost discipline. This aligns with National Grid's goal of maintaining a 99.9999% reliability standard while nearly doubling grid capacity by 2031. The regulator has also introduced incentive mechanisms such as the Business Plan Incentive (BPI) and TOTEX Incentive Mechanism (TIM), which reward timely delivery and efficiency gains. For instance, the CSNP-F Delivery ODI-F penalizes delays and rewards early completion, while a new reward-only incentive targets innovation in supply chain savings and design efficiency.

Strategic Execution: Securing Supply Chains and Financial Resilience

National Grid's ability to execute its £60 billion plan hinges on securing supply chains and managing capital structure. The company has already secured £30 billion in supply chain agreements, including £9 billion for UK onshore ASTI projects and £21 billion for HVDC cables. This proactive approach mitigates risks from global supply chain volatility, a critical factor given the long lead times for equipment like transformers and turbines.

Financially, National Grid is leveraging a £7 billion fully underwritten rights issue and asset sales (e.g., its US onshore renewables division and UK-based Grain LNG asset) to fund the investment. These moves strengthen balance sheet resilience, with net debt projected to decrease by 5% to £41.4 billion. The company's dividend hike of 3.21% in FY2024, despite a £303 million offshore wind impairment, underscores its commitment to shareholder returns.

Decarbonization and Innovation: A Dual-Track Strategy

National Grid's plan is not just about scale but also about innovation. The company is deploying dynamic line ratings and power control devices to maximize existing infrastructure capacity, reducing the need for new builds. Additionally, 80% of the £60 billion investment is allocated to electricity network expansion, with £51 billion aligned with the EU Taxonomy for decarbonization. This includes connecting 35 GW of renewable energy and creating 26 GW of future connection options, directly supporting the UK's Clean Power 2030 goals.

The Great Grid Partnership, an enterprise model to address supply chain and skills shortages, further reinforces National Grid's ability to deliver projects on time and within budget. This initiative is critical for meeting the UK's 2030 decarbonization targets, which require rapid deployment of offshore wind, solar, and storage.

Risks and Mitigants

While the regulatory and strategic alignment is robust, risks remain. Regulatory changes, such as adjustments to the allowed cost of equity or inflation assumptions, could impact returns. Additionally, project execution risks—such as cost overruns or delays—could strain margins. However, National Grid's use of pre-construction funding, independent technical advisers, and incentive mechanisms mitigates these risks. The company's focus on biodiversity net gain (equivalent to 8,000 acres of land) also aligns with evolving ESG standards, enhancing long-term resilience.

Investment Implications

National Grid's strategic position is compelling for investors seeking exposure to the energy transition. The company's 10% CAGR in regulated asset value through 2028/29, coupled with regulatory tailwinds and secured supply chains, positions it as a high-conviction holding. The RIIO-ET3 framework's emphasis on innovation and efficiency ensures that returns are not only achievable but also scalable.

For investors, the key metrics to monitor include:
1. Regulatory outcomes in Q4 2025 (Final Determinations).
2. Execution of ASTI projects and their impact on capital efficiency.
3. Debt-to-equity ratios and the success of the rights issue in reducing leverage.

Conclusion

National Grid's £60 billion plan is a masterclass in aligning regulatory frameworks with strategic execution. By leveraging Ofgem's RIIO-ET3 incentives, securing supply chains, and prioritizing innovation, the company is well-positioned to deliver long-term value while advancing the UK's decarbonization agenda. For investors, this represents a rare opportunity to participate in a utility model that balances environmental stewardship with robust financial returns. As the energy transition accelerates, National Grid's ability to navigate regulatory complexity and execute at scale will be a defining factor in its success—and a benchmark for the sector.