英国国家电网

National Grid announced on July 1 that it agreed to invest USD 1.75 billion through National Grid Ventures for a 35% stake in Joulent, a newly launched, Texas-based energy infrastructure developer providing integrated power solutions for data centers.

Why it matters: NGV's investment will fund the development of Joulent's flagship project, Kilby, in a joint venture with Chevron. The project consists of a 2.7 Gigawatt colocated gas-fired power plant that will supply dedicated electricity to Microsoft's data center campus under a 20-year power purchase agreement. National Grid gets exposure to US data centers' baseload power demand in Texas, where developers are increasingly turning to dedicated generation because of lengthy grid interconnection queues. We view this as an attractive source of business and geographic diversification. The investment comes on top of the company's GBP 70 billion five-year investment plan through 2031 and will be funded from existing balance sheet capacity. Management indicated the transaction will not affect its current five-year guidance, implying only limited earnings contribution before 2031.

The bottom line: We estimate the project could generate a low-double-digit internal rate of return and create roughly GBP 200 million of net present value, which is not material relative to National Grid's size. Accordingly, we maintain our GBX 1,440 fair value estimate and no-moat rating. The transaction gives National Grid exposure to a potentially significant new growth avenue as AI-driven power demand accelerates and Joulent advances its multi-GW pipeline. However, scaling this opportunity could eventually require additional capital. Shares appear undervalued as the market is overly discounting high interest rates while overlooking strong fundamentals underpinned by multiyear growth profiles driven by secular investment needs in the electricity grid.

Coming up: Kilby targets first power delivery in 2028.

We tweak our fair value estimate for National Grid ADR to $98.00 per share from $96.50 by using the $/GBP exchange rate of 1.36 of early September versus 1.34 previously. Our new fair value estimate implies a fiscal 2027 enterprise value/regulated asset value of 1.6, price/earnings of 16.2, and dividend yield of 3.4%.

We forecast a 9.4% underlying EPS CAGR through 2030, driven by hefty investments and higher returns under RIIO-T3.

Over 2026-30, we also forecast a 9.4% EPS CAGR and a regulated asset value CAGR of 9.7%, in line with the 2026-31 guidance of 8%-10% for the former and around 10% for the latter.

In fiscal 2026, we project the EPS to grow by 9% to GBX 80, ahead of the 6%-8% guidance range. The 11% EBIT growth we project on the back of 11% growth in the rate base and rate increases in the US will be mitigated by a higher number of shares driven by the dividend scrip scheme and the June 2024 rights issue.

Our investment forecasts total GBP 59.5 billion over 2026-30, or GBP 11.9 billion annually, slightly ahead of the GBP 11.7 billion annual investment implied by the 2026-31 business plan, which we expect to taper toward the end of the period.

In our discounted cash flow valuation, we use a 5.5% cost of capital and a 7.5% cost of equity.

We raise National Grid’s Morningstar Economic Moat Rating to narrow from none following the improvement in the new 2026-31 regulatory period for the UK transmission grid.

RIIO-T3 price control for electricity transmission networks that started in April 2026 marks a material improvement from RIIO-T2. Ofgem set a 5.7% CPIH-real allowed return on equity versus 4.3% under RIIO-T2 and introduced a seminominal cost of debt, replacing the fully real allowance used in RIIO-T2. The resulting debt allowance of roughly 5.3%-5.8% (seminominal) better reflects actual financing structures and aligns with the CPIH-indexed regulatory asset base. Together, these changes translate into a nominal allowed WACC of around 6.5%-6.9% (or 4.4%-4.7% CPIH-real).

RIIO-T3 also recalibrates efficiency incentives. Under RIIO-T2, electricity transmission operators retained roughly 49%-50% of any total expenditures outperformance under the totex incentive mechanism, exposing companies to symmetrical upside and downside risk against often challenging efficiency baselines. While this created strong cost discipline, it also increased earnings volatility and risked discouraging timely investment.

Under RIIO-T3, incentive sharing factors moderate to approximately 40%-45%, with consumers receiving a larger share of efficiency gains. Although this slightly reduces potential upside from cost outperformance, it meaningfully lowers downside risk associated with necessary overspend and better aligns incentives with the sector’s primary challenge of delivering hefty investments rather than minimising expenditure. In other words, efficiency incentives are more consistent with large-scale infrastructure delivery.

On the bottom line, RIIO-T3 restored the ability of National Grid’s core business to achieve economic profits and make the business’ massive ongoing investments value-accretive.

We view the UK electricity distribution business as moaty thanks to efficient scale and a regulatory regime with generous efficiency sharing incentives which more than offset tight baseline returns.

Under the 2023-28 RIIO-ED2 regime for UK electricity distribution networks, the CPIH-real allowed cost of equity is 4.75% and a real cost of debt is roughly 2.0% with at 60% notional gearing. This results in an allowed CPIH-real WACC of around 3.25%–3.35%, equivalent to a nominal WACC of roughly 5.25%-5.55%.

Despite these tight baseline returns, RIIO-ED2 retains powerful efficiency incentives through the totex incentive mechanism. While totex sharing factors of around 50% are similar to RIIO-T2, their impact differs materially from RIIO-T2 transmission, where incentives interact with tight baselines and large investment risk. In distribution, where expenditure is more predictable, achieving operational efficiency is much easier for operators.

On top of TIM, output delivery incentives can adjust realized returns by approximately 2%/negative 4% of return on equity, linking earnings to reliability, customer service, and connection performance.

National Grid’s UK electricity distribution’s average return on equity of 8.2% over the first two years of RIIO-D2 shows the favorable incentive-sharing plan.

In the next regulatory period for UK electricity distribution networks, starting in April 2028, we believe that baseline allowed returns will be raised close to RIIO-T3 to incentivize the investment surge needed to accommodate renewables expansion and to connect data centers.

National Grid’s US business consists of regulated electricity and gas transmission and distribution networks across New England (primarily Massachusetts and Rhode Island) and New York State. We view these assets as moaty thanks to efficient scale and higher allowed returns than in the UK and anywhere in Europe.

National Grid’s New England utilities operate under roughly five-year rate plans. In New England, regulation follows a cost-of-service model in which utilities recover operating costs, depreciation, financing costs, and an allowed return on equity applied to the rate base. Allowed return on equity ranges from 9.5% to 10.0%. For transmission networks regulated by the Federal Energy Regulatory Commission, allowed returns on equity range from 10% to 11%. National Grid achieved a ROE of 9.1% in New England in fiscal 2025, representing about 92% of allowed returns.

Performance tends to track slightly below allowed levels due to timing effects and storm costs, but remains stable. Over the last five years, the average achievement amounted to 93% in New England.

In New York, the company operates under typically three-year rate plans approved by the New York Public Service Commission. New York regulation combines traditional cost-of-service ratemaking and performance-based elements introduced under the REV (Reforming the Energy Vision) framework, which links earnings to reliability, customer outcomes, and energy transition objectives. Current allowed returns amount to 9.35%-9.50% National Grid’s New York utilities. In fiscal 2025. National Grid achieved an 8.7% ROE in New York, implying a 94% achievement, bang in line with the average achievement over the last five years.

We expect National Grid’s US utilities return achievement to be in line with the historical average going forward, underpinning maintainable economic profits.

We forecast a 2031 return on invested capital excluding goodwill of 5.7%, ahead of our 5.5% WACC estimate.

National Grid has an enviable geographic footprint. The UK has the most favorable regulatory environment for energy networks in Western Europe, while US returns are higher than in most European countries.

The Joulent investment gives exposure to a potentially significant new growth avenue as AI-driven power demand accelerates and Joulent advances its multi-GW pipeline.

Secular investment growth in UK networks, combined with attractive returns, will boost earnings growth.

National Grid will need to do another rights issue to fund its tremendous investment plan and potentially more cash injections into Joulent.

Due to to its high net debt issuance, the firm is particularly exposed to higher interest rates.

The firm will continue to resort to a dilutive scrip scheme to pay its dividend despite the rights issue and the rebase.