Hello, everybody, and welcome to National Grid's Full Year Results Presentation. I'm Nick Ashworth, Head of Investor Relations, and I'm thrilled to see so many people here live in the Stock Exchange for the first time since November 2019. It's been quite a long time, so thanks a lot for attending. A warm welcome to everyone who's listening online as well. As always, we'll start with safety. We are not expecting a fire alarm this morning, but if one goes off, then we'll have to go out into the square. The second important thing to draw your attention to is the cautionary statement, which is at the front of the presentation. As usual, today's materials are all on the website, and there'll be a Q&A with John and Andy after the presentation.
Any further queries, please feel free to reach out to me or any of the IR team later today. We are around to take your questions. With that, I'd like to hand over to our CEO, John Pettigrew.
Thank you, Nick. Good morning, everyone, and welcome back to the London Stock Exchange. As usual, I'm joined by Andy Agg, our CFO, and following the presentation we'll both be happy to take your questions. The results we've announced today reflect both the underlying strength of our business and the positive impact of the strategic and operational changes we made during the year. Last May, we laid out our five year framework, where we showed National Grid is uniquely positioned as the energy transition company. Today, we're announcing that GBP 24 billion, or more than 70% of our five-year framework, is investment in the decarbonization of energy systems as aligned to the EU taxonomy principles. By my reckoning, that makes us one of the FTSE's biggest investors in the delivery of net zero.
Clearly, over the last year, the world in which we operate has seen major changes with Russia's devastating war on Ukraine, a global economic slowdown, and rapidly rising inflation. Despite this, our growth objectives are unchanged and remain just as ambitious. Between 2022 and 2026, we still expect to invest GBP 30-35 billion in critical infrastructure, deliver asset growth of 6%-8% per annum, drive average underlying earnings per share growth of 5%-7% per annum, while maintaining a strong balance sheet. Our strategy to enable the energy transition for all, while delivering for customers efficiently, could not be more important. The need for action to decarbonize was clearly underscored at COP 26, where we used our role as a principal partner to push for continued action in the fight against climate change.
Since COP26, our strategy has been further underpinned by the British Energy Security Strategy and the Infrastructure Investment and Jobs Act in the US. They both provide further impetus to our growth over the longer term. The overall cost of living is clearly a major focus, and we're working hard to provide financial and practical assistance to our customers and communities. For example, in Massachusetts, we've implemented more than $1.3 billion in energy efficiency measures over the last three years. In the UK, we're returning GBP 200 million from our interconnected business to customers early, rather than waiting for the end of the five-year assessment period. Our GBP 400 million cost efficiency program benefits consumers today and long into the future.
These initiatives align with our vision, which is to be at the heart of a clean, fair and affordable energy future. A vision that's never been more critical than it is today. Let me now turn to some of the significant changes we've made in our portfolio over the last 12 months. In June, we completed our acquisition of WPD and the integration process is well underway. In March, I was pleased to announce our agreement to sell a 60% stake in our UK gas transmission and metering business to a consortium led by Macquarie. This followed a competitive process through which we received an attractive price and we expect completion in the third quarter of this financial year. The consortium also has an option on the remaining 40% on broadly similar terms, which can be exercised through the first half of 2023.
The last part of our strategic repositioning we announced last year is the sale of our Rhode Island business. We've obtained all regulatory clearances and are awaiting conclusion on the legal process. We remain confident that the transaction will complete this quarter. Together, these transactions pivot our portfolio towards electricity and bring even greater visibility and certainty of long-term growth. We also announced the sale of our 50% interest in the St William joint venture to our partner, the Berkeley Group. With substantially all of the development properties identified for transfer, this was a natural time to exit this very successful JV. Finally, last month, BEIS and Ofgem made the decision to create an independent future system operator. The electricity system operator is already legally separated from National Grid plc, and a process to agree a full separation of sale has begun.
We'll work closely with all parties to ensure an orderly transition, which is expected to be completed by the end of 2024. Turning now to our financial performance. To help you better understand the group's underlying performance, we presented our prior year numbers on a pro forma basis. Operating profit of GBP 4 billion was 11% above last year, reflecting a good performance in our UK. electricity transmission business in its first year of RIIO-T2, the early commissioning of the North Sea Link interconnector to Norway, as well as the first full year of operation of IFA2, higher revenues following the agreement of a new rate case in Massachusetts Gas, and gains on investments by National Grid Partners.
Consequently, underlying earnings per share was up 10% compared to the prior year. Capital investment from our continuing operations was in line with guidance at GBP 6.7 billion, 19% above the prior year, reflecting our critical role at the heart of the energy transition. In accordance with our updated policy, the board has proposed a final dividend of GBP 0.3376 per share. This takes the total dividend for the year to GBP 0.5097, an increase of 3.7% in line with average CPIH inflation. Turning next to our safety and reliability performance. Last year was another year of good safety performance. However, we did see a small uptick in our lost time injury frequency rates from 0.1- 0.13, primarily due to an increase in minor incidents.
This continues to be an area of close attention to ensure that we improve our performance further. Turning to our reliability, we had another excellent year with over 99.9% availability across all of our regulated networks. This is a particularly good outcome with both the U.S. and the U.K. seeing several challenging storms during the year. Let me now turn to our operational performance. I'll start with New York, where we achieved a return on equity of 8.8%, 99% of the allowed level, and in line with our target of at least 95%. During the year, we delivered capital investment of $2.6 billion, around $300 million higher than last year. This resulted in a strong rate base growth of 7.6%.
The largest element of this was our gas pipeline replacement program, where we delivered 237 miles, further reducing methane emissions across our networks. On regulation, I'm pleased with the good progress that we've made on rate filings, reaching a settlement on a three-year rate plan for KEDNY and KEDLI. The settlement, as you know, was delayed by COVID and backdated to April 2020. Because of this, we've chosen to extend the rate plan for an additional year and expect to file for new rates in March 2023. In Upstate New York, a new three-year rate settlement for Niagara Mohawk was approved in January. It includes an allowed return on equity of 9% with CapEx of GBP 3.3 billion over the three years. We've also been working hard to progress clean energy policy.
We published a joint report with the New York Mayor's office and Con Edison, recognizing low-carbon gas as part of the long-term energy transition. In August, Governor Hochul was sworn in with an ambitious agenda. I'm pleased with how closely aligned our aims are with the Governor, having had the opportunity to meet with her recently at our Brooklyn office. Moving now to New England, where we've made good regulatory progress with a new five-year rate plan for our Massachusetts gas business. This includes an allowed return on equity of 9.7% and a formula which factors inflation into our revenues along the same lines as our electric business. Our achieved return on equity was 8.3%, 85% of the allowed level. While this was 80 basis points above last year, it's short of our target to reach at least 95%.
However, this performance only reflects six months of the new rate case and the initial benefits of our cost efficiency program, both of which will have a fuller impact this year, helping to improve returns. During the year, we delivered capital investment of $2.1 billion, around $170 million higher than last year, with rate-based growth of 6.7%. Similar to New York, we made strong progress with our gas pipeline replacement program. Plus, on the electric side, investment was focused on upgrading aging infrastructure. Our focus on working towards decarbonizing our networks also continues. Last month, we filed a proposal with the DPU on the future of gas. The proposal centered around our recently announced clean energy vision, which sets out a plan for utilizing fossil-free gas and electric networks to support the state's climate goals.
In the UK, our electricity transmission business has had a successful start to RIIO-T2, delivering a return on equity of 7.7%, 140 basis points above the allowed level. The first year of RIIO has also meant a significant step-up in investment, with CapEx increasing by 21% to GBP 1.2 billion. This reflects the start of tunnel boring activities on our London Power Tunnels two project and construction of the world's first T-pylons at Hinkley Point C. Our investment in the UK will continue to grow. In March, we received provisional approval from Ofgem for two subsea interconnectors between Scotland and the north of England. These green links will form part of a GBP 10 billion investment needed over the next decade for the 16 major projects identified in the ESO's recent Network Options Assessment.
Included in the GBP 8 billion of CapEx in our five-year outlook for electricity transmission is around GBP 1 billion of early investment in these projects, which will deliver the necessary reinforcements along the East Coast. I'll come on to talk about the government's energy strategy published last month, but it's clear that the outlook for electricity transmission remains strong through RIIO-T2 and beyond. Turning now to U.K. electricity distribution, where WPD has continued to perform well under RIIO-ED1, delivering a return on equity of 13.6%. The integration process is well underway, and I'm particularly pleased to see our teams working together. For example, recently, we were able to connect a customer faster at our Coventry substation through our transmission and distribution teams collaborating to redesign the connection.
Capital investment of GBP 899 million was driven by asset replacement and reinforcement alongside connecting new renewable generation and electric vehicle charging infrastructure. A key focus since acquisition has been the submission of the ED2 business plan. As part of this, WPD conducted its largest ever consultation with over 25,000 stakeholders. The plan, which proposes GBP 6.7 billion in TotEx, focuses on readiness to connect an additional 1.5 million EVs and 600,000 heat pumps, and driving decarbonization through connecting 2.6 GW of renewables, all while continuing to support our most vulnerable customers. Our plan also includes more than GBP 700 million of embedded efficiencies, despite investment increasing by more than 20%. We believe the plan balances continued affordability alongside the investment required to accelerate the energy transition and provide a fair financial return.
We expect draft determination from Ofgem in June, with final determination in December. Moving next to National Grid Ventures, where capital expenditure was GBP 452 million, similar to the prior year. We're now moving into the operational phase for our new interconnectors, with only the Viking Link to Denmark to complete in 2024. IFA2 had its first full year of operation, and we were pleased to commission the North Sea Link to Norway ahead of schedule. As you know, we suffered a serious fire at our Sellindge converter station in September, but since then, one GW has been safely brought back online, with the remaining one GW on track to return to service in December 2022. At Grain LNG, investment increased as we progressed construction of phase IV to expand the site's capacity.
This followed the fully contracted sale of capacity for 25 years, enhancing the long-term security of UK gas supply. In the US, our community offshore wind joint venture with RWE was successful in winning a seabed lease in New York, our share of the cost being $300 million. This lease area comprises 125,000 acres with a capacity to host 3,000 MW, enough to power 1.1 million homes, and is expected to be in operation by 2030. In our onshore renewables business, we started commercial operations of our 200 MW solar project in Illinois. This brings our total operating portfolio to 635 MW, and another 700 MW is under construction.
Finally, UK Gas Transmission and Metering delivered a strong start to the new regulatory period with a return on equity of 7.8%, 120 basis points ahead of the baseline returns. Capital investment was GBP 261 million, GBP 57 million higher than the previous year, driven by spend on asset health, emission reductions, and cybersecurity. Overall, we've had a year of strong performance for National Grid while delivering on a strategic pivot. We're now uniquely positioned at the heart of the energy transition, making record levels of investment and delivering a better and more affordable energy future for all. Let me now hand over to Andy to take you through the financials in detail before I come back to talk through the priorities and outlook for the year ahead.
Thank you, John, and good morning, everyone. To illustrate the underlying performance of our business more clearly this year, we're presenting the comparative underlying results on a pro forma basis. This means we've adjusted FY 2021 to include an estimate for nine and a half months of WPD together with the associated financing, and to exclude UK Gas Transmission and Metering, which is a discontinued business, and depreciation on Rhode Island, which is held for sale. As usual, our underlying performance from continuing operations also excludes the impact of timing, major storms, and exceptional items, and is presented at constant currency. Turning to our financial performance. Underlying operating profits on a continuing basis was GBP 4 billion, up 11%, driven by higher UK electricity transmission net revenue to fund higher investment levels.
The early commissioning of the North Sea Link Interconnector, as well as the first full year of operation of IFA2. The impact of new rates in our Massachusetts gas business, gains on investments in National Grid Partners, and a reduced year-on-year impact from COVID. This helped underlying earnings per share to increase by 10% to 65.3 pence per share. We've made good progress on our three-year, GBP 400 million cost efficiency program that we announced in November, with around GBP 140 million of savings achieved so far. Our resilient operational performance was also reflected in the 11.4% group return on equity, up 80 basis points year-over-year.
The board has recommended a final dividend of 33.76 pence, taking the full-year dividend to 50.97 pence per share, which is up 3.7%. This reflects our policy to aim to grow the dividend in line with average UK CPIH inflation. It was another strong year of capital investment from our continuing operations, with the group investing GBP 6.7 billion, 19% higher than the prior year and the highest level of investment we've ever delivered. Our investment has increased across all areas, and I'll go into more detail by business unit shortly.
Higher investment has also led to strong asset growth across each of our businesses, culminating in group asset growth of 8.7%. This increasing level of investment is focused on delivering the clean energy networks needed across our UK and US regions to enable net zero. We announced back in November that GBP 13 billion of our GBP 30 billion-GBP 35 billion five-year investment program was aligned to our Green Financing Framework, where we raise green financing instruments for specific projects. Today, we're going one step further and announcing that around GBP 24 billion of our five-year investment program, over 70%, is aligned to the principles of the EU taxonomy. Of this, around GBP 14 billion is in our UK businesses and around GBP 10 billion in the US.
This now covers most of our electricity investment across transmission and distribution, including connecting clean sources of generation such as renewables and nuclear. It also covers investments in our gas networks, where we're reducing emissions and investing for cleaner gas. Now let me take you through the performance for each of our business segments. Starting with our new business. UK electricity distribution continues to perform well under RIIO-ED1. Underlying operating profit for the nine and a half months of ownership was GBP 887 million, an increase of GBP 34 million from the prior period on a pro forma basis. During the period we have owned the business, capital investment reached GBP 899 million, up GBP 45 million over the prior period.
This was due to greater spend on reinforcement and connections aligned to the government's green recovery objectives, as well as more high voltage and electric vehicle connections. Since acquisition, the RAV has grown 9.1% to GBP 9.3 billion. Finally, it achieved a return on equity of 13.6%, 400 basis points ahead of the allowed return. Most of this outperformance relates to improved customer experience incentives, such as fewer and shorter disruptions alongside totex performance. Moving to UK electricity transmission, where we've delivered a strong performance under the first year of RIIO T2. Underlying operating profit was GBP 1.2 billion, up GBP 100 million on the prior year. This primarily reflects higher base revenues in the first year of RIIO T2 as we embark on greater investment in clean energy infrastructure, partially offset by lower returns.
Capital investment of GBP 1.2 billion was 21% above the prior year, primarily driven by tunnel boring activities on London Power Tunnels 2, construction of T-pylons at Hinkley Point C, and increased activities in our Visual Impact Provision projects in Dorset and the Peak District. This investment helped increase our year-end regulated asset value by 8.1% to GBP 15.5 billion. We've achieved a 7.7% return on equity, 140 basis points ahead of baseline allowance. This is primarily from TotEx incentives, including projects started under RIIO-T1, and we remain on track to achieve 100 basis points of average annual outperformance throughout RIIO-T2.
Turning to the electricity system operator, underlying operating profit was down GBP 16 million in the period to GBP 54 million, with higher baseline revenues under RIIO-T2, more than offset by higher costs and depreciation. Moving now to the U.S., where New York achieved 8.8% return on equity, 99% of our allowed baseline return. Underlying operating profit of GBP 706 million was GBP 12 million lower than the prior year, primarily due to a GBP 130 million increase in environmental reserves given higher inflation, which will ultimately be recoverable in future years, as well as increased depreciation from higher levels of investment. This was partially offset by rate case increases in KEDNY, KEDLI, and NIMO, and a reduction in bad debt charges, given the resumption of collection activities post-COVID.
In both New York and Massachusetts, we're making good progress working with our state regulators on recovery mechanisms for our COVID-related bad debt expense and remain confident that the majority of costs will be recovered through these mechanisms. Capital investment was GBP 2 billion, GBP 231 million higher than the prior year at constant currency, driven by greater leak-prone pipe replacement activity and our investment in the Upstate New York Smart Path Connect transmission project. This led to a 7.6% increase across our New York rate bases, increasing to $17 billion. In New England, we achieved an 8.3% return on equity, 85% of our allowance, slightly ahead of our forecast at the half year.
Underlying operating profit was GBP 886 million, GBP 96 million higher than the prior year on a pro forma basis. This reflects higher rates in our Massachusetts gas business under the new rate settlement and resumed collection activities for outstanding receivables. Capital investment was GBP 1.6 billion, GBP 132 million higher than prior year. This was driven by high levels of gas pipeline replacement and upgrading of aging infrastructure. Our closing New England rate base of $12.2 billion was up 6.7% or $763 million year-over-year.
National Grid Ventures continued to perform well with underlying operating profits, including joint ventures up GBP 167 million to GBP 408 million for the full year. This primarily reflects the North Sea Link interconnector coming online and the first full year contribution from IFA2, together with higher revenues from interconnector arbitrage across the portfolio and higher development income in our U.S. onshore renewables division. IFA2, North Sea Link and our Nemo Link interconnectors have each delivered performance above the regulatory cap this year. As John mentioned, we've agreed a mechanism with Ofgem to accelerate the repayment of our revenues above the cap to customers, equating to around GBP 200 million over two years. Our underlying operating profit, therefore, includes revenues only up to the cap for these interconnectors.
Capital investment across National Grid Ventures reached GBP 913 million, a 72% increase on the prior year, principally driven by higher investment on Viking Link and on Sellindge refurbishment, our success in the New York Bight offshore wind seabed lease auction, and higher spend at our Grain LNG facility for the Capacity 25 project. Full-year operating profit, including share of joint ventures for our other activities, was GBP 47 million. GBP 105 million higher than last year, reflecting fair value gains in National Grid Partners, as well as the release of an aged liability related to historical balances for unclaimed dividends. The latter has allowed us to inject funds through the year to support additional community and environmental causes.
Finally, turning to UK gas transmission, which will be treated as discontinued operation until the sale of the 60% stake completes, expected in the third quarter of this financial year. It's had a good start to the RIIO-T2 period, delivering a return on equity of 7.8%, 120 basis points ahead of allowance. Underlying operating profit was GBP 734 million. GBP 139 million above prior year, following higher revenues in the first year of RIIO-T2. Capital investment was GBP 261 million, GBP 57 million higher, driven primarily by gas compressor projects at Peterborough and Huntingdon.
Our net finance costs were GBP 1.1 billion, up GBP 37 million on a pro forma basis, reflecting GBP 145 million of higher RPI-linked debt costs, partly offset by one-off benefits relating to favorable pension interest and a property tax refund. For the year, treasury managed interest costs also includes GBP 130 million of interest cost for the existing WPD debt book, as well as GBP 100 million of financing for the WPD bridge loan, which we expect to refinance later this year as we receive the proceeds from the sales of Rhode Island and the stake in National Grid Gas.
Our underlying effective tax rate before joint ventures was 24.3%, 260 basis points higher than the prior year, reflecting the in-year deferred tax impacts of the UK corporation tax rate change and US state deferred tax remeasurement due to the upcoming sale of our Rhode Island business. Underlying profit after tax was GBP 2.4 billion, with EPS at 65.3 pence, up 10% on the prior year on a pro forma basis. Moving to cash flow. Cash generated from continuing operations was GBP 1.8 billion higher at GBP 5.8 billion, driven by the first time contribution from WPD as well as higher NGV cash flows and working capital movements.
Net cash outflow in the period was 45% lower at GBP 1.6 billion, further helped by proceeds from the disposal of our interest in the St William joint venture and a lower cash dividend given scrip uptake in the year, partially offset by higher capital investment. Net debt increased by GBP 13.4 billion to GBP 42.8 billion at constant currency, driven by the acquisition and financing of WPD, partly offset by GBP 4.1 billion of debt that has been reclassified as held for sale associated with the disposal of National Grid Gas. As we complete both the Rhode Island and National Grid Gas sales this year, we expect net debt to reduce to just under GBP 40 billion by March 2023. Once the transactions have completed, we expect our net debt to RAV to settle slightly above 70%.
This is consistent with delivering credit metrics within the ranges required by our credit rating agencies to maintain our strong investment grade ratings. Now turning to inflation. As expected, with high levels of inflation, last year we saw the impact on IFRS operating profit in our U.K. regulated businesses where inflation-linked revenues broadly offset by higher RPI-linked debt costs. At the same time, we've worked hard to deliver flat controllable costs as part of our cost efficiency program. In the year ahead, we expect a similar outcome with the impact from inflation on our U.K. regulated businesses, again, largely offset by inflation-linked debt costs. In due course, assuming inflation moderates, U.K. operating profit will be driven by higher revenues, given the real return on a higher regulated asset base, coupled with mitigation of controllable costs through our ongoing efficiency program.
This should then translate into improved earnings as the current high level of index-linked interest costs moderates. Within our supply chain, we're seeing some higher costs as well as lead times lengthening for certain parts. To date, this isn't having a material impact on the business. In the US, we're seeing above-inflation cost increases for certain products. We're managing this by finding alternative suppliers or changing the pace of discretionary spend. Any additional spend would ultimately be picked up in the following rate cases. Finally, before turning back to John, I want to touch on our five-year financial framework and outlook for the year ahead. We set out our financial frame last May, assuming long-term macroeconomic and energy market assumptions at that time.
At the start of the year, we guided that underlying EPS would be above our 5%-7% growth range in the near term as we work through the transactions. While our strong in-year performance has been better than our initial view, assuming inflation moderates in the next couple of years, we still expect to remain within our five year framework. Specifically for the year ahead, our forward guidance this morning sets out underlying operating profit growth across our businesses. However, alongside higher RPI-linked interest costs, we will be returning nearly GBP 150 million to customers, reflecting the previously announced Western Link construction delays within UK electricity transmission. Therefore, we expect to see a broadly flat EPS profile for the year ahead. In summary, we've had a strong year with record group investment as we accelerate our spends to deliver the energy transition.
A good start to our GBP 400 million cost efficiency program and a strong financial performance, delivering 10% underlying EPS growth year-over-year on a pro forma basis. With that, I'll hand you back to John.
Thank you, Andy. Let me now finish by summarizing our priorities and outlook for the coming year. Our vision is to be at the heart of a clean, fair and affordable energy future, and we're delivering on that vision by leading the way in pioneering smart, low-carbon energy networks with resilient and efficient transmission and distribution grids at our core. Our vision is supported by new policies and increased clean energy targets that are being developed on both sides of the Atlantic. These increased targets, coupled with our strategic transactions and our pivot to electricity, give us even greater certainty of growth in the medium term than we envisioned last November. In the UK, the government is being bold with energy policy, with an ambition to deliver greater levels of clean energy sooner.
For example, the recent British Energy Security Strategy sets out the ambition to produce 95% of the U.K.'s electricity from low-carbon sources by 2030. The energy transition also has significant focus in the U.S., where we were pleased to see the Infrastructure Investment and Jobs Act signed into law during the year. This legislation creates the opportunity to accelerate the energy transition while mitigating the impact to customer bills. This is shaping up to be a critical period across both the U.S. and the U.K. for energy policy. Our priorities for the year ahead will be to progress the opportunities these policy developments will bring. Starting with the U.K., with the heightened awareness around security of energy supply, our focus on delivering world-class reliability across both our transmission and distribution networks has never been greater.
Both the gas and the electricity system operators forecast that despite events in Ukraine, we currently have sufficient supply to meet demand in both the gas and electricity networks. Although as you'd expect, this will need to be closely monitored as we move towards the winter. In the year ahead, we'll finalize our portfolio repositioning and expect to complete the sale of 60% of our UK gas transmission and metering business in the third quarter of this financial year. We'll continue our integration of WPD and maintain our focus on agreeing a settlement for ED2 that provides the flexibility to deliver the investment required. Looking further ahead, we know that our networks will become even more important, presenting us with significant growth opportunities.
Last November, we talked about the 16 major projects and GBP 10 billion of grid investment needed to support 40 GW of offshore wind by 2030. The government now aims to deliver up to 50 GW of offshore wind capacity alongside a push for more nuclear generation, solar and hydrogen. Needless to say, this will require more electricity infrastructure to meet these ambitions. As you'd expect, we're already developing plans to turn the government's new clean energy ambitions into reality, including the transmission projects needed on the East Coast to bring offshore supply to major population centers. We're also supporting the development of the Holistic Network Design, which will lay out a coordinated onshore and offshore network to efficiently meet the government's offshore wind objectives.
Finally, I'm pleased that the British Energy Security Strategy also recognizes the need for updating National Policy Statements, clarity on the scope of network competition, and Anticipatory Network Investment. This will therefore be an important year as we work with others to create the right regulatory and planning framework to enable this investment that is needed. Moving now to the U.S. priorities. We'll continue to work with the Biden administration and stakeholders on the Infrastructure Investment and Jobs Act to progress a number of projects, including grid modernization and resilience, deploying electric transportation infrastructure along highway corridors, and securing a regional hydrogen hub in the Northeast. In Massachusetts, we expect decisions in the second half of the year on our regulatory filings for grid, electric grid modernization, advanced meter infrastructure, and our phase three electric vehicle proposal.
We also expect an order from the DPU on the future of gas proceedings, which could include the decision on the proposed regulatory framework and a broader policy on the role of gas distribution networks in delivering state climate targets. In New York, we're preparing for our next KEDNY and KEDLI rate filings for April 2023. We expect an outcome this year on National Grid Ventures' bid to install increased transmission capacity to Long Island to support up to 6 GW of offshore wind generation expected over the next decade. We'll also continue to work with our states in developing net zero pathways. Last month, we announced our clean energy vision, setting out our plans to reduce reliance on fossil fuels and increase the use of fossil-free gas, enabling homes and businesses to meet their heating needs without the use of fossil fuels by 2050.
The plan sets out four pillars to continue to increase energy efficiency and reduce energy usage, eliminate fossil fuels from our gas networks no later than 2050, give customers tools to maximize benefits of pairing electric and clean gas solutions, and support targeted electrification of heating where it's cost-effective to do so. Through our hybrid approach, we estimate that home heating costs could be 15%-20% lower than under a full electrification approach. In the next 12 months, we'll channel this work into the public proceedings that are ongoing in both Massachusetts and in New York to help formulate pragmatic long-term policy. We'll be building several demonstration projects that support the delivery of this vision. For example, we're building a green hydrogen project in Hempstead, New York.
This is one of the largest projects of its kind and will aid in the decarbonizing of networks by blending hydrogen into the existing distribution system. We'll also be hosting an event in New York in July, where we'll showcase the work that we're doing to deliver clean energy networks. Finally, I wanted to mention that we'll be publishing our second Responsible Business Report alongside our annual report next month. This will highlight our progress against the commitments that we set out in last year's Responsible Business Charter. I'll be hosting another event later in June to talk through the key messages as well as the priorities for the year ahead. In summary, National Grid has made significant progress over the last year, and we've another busy and exciting 12 months ahead.
Our strategic pivot to electricity announced last year is nearly complete as we look to finalize the transactions. Our focus on regulatory settlements continues with a particular focus in Massachusetts and the UK electricity distribution businesses. Our ongoing work with regulators and politicians will remain the focus as we help to define clean energy roadmaps to 2050. Over our five-year framework, around GBP 24 billion, or more than 70% of our investment, is in decarbonizing energy systems, and this makes us the energy transition company. Critically, we'll be doing it in the most efficient and affordable way for all of our customers to help ensure that nobody is left behind. Thank you for listening. With that, Andy and I will be happy to take your questions. Okay.
What I'm gonna do, I'm gonna take questions in the room first, but we got people who have called in, so we'll take the questions online second. Who's first? John, should we take it?
Yeah, thank you. Good morning. It's John Musk from RBC. Just a couple of linked questions on the five-year plan. On CapEx, which was running just under GBP 7 billion this year, that's obviously at the top end of the GBP 30 billion-GBP 35 billion average over five years. You know, is there not upward pressure to that number, both coming through from inflation and then obviously better asset growth and opportunities for you to invest? I'm just surprised that that isn't increased. I guess linked to that, on the 6%-8% asset growth target, also I'd expect upward pressure there. Can you just remind us what exactly you're assuming in terms of inflation within that 6%-8%?
Okay, I'll let Andy take the second one. Let me just deal with the first one. I think we feel that the framework that we set out last year is one that we remain comfortable with. The GBP 30 billion-GBP 35 billion, when we look at the projects that we've got going on over the course of the next five years, gives us comfort that that range is the right range. You know, typically, when you go down a level, we see some of the big projects that are finishing, such as the investment we made in interconnectors like the Danish interconnector, which will finish in 2024. At the same time, we are seeing increased investment in areas like electricity transmission.
At the moment, John, we feel very comfortable that the GBP 30 billion-GBP 35 billion is a sensible range for the five-year period. Obviously, when we look beyond that, we're gonna be very interested to see how much of some of the proposed changes that the UK government is setting out in the strategy document come to fruition and what that means for the investment beyond the 2026 period. For the period that we're in, we remain comfortable with the GBP 35 billion number that we've set out.
Yeah. John, on the inflation point, you'll see the 8.7% asset growth this year. That obviously has had some benefits from RAV indexation feeding through in the UK. As we said, if we look forward, it's based on what the forward curves are telling me, this isn't my assumption. You know, you see that inflation moderating again. I think that's why we see the 6%-8%, remember, it's a five-year CAGR out to 2026, still being good. Potentially, you know, obviously towards the higher end of that frame now than we were previously. Still, we think that remains a good frame for now.
Do you wanna pass it on?
Hi, it's Mark Freshney from Credit Suisse here. I have two questions. Firstly, on the agreement with RWE on the New York Bight-
Yeah.
Could you give us some color as to the expected timeline it would take to lead to investment there? What, you know, indicative investment costs could be, et c. Secondly, on—sorry to pick you up on the five-year plan again, but with inflation running at 11%, RPI, I mean, which is a real benefit for you having bought WPD at just the right time. But I'm surprised that your net debt to asset base, you still seem comfortable with it settling at the low 70s. Surely with this big inflation surge and the exit of the property business, you know, potentially it comes to high 60s on my numbers. So I was just looking to understand why we're so different.
Okay. Again, let me take the first question, and I'll have Andy talk about inflation. In terms of our joint venture with RWE, I mean, firstly to say is that we were really pleased that we were successful in winning the auction. It is actually the largest of the seabed leases, but actually the lowest cost in a MW hour basis. Our share of it is just under 30%, so as I said in my remarks this morning, the investment for the seabed lease is around about $300 million. The next phase is actually the solicitation for the procurement of energy that offshore wind would support. New York are running a solicitation that will run through the course of this year.
In terms of CapEx for actually doing the development, that's likely to be at the back end of this decade. So certainly not in the five-year framework that we've set out, but probably in the sort of 2027, 2028, 2029 period. In terms of how much of the 3,000 MWs of capacity we will do, well, that will be a function of the solicitation. As I've said many times, you know, our approach to these things is very disciplined in terms of taking these projects forward only where there are sensible returns, relative to what we see in our regulated businesses.
I think on the net debt point, Mark, just to say a couple of things. One is obviously within our net debt, there's also RPI linked around, you know, GBP 4.5 billion of that. There'll be an accretion piece of that which feeds through into your leverage calculation. I think the other thing is a point in time. If you may be doing the math on where we are today, maybe on a pro forma basis, post transactions. You know, you've seen from the numbers this morning that the cash performance has been strong this year, where when I'm trying to give forward guidance as to where we expect to settle, I'm looking out to the medium term, given the higher investment, and that's what gets me to slightly above 70.
Should we move forward a row? Go here first. Thank you.
Thanks. It's Jenny Ping from Citi.
Hi, Jenny.
Thanks. Two questions from me, please. Firstly, you touched on supply chain and inflationary pressures. I was more specifically thinking about the US, especially we've seen meaningful wage increases, labor shortages. You obviously talked about the delay of discretionary CapEx. I presume that's temporary. Can you just touch on a little bit more in terms of, as we look forward, how things you expect to develop? You also then go on to say rate cases apply to claw some of that back. What is the political appetite as we stand today in some of your jurisdictions on, you know, further utility bill increases effectively? Secondly, just going back onto the New York Bight investment, you will have seen Eversource is looking to exit US.
I think it's interesting that they point out some of their returns on the offshore wind space is very similar to those of networks. This makes me wonder whether you should really be focusing on the networks part of the business and some of the growth coming through, given it's a much lower risk investment opportunity. Yeah, any thoughts around that would be great. Thanks.
Yeah. In terms of supply chain and inflation, I mean, what we're seeing is relatively modest at the moment at the group level. We are seeing some cost pressures in the US and in the UK. A small uptick in terms of sort of direct labor, in terms of union negotiations. The most recent one we settled was just about 4%, I think. But we've been able to take some mitigating actions as well in terms of we got a lot of long-term contracts in place for a lot of the CapEx in both the US and the UK. We've been able to extend some of them. We've been able to change some of our suppliers.
We've got some mitigating actions, which means we are seeing modest inflationary pressure in terms of the cost base in the US and UK, but not something that's material at this stage, and we continue to look for opportunities to mitigate that. In terms of the regulatory environment, well, as you know, in Massachusetts, we've got five-year rate cases. We've just entered into a new one for Massachusetts Gas. That has indexation in it in terms of revenue. On the electricity side, it's RPI plus 1.7%. On the gas side, it's inflation plus 1.3%. That drives through over the next five years on the Massachusetts side, and we've agreed that with the regulator most recently.
In New York, as I said earlier, we've just extended on the KEDLI and KEDNY rate case. Actually for the extension year, I think, we see an increase of around about 5% on the revenues. CapEx is about $1.3 billion for that incremental year. We'll now enter in discussions with the regulator for KEDLI and KEDNY for the longer term rate cases. But that's a year-long process, as you know. Actually it won't be implemented until April 2024. In terms of the second question, Jenny, well I can't speak for Eversource. I can only talk for National Grid.
You know, as I've said previously, you know, our approach to development outside of the regulated networks business is to use the capabilities we've got in adjacent markets where we think there's an opportunity to earn returns that are better than what we would see in our core business. We did see the RWE joint venture as an opportunity. You know, it allows us to develop transmission offshore, working with I think the second-largest developer in the world on offshore wind. You know, that's not a skill set that we have, but we are one of the biggest offshore developers of transmission, so we bring a lot of capability to that.
We apply a disciplined approach, you know, and we have the decision as to whether we take that project forward will be determined in a disciplined way based on the returns that we see. We'll have a better view on that once we get through the solicitation in terms of what the states are willing to pay for the energy that's associated with those wind farms. You know, we'll take it step by step. We have the ability to exit should we need to, without any loss to National Grid.
Well, good morning. Chris Mayfield, Morgan Stanley. Couple of questions. First, looking big picture strategic, outside of, I guess, strategic view looking forward. You've just provided us with a new slide today which has your strategic priorities, and included in that is a shift from gas to electricity. Do we assume that that means that you'll continue that process? And are you really flagging an ongoing shift, or beyond gas transmission, are you happy with the portfolio as it kind of stands? And then in terms of your electricity transmission guidance, I'm just wondering whether you can unpack the impacts this year, Andy, or in fiscal 2023. Previously, were you expecting revenue to increase?
Therefore, if we're going to treat this as a one-off, which we will, what sort of number should we be looking at when we think about our revenue for the following year? How much rebound can we expect, and what's the extent of the one-off impact? Thank you very much.
Again, I'll take the first and let Andy take the second. In terms of the first, our position hasn't changed to what I said last year, Chris. You know, we took the decision last year to do the strategic pivot. We're nearly through that in terms of the transactions. Where that leaves National Grid is 70% electric, 30% gas, broadly 50/50 U.S., U.K., which is a portfolio shape I'm very comfortable with because I think it reflects the sort of my sense of how the energy transition is going to play out. Gas is gonna have an incredibly important role to play, and we see that playing out, massively in the U.S. You would have seen a few weeks ago that we launched the vision for our gas business.
I think a lot of people have been thinking around what's the roadmap for gas, as part of the energy transition and how it supports the targets that we've set by the states. National Grid did a huge amount of work looking at what that roadmap might look like and how we can deliver a proposal and a solution that's actually affordable to customers. As I've said this morning, what we've set out is a hybrid solution, a mixture of energy efficiency, fossil-free gas, electrification, heat pumps. That, we believe, will deliver a solution that meets the targets set in New York and in Massachusetts, but does so at a cost of between $800-$1,000 per year lower for customers. It is a vision.
It will require work with the regulators and with key stakeholders to turn that vision into reality, but that's the next task for us, and we think, you know, it was launched very well, I think, and received very well as a think piece. As I also said this morning, we'll now start to do some demonstration projects, both in terms of how you can inject hydrogen into the network and the role that that can play, but also renewable natural gas. There's a huge source of renewable natural gas in the US.
I think there's 19,000 water treatment plants and 17,000 farms, all of which have access to renewable natural gas, which if you can capture, it's fantastic 'cause it avoids methane going directly into the atmosphere, and we can then use the existing pipeline to provide that to customers. It's a clear vision for that we've set out in terms of how we see gas going forward, but I'm very comfortable with the overall shape of the portfolio.
Chris, in terms of the electricity transmission question, obviously you'd have seen, in my presentation this morning I mentioned the one-off impact of the Western Link revenue return, which is going through next year's numbers. That's up to around GBP 150 million, the fast money element of that. Other than that, as you would normally expect, you'd anticipate that over the five years of the price control, the underlying performance of ET would then reflect the ongoing investment and the growth of the RAV and all the other factors which have adjusted into this year. It's really just Western Link is the one-off into next year, and then you'd expect to return to the normal profile.
Let you go over there, and then we'll do Dominic after that if that's okay.
Thank you. Deepa Venkateswaran from Bernstein. I have three questions. Starting with Western Link, just a clarification. The GBP 150 million that you're returning, is that just your fast money disallowance from past, or is there also a RAB impact that we need to consider? I think it used to be 85/15 TotEx in the previous period. Retrospectively, should we also adjust the outperformance that we may have counted? Secondly, on inflation, Andy, could you just maybe tell us what you're assuming for inflation for the asset base and the inflation-linked debt for this year? I know you've guided to GBP 300 million more finance expenses, so maybe if you can just calibrate that. The last question on New York Bight.
Obviously you'll bring the transmission construction abilities to bear, but I presume you will end up owning 30% of the entire offshore wind project. Or is there a plan to further restructure with RWE such that they just own the generation and you own transmission, or will you be owning essentially 30% of a large offshore wind farm?
Yeah. Okay.
Thank you.
I'm gonna answer one and a half of those, and I'll give one and a half to Andy. Let me start with the last one in terms of New York Bight. It is a joint venture for the whole project. Effectively we would end up being a just under 30% holder of the wind farms, including the transmission. I mean, one of the things, you know, I would say is that as we see the aspirations have been set up by the Biden administration in our states, I think the opportunity for offshore grids in the US is similar to what we're seeing in the discussions on the North Sea and the UK. Therefore, there may be an opportunity in the longer term to do transmission-only offshore investment.
That's not there today, but clearly it's something you could see happening. In the meantime, the opportunity for us to bring that expertise offshore is through joint ventures like the one we got with RWE. There's no suggestion that we're gonna change the shape of that joint venture. In terms of Western Link, I'll just say at the highest level, I mean, effectively what this is the return of the outperformance. Obviously Western Link was a unique project using new technology. Ultimately, like often with these new technologies, you get periods where the commissioning goes through a sort of bumpy start. We certainly saw that with Western Link. As a result, against our license obligations, it was slightly later than anticipated.
Otherwise, I remind Ofgem on a frequent basis, actually, that technology is saving customers hundreds of millions GBP because the alternative would be another cable. Nonetheless, what we agreed with Ofgem, which I think was sensible, was even though it was late, it was actually delivered significantly lower than the allowance that was set. It's that allowance that effectively we're returning to customers so that there isn't an outperformance for Western Link for both ourselves and for ScottishPower. In terms of split between fast and slow money, I'll hand that to Andy.
Yeah. I think, Deepa, just be clear and to build on John's answer there, we didn't recognize any of that outperformance over prior years. Effectively none of that has been reported through our previous years' ROEs or earnings. You know, there is no sort of downward adjustment either to the RAV or to ROE as a result of that giveback. But it's a one-off catch-up, if you like, for all of that, the revenue that we've previously started to collect as well. Then I think the other question was your inflation one around what are we assuming for next year. Obviously inflation has been reported as of yesterday again as we speak.
I think, you know, the key thing for us is actually we've actually assumed in our modeling at what was the current RPI ahead of yesterday, which was around 9% headline RPI. The reality is, as I explained this morning, because of the RPI debt book that we carry, there is a relatively broad offset between how it flows through an operating profit level, and what eventually turns up in earnings because of the accretion. If you get, you know, increments up or down from that nine, there will be a relatively broad offset as well, which is, you know, what we see. We haven't actually sort of guided in terms of expectations around, you know, what RAV indexation may do next year.
That's actually based on closing spot at the 31st of March, and I'm not gonna try and second-guess what closing spot might be in 12 months' time.
I think Dominic was next.
Hi. Yes, it's Dominic Nash from Barclays, please. A couple of questions from me, please. Firstly, could you just give us sort of a summary of the timeframe and what are the major sort of milestones for this sort of offshore wind grid and the MPI sort of policy? Like when are we gonna hear decisions from the government, and who's gonna be owning it, and when we're realistically gonna start seeing construction on that? And sort of flipping on to your CapEx numbers and the baseline in RIIO T2, are you lining up for an uncertainty mechanism yet for increased CapEx? I don't believe anything's been sort of put through the system yet. If you could just give an update on that, how it works.
That's a cheeky one as I did say two, but gonna throw another one in. Going back to the dreaded inflation numbers, the RORE that you reported in the UK on the numbers just up there, obviously you've got a long run inflation number embedded in that, which I don't believe is a spot number. It's a long run assumption number. Can you just give us sort of detail what number you use for that? What financing outperformance do you think that you would have made in the last year's numbers, please?
Okay. Let me take the first and second, and let Andy take the third. In terms of MPI specifically, as opposed to any offshore regime for transmission, I'll separate out the two because actually there's sort of two debates going on at the moment. In terms of MPIs, as you know, National Grid has been advocating for almost the next evolution of interconnectors is multipurpose interconnectors, which for those who are not close to it's basically a traditional country-to-country interconnector that also allows wind farms to connect into it, which gives them access to the European market and the UK market.
We've been in discussions with BEIS and Ofgem around creating the right business model to encourage that type of investment and have been really advocating for them to take one forward in sort of pilot phase, where we actually put a business model in place, test it, and then create a regime around it going forward. That discussion is going on. We're very hopeful that over the next few months, we'll try and land a decision on that. That may or may not create an opportunity then to take some development and investment forward. We're working with a number of partners in Europe on those types of developments.
More broadly, there is a consultation that is due to land any day now, Dominic, on, actually how Ofgem see the offshore regime for transmission, whether that's an evolution of the OFTO model. But also with the Holistic Network Design, we are expecting there to be potentially links between one offshore wind farm and another, having transmission links between it and then what's the regime around that. It's not an OFTO, it's not an onshore transmission investment, so what is it and what does the regime look like around that? I'm pretty sure it's imminent. In fact, I think we're expecting it sort of in the this month. Whether it's gonna land this month, I'm not sure, but it's definitely soon. In terms of the CapEx and uncertainty mechanisms, actually there are quite a lot of them.
You know, of the GBP 8 billion of ET's investment, about GBP 5 billion of it is in the baseline, and quite a lot of it is through uncertainty mechanism. I think the team have already done something like 16 submissions for uncertainty mechanisms, which are in different phases. Some of them are relatively modest in terms of size, in terms of CapEx. Some of them are rather larger. The two East Coast links, the one with ScottishPower and the one with SE, are going through the process of agreeing with Ofgem what the allowances will be for them. They sit in that sort of process of uncertainty mechanisms as well. We've got a whole host of them around cyber investments and smaller types of investments as well. I think we've done about 16 so far.
So two parts to the question. I think in terms of our normal long run assumptions that we use for the metrics that we report, we tend to use 3% as a long run RPI assumption and 2% as a long run CPIH assumption. That's historically been roughly the wedge between the two. And that's what we've used over certainly since we you know introduced those metrics. In terms of last year actually, as ever, there's not an easy answer to actual financing performance. Remember T2 now is on a CPIH basis. Average CPIH last year was around 3.7, as you'll have seen, for example, behind the dividend increase.
Obviously within our debt, but we also have a fair amount still of RPI debt within NGET or within the electricity transmission business, which acts as a bit of an offset to some of that increased inflation going through the debt allowance as well. Actually, in the key terms of the current year, we haven't seen a significant uptick in overall debt performance. We've seen some upside, but as I say, if you take the 3.7% CPIH offset by the fact there's, you know, an RPI tranche in the debt book, that tends to act as a drag on it.
Oh, sorry. Should we go there and then come back to you? That's okay. Trying to do it on a fair basis. Whoever gets their hand up first.
Morning. Verity Mitchell from HSBC. I've just got two questions. One is about the share of investment in NGV. I mean, you've almost got a quarter of your investment this year coming from NGV, and with New York Bight, which you've won since the capital market day. Should we see that share of NGV growing in terms of the business, both investment and size of the business? And secondly, on I suppose ED2, I mean, you're making 400 basis points of outperformance in UK ED2. I mean, do you see pressure on the upcoming review in terms of efficiencies given that risk-free rates are going up? There's got to be a squeeze somewhere. How do you see that panning out at the moment?
Yes, in terms of National Ventures, I mean, the number's slightly distorted this year for the reason you said, which is, you know, $300 million of it is for a single payment for the seabed lease. Actually, our view on National Ventures hasn't changed. In terms of the 30-35, I think we set out in November last year that we expect 2-3 of it to be in National Ventures. That remains our view. As I said, as new opportunities come on, then we see others completing. As I said, you know, we've completed IFA2, we completed NSL, the Norwegian Interconnector. We're just about at the tail end of the Viking Link. They will start to tail off as other investments come through, but 2-3 still remains the guidance with regards to that.
With regards to electricity distribution and WPD, I mean, we're really pleased actually with the performance of the business. If you look at the underlying performance of the business, a lot of that 400 basis points above base is coming through the incentives and in particular customer satisfaction and through reliability and great response to outages. I think that's driving about 300 basis points of it. You know, that aligns very much with what customers are asking of us and what customers want and are getting the benefits of that. As we look to the discussions with Ofgem for ED2, you know, one of the things we do want to emphasize is just the benefits of incentives and how those incentives can drive great performance and give customers real benefits as well.
In terms of efficiency, you hopefully picked up in my remarks this morning, actually, we've set out a plan, I think that's got a huge amount of support from our customers and from our stakeholders. It sets out an investment plan which I think is 27% higher in the next five years than the last five years, but on a CPIH basis, broadly holds the customer bills flat, which effectively embeds around GBP 700 million of efficiency savings over that five-year period. I think we've deliberately put in place a plan that has got that balance right between meeting customer needs, doing the investment that's needed for the energy transition, but recognizing affordability is really important. Thanks for that.
Hi, Sam Arie, UBS. Thanks very much for the presentation today. Obviously a good full year result. If there was, I guess anything to be disappointed about today, which we're touching on in some of the questions, it's I suppose the fact that the five-year framework hasn't moved upwards. I think Mark asked a good question about this on the asset side. We've had a few kinda goes at the inflation sensitivity. I think from the outside, a lot of people would have thought you must be long inflation, all things considered, across the different businesses. I think what we're hearing from you in the Q&A and what you're saying by keeping the five-year earnings guidance where it was before, is you're not long inflation fundamentally. I just want to check. Is that right?
Is that what you're saying? How does that map with the fact that then you've got an EPS which is not moving with inflation, but you've got a DPS which is? I know you're happy putting through the DPS increases with inflation if EPS isn't sensitive to inflation in any way. I think feels to me like the big question for today, and I'm struggling to follow why you're not a little bit longer. Inflation overall.
Okay. Well,
Thanks.
Again, I'll let Andy talk about inflation and the various metrics. I mean, from a CapEx perspective, I don't think you should be disappointed. I mean, I think GBP 30 billion-GBP 35 billion is a massive investment program. As I said this morning, GBP 6.7 billion this year is 19% up on last year. It's a significant capital program. You know, our objective is to manage costs with our supply chain to deliver the volumes of work that we set out in November. I've given you some examples of the things that we're doing. To the extent that we can mitigate cost pressures and deliver that volume, we remain comfortable that the GBP 30 billion-GBP 35 billion is the right target.
As Andy said, when he looks at the forward curve, we think inflation is gonna come off, and therefore, we don't think it's a sort of a continuous increase in cost pressure. We think it will come off, so that's an underlying assumption in this. You know, GBP 30 billion-GBP 35 billion over a five-year period is not to be sniffed at.
Yeah, I mean, on the broader point about the five-year frame, I think, you know, clearly our strategy for many years has been to hedge a portion of our exposure to inflation. You know, post all the transactions, we'll probably be around just over 10% hedged. So we'll have about a GBP 4.5 billion level of index linked debt within a debt book, which as I said this morning, will be just under GBP 40 billion overall. In terms of the overall capital allocation, we think that's the appropriate strategy to continue to hedge a portion of our index linked exposure. You know, that means that we will see some benefits.
The second point I'd make is that, you know, when we announced the five-year frame, we said we deliberately wanted to put a frame out there that was robust to many different scenarios. As John's just said, if I look at the curves today, you know, the curves are not indicating this is sustained multi-year inflation. Therefore, when we think about that frame, as I said it to an earlier question, we may well be, you know, closer to the higher end of the frame than we were previously. But I think at the moment, you know, that may change as the inflation curves may shift again, as we continue to see. But based on what we see today, I think the five-year frame stays good.
There's a question in the back there.
Thanks. James Brand from Deutsche Bank. Two questions, please. Firstly, on the U.S., you're obviously in a very good position in terms of the cost cutting and keeping your controllable costs flat there and earning an attractive return on equity. If we think back a bit and about your inflation exposure there and your ability to pass through inflation and cost pressures, it seems like you've also made some progress there. You mentioned Massachusetts and having some inflation uplifts coming through in the revenue allowances there for gas as well as power. You've got trackers in New York. Where are we now in terms of the proportion of your cost base, where there's some kind of automatic pass-through if there are cost pressures or of inflation, if it's possible to characterize it in that way?
Secondly, on the UK and the government's target, or maybe it's Boris' target for a nuke a year, think that fell into the category of things around energy policy that were after 2026. I was just wondering whether is that kind of remotely on your radar at the moment? You're actually having discussions with either government or with Rolls-Royce or with companies around what might be required for transmission connections for new nukes above and beyond, obviously Hinkley Point C.
Yeah.
Thank you.
In terms of U.S. exposure to inflation. You're right, we're in a reasonably good place, given what we've done over the last few years with the various rate cases. Massachusetts, both electricity and gas, we now have what's called performance-based rates, which means that it's a five-year rate plan that, as I said earlier, increases revenues by inflation, actually plus 1.7% in electricity and 1.3% in gas to reflect the increased investment over that five-year period. That gives us a degree of sort of protection against inflation in that jurisdiction. In our electricity transmission investments we do in the U.S., under FERC regulation, as you spend the money, it goes onto the regulated asset base. Therefore effectively is at cost, so you've got protection there.
The exposure really is in New York. To the extent that we get the forecast wrong when we do a multi-year settlement in New York, then you have an exposure for the period of the rate case. You can, if you get it substantially wrong, go back in and try and reopen it. Obviously, we would rather not do that. For KEDLI and KEDNY, we were comfortable to extend based on the cost pressures we're seeing and the revenues that we've got to extend it by additional year. We are now going to start negotiations with the regulator over the next 12 months for a new rate filing. Similarly in NIMO, it's a multi-year settlement, and therefore you're exposed to the difference. At this point, you know, we're comfortable with that.
That's the inflation question. In terms of energy policy, early days. We were really pleased to see some of the things that were set out in the energy strategy document. Obviously, an increased focus on energy independence, but using the energy transition and clean energy as the solution to that, including nuclear. At the moment, and the other point I'd make, we're really pleased to see actually a recognition that some things need to change in order to make those investments. Things like anticipatory investment and changes to the planning process, which are gonna be quite important if we're gonna meet the targets. We're pleased to see that. We've been advocating for them. In terms of nuclear, early days.
Obviously, we've got a lot of experience around nuclear connections, and to the extent that they're likely to be at the sites that have been indicated, then we've done a huge amount of work in the past. Obviously, the Anglesey nuclear connection, which, we spent about five years working on, potentially could come back. Similarly, the one in the north, the northwest, and Sizewell. We're not yet sitting down with government, in terms of, specific connections, but we, you know, we understand where these connections are and we understand the infrastructure investment that would be needed to connect them, depending what the time scales are. Okay, in which case I'm gonna take a question we've got online. I think Martin Young from Investec is online. I don't know if you can hear me, Martin.
I'm hoping you can, and technology is working. If you'd like to ask your question.
Hi there.
Hi, Martin.
Can you hear me?
Yep, can hear you.
Yeah. It's Martin Young from Investec. A couple questions if I can, please. The first relates to the suggestions that we might in the future move to locational pricing in the UK, and that comes with a further suggestion that it could have implications for transmission investment and perhaps reduce the need for transmission investment. Just wondered what your thoughts around that are in the context of the long-term outlook for NGET. The second question relates to the paper that you put out for a fossil-free future in the US. That's certainly an interesting document that I've been through.
Just sort of thinking about the UK, you know, situation, given that we are in a way struggling to set out a clear view about the decarbonization of heat, in this country, why can't some of the principles that you've outlined for the US be brought to bear in the UK? Now I appreciate that you're not really on the gas side, in the UK, but at a high level, you know, why can't we and why shouldn't we be thinking along those lines for the decarbonization of heat in the UK? Thanks.
Okay. Thanks, Martin. They're quite big questions. Let me start with the locational marginal pricing. I mean, actually just to take a step back. One of the things that National Grid has been doing consistently as part of the debate and discussion with Ofgem and BEIS is to say that in order to deliver the energy transition, then there'll need to be regulatory reform, institutional reform and market reform. I've already mentioned some of the things we've been advocating on regulatory reform, such as an anticipatory investment. Institutional reform, we were pleased to see the decision in the BEIS document around the future of system operator. That's something we've been working with BEIS and Ofgem on, so I think that's a good step forward in terms of institutional reform.
In terms of market reform, we also see that there's a need to look at the market, how it operates, and I think within that it includes things like how do we incentivize things like long-term storage? You know, the energy market reform that came in about a decade ago has been very successful at encouraging offshore wind through the CFDs and the capacity market. But what's the next wave of that, and what does that look like to encourage long-term storage? Similarly, given the volume of new generation that's going to connect to the network, I think it's right to ask the question, how would you allocate the costs of that? Locational Marginal Pricing is one proposal and one solution. It is a solution that many countries use. We're very familiar with it in the U.S.
If you did the math today, what it would tell you is you need to build transmission because you've got a load of generation being built in offshore in the North Sea, and therefore you'll need to build transmission in order to export that generation. I think it's the right debate to be had, and obviously our own ESO has put its thoughts out. There was a really good report that was published recently by Catapult, which I think was supported by Octopus, which again gives their views on it. You know, the fact is, the government is going to do a consultation on the review of the electricity market, and I think Locational Marginal Pricing will be one of the issues that they'll consider as part of that broader market reform.
In terms of the fossil fuel future for the UK, I mean, I could say, well, that's probably the job of the other companies that run distribution companies in the UK. I think one of the things that I would say about it, and one of the things we've learnt is actually it is likely that the solution for gas is gonna be different in different jurisdictions. You know, the northeast of the US for us is you know is a key jurisdiction, also very cold in winter, very mild in summer, and therefore the volumes of gas that we see being used for heating in the winter are massively different to the summer, and therefore we need a solution that actually reflects that. Also, just the geology of the two countries are very different.
Blue hydrogen is not necessarily a very good solution in the northeast of the US because there's nowhere to store the carbon. Whereas in the UK, potentially blue hydrogen is a solution because actually we've got these massive caverns and oil and gas fields that you could store the carbon dioxide in. I think where you get to is you need to define a roadmap and a solution that is fit for purpose for the geology, the geography, the climate, and the infrastructure that you have. I think it's the same challenge in the UK. I think looking at things like blue hydrogen, and of course we're involved in that with the carbon capture project in the northeast, looks quite sensible when you potentially could actually store that carbon efficiently in oil caverns in the North Sea.
We are thinking about it from a transmission perspective. As you know, we still own the transmission business for a few more months. We are thinking about things like a backbone for hydrogen to support industry, which will be very helpful to CO2 emissions. At the distribution level, you have to think about it in the context of what are the challenges for the U.K. business, not just the same as the U.S. Is that time up, Nick?
No, but I've got another question online, which is a written one, if you wanna do it. It's from Bartek at Soc Gen. There's two parts to it. The first part is draft determinations have resulted in some disappointments for NGET given low TotEx approval and business plan penalties. How do you assess the risk of a similar disappointment to come from the upcoming DDs for electricity distribution? Could you assure the market that you have learned from past mistakes? His words, not mine. Secondly, what could be the potential basis for the valuation of the ESO assets when being transferred to the new state-owned entity? Premium or no premium to RAV, earnings multiples, book value of assets?
Okay, well I'll let Andy talk about the second. So in terms of electricity distribution, WPD, I mean, first thing I'd say is I'm really proud actually of the way the team has approached it. I think compared to any other electricity distribution company, they've had more drafts of their business plan shared with customers and stakeholders. As I said earlier, we've had 25,000 people comment on it, so we're really comfortable and confident, I think that we're reflecting what people are asking of us. Ultimately, we're in the hands of Ofgem as to whether they agree with that view. In terms of lessons learned, we've spent a lot of time actually. In fact, Phil was here today.
His team's spent a lot of time with the electricity transmission team, making sure that we have learned the lessons, and they've been reflected actually in the submission that we made. We're hopeful that the draft determination will be a sensible draft. Obviously there'll be a bit of work to do between the draft determination in June and the final in December. In terms of what we submitted, as I said, I think we've got the balance right between the capital investment to support the energy transition and affordability, which is massively important as well.
Bartek, just on the system operator question. Clearly it's very early days. You know, it was obviously included in the strategy. It's been included in the Queen's Speech, so we absolutely expect it to be in the Energy Bill. We're really early days in terms of dialogue with BEIS and others around, you know, both the process for separation, as well as any approach to valuation. For reference, you'll have seen this morning the RAV of the SO is just under GBP 300 million, as a reference point. Obviously we'll update further as that dialogue progresses.
Okay, I don't see any more hands, so I'm gonna say thank you very much, ladies and gentlemen, for joining us this morning. As I said, I think if we look back over the last 12 months, good operational performance, strong financial performance. I think we're really well placed to deliver on the capital investment program we've set out for the next five years. Thank you. Look forward to seeing you all soon.