National Grid PLC (LON:NG.) shares actually climbed after the UK energy sector watchdog made formal recommendation to the government to establish an independent electricity system operator (ESO) with additional responsibilities to deliver carbon net zero targets.
The FTSE 100 group currently owns the ESO with the role of balancing the electricity grid, which it combined with its business of owning energy networks.
There could be a conflict of interest for National Grid, Ofgem said, as it may be against the interests of its energy network business to have an ESO that managed the system to provide energy for elecrtic vehicle (EV) charging at the cheapest times.
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“The energy system needs to go undergo the biggest transformation in over a century to meet Britain’s ambitious climate goals,” said Ofgem chief executive Jonathan Brearley.
To explain his point he painted a scene where the UK had 10mln electric cars on a system supplied by lots of renewable energy.
“You could manage this in two ways," he said. “One way is to build a much bigger and higher capacity network. Equally you could have a smarter and more efficient system that begins to shift the times that those different cars charge, which could be a lot cheaper overall for customers. Asking a company which builds networks to make that kind of trade-off is the sort of thing we’re concerned about in the future.”
Analysts at Citigroup noted that there is an expectation that NG will be compensated for this loss of RAB and earnings, although it is unclear currently if it will be at RAB, a premium or at book value, which was last calculated at £145m.
“The headlines may appear worrying, with potentially part of NG being forced away from the group."
“However, the scale of the ESO should be taken into account," they added, noting that it has a regulated asset base of £211m as at March 2020, 1.0% of the £20.4bn National Grid UK RAB at the same date or 0.5% including US rate bases.
“The risk around the ESO separation has been well talked about last year and should not come as a surprise to the market."