Good morning, everyone, and welcome to our full year results presentation. I'm joined today by Finance Director Gregor Alexander and Chief Commercial Officer Martin Pibworth. In today's update, we'll outline how we are creating sustainable value from a growth-aligned strategy, which is delivering for shareholders and society and promises much more for the future. First, in our results overview, we'll cover a year of delivery in which we invested record levels well in excess of the strong profits we earned. We'll outline how this has given us financial strength to weather future market uncertainty, seize opportunities, and create more shareholder and societal value. In our strategic update, we'll set out how we'll deliver GBP 18 billion of investment as part of our upgraded NZAP Plus plan to financial year 2027.
Finally, we'll show how we'll grow value out to 2032 and beyond, thanks to the sustainable solutions we offer on energy, security, and climate change. In short, SSE offers a compelling investment proposition, a strong balance sheet, solid ESG credentials, fantastic optionality and capability, and sustainable long-term value. You'll have seen our NZAP Plus outlined in this morning's statement, and I'll cover it in more detail later. Here is a brief overview of the main changes. When we launched the original NZAP back in November 2021, we made it clear it was a floor, not a ceiling, to our ambition. We now expect to meet or exceed our original financial targets. We've rolled the program forward by 12 months to financial year '27 and upgraded the plan to account for new opportunities and a changing investment mix between businesses.
It remains a fully funded plan, but we're targeting over 40% more CapEx, partly due to inflation, but the majority through additional growth spread across our networks, renewables, and thermal businesses. We have concluded, after careful consideration of the balance and financial strength of the new plan, that retaining full ownership of SSEN Distribution is the right strategy at this time. We'll outline why we believe we can continue to maintain attractive returns on that investment and why our current business, bolstered by this additional investment, can deliver sustainable earnings growth over the longer term. We are aiming higher, investing for the future in both proven and emerging technologies and assets that society will need in GB, Ireland, and further afield. Before we go any further, I'd like to say a few words about SSE's overriding priority, which is safety.
Our record levels of investment come with a significant rise in construction activity, regrettably, we had 16 more injuries year-over-year and a small increase in our total recordable incident rate. Getting everyone home who works for SSE at the end of each day remains our top priority, that focus is all the keener following the tragic death of Liam MacDonald, a young contractor working on Shetland in June last year. We pay tribute to Liam again today. Let me now turn to our role in the future energy system. The key lesson for everyone from the past year is this: we must go further and faster in delivering the clean energy transition. The war in Ukraine and the global energy crisis means decarbonization is now not only synonymous with tackling climate change, but also with security, affordability, and fairness.
This means there is now broad national and international consensus on what needs to happen. Firstly, we need to radically increase renewables, particularly wind and solar. Secondly, we need to transform our electricity networks to transport all that clean energy to homes and businesses. Thirdly, we need to back it all up with low-carbon, flexible generation and storage. Finally, we need to do all this without leaving people behind. Renewables, networks, flexible generation and storage, and a just transition. These are the key ingredients of both our NZAP Plus strategy and a clean energy future. This is what we mean by creating value for shareholders in society, and we're doing this in a sustainable way. We've published one of the U.K.'s first net zero transition plans with science-based targets aligned to a 1.5 degree pathway and supported by an annual shareholder vote.
We also have a long-standing commitment to fair tax and a leadership position on the living wage. At the same time, our employee base is growing. We're championing a just transition to net zero through increasing the number of people joining us from high-carbon industries and the other elements of our sector-leading strategy in this area. These are just some of the social and environmental credentials that are reflected in our leading ESG index ratings and form a central plank of the compelling investment proposition that I have already mentioned. Finally, the last financial year shows how we're currently realizing our potential. Our investment plans are not hypothetical. We have been spending to bring forward critical infrastructure to create jobs and support communities. We invested GBP 2.8 billion, a record level of CapEx investment for SSE, which represents a 36% increase on the previous year.
Much of that spend was on flagship capital projects in networks and renewables, notably the Shetland HVDC link, Seagreen, and our expansion into Southern Europe. We also invested in current and future flexibility, be it Triton Power, our battery portfolio, or early-stage development spend on future hydrogen, carbon capture, and hydro pump storage options. With alignment to societal tailwinds, we have a major opportunity to leverage our unique capabilities, world-class assets, and balance sheet strength to deliver decades of sustainable growth. I'll now hand over to Gregor.
Thanks, Alistair. I'll talk you through what is clearly a year of strong financial and operational performance. You all seen our preliminary results statement this morning. Rather than go through the numbers line by line, I will focus on the drivers behind the 65% of group adjusted operating profit contributed by our main generation businesses and the 30% from regulated networks. To summarize, earnings from our thermal, flexible hydro, and gas storage assets, which were awarded for providing timely backup, more than offset broadly flat performance in renewables, which included the impact from Seagreen delays and the Electricity Generator Levy. As Martin will mention later, we expect flexibility to be a key requirement of energy markets over the decade ahead and have plans for continued investment in this area.
This balanced portfolio of market-focused assets was well supported by regulated income from electricity networks that provide a strong foundation. At group level, we saw adjusted operating profit increased by 66% to GBP 2.5 billion. Adjusted profit before tax increased by 90% to GBP 2.2 billion. Adjusted EPS was GBP 1.66 in line with the upgraded guidance from our pre-close statement. These are strong profits that show the value of the business mix we have carefully created. They're also profits with a purpose, and we're delivering on our commitment to reinvest back into critical infrastructure projects. The effect of the volatile market conditions can be seen in the strong adjusted operating profit that was mainly driven by our flexible generation fleet and gas storage assets.
A year ago, we reported a GBP 2.1 billion net derivative asset on our balance sheet, which reflected the impact of the market volatility on our forward commodity contracts, not underlying performance. It is no surprise to see this asset unwind in the year, resulting in the net remeasurement loss shown to leave a GBP 260 million net liability on derivatives this year-end. The change in volatility and resulting IFRS 9 measurement impact highlights exactly why we exclude those remeasurements from SSE's adjusted profit measures. In September, we reported a GBP 141 million gain on the acquisition of Triton Power, reflecting the higher price environment upon completion. With most of that uplift earned in the second half of the year and after derivative remeasurements, the net uplift has reduced to around GBP 21 million.
Finally, we've included adjustment for the first time this year to remove 25% of SSEN Transmission operating profit from our adjusted results, as these are ultimately attributable to the minority interest shareholder of that business. SSE's regulated electricity networks represent the backbone of the company, and they are increasingly becoming engines of long-term growth. This year saw a solid financial performance in Transmission, with operating profit broadly flat versus the prior year, as higher allowed revenues were offset by lower than expected volumes, higher operating costs, and the 25% minority interest which we exclude from our adjusted metrics. SSEN Transmission has a central role in net zero. It is one of the fastest-growing regulatory networks in Europe, underpinned by one of the most well-respected regulatory frameworks.
For the last three years, consecutive years, the business has consistently been awarded 100% of the available incentive against the energy not supplied reliability measure. Meanwhile, we have seen excellent progress on a significant investment program, which includes the Shetland HVDC link, northeast Scotland upgrade, and the final circuit connecting Seagreen offshore wind farm to the grid. The base plan has been supplemented by uncertainty mechanisms that are all making good progress at various stages of their Ofgem processes. The business is focused on preparing to deliver its share of the accelerated strategic transmission investment framework, known as the ASTI program, announced by Ofgem last year. Based on the latest view of the business, we expect average annual operating profit net of the minority interest to be at least GBP 400 million across the five years to the financial year 2024.
However, the current regulatory period marks the beginning of many years of growth as the network helps to connect the vast array of renewables under development in the north of Scotland. Moving to distribution, which has just completed its final year of RIIO-ED1. Performance has largely been as expected with an increase on last year's profit. I'm pleased to say that the lessons learned from the extreme back-to-back weather events of the financial year 2022 led to quicker restoration times and better communication with our customers through the ice storm that hit Shetland and later during Storm Otto, which was recognized by the Scottish Parliament. It's been a good year in terms of service levels. There's more work to be done, but we are pleased to see significant progress over the period, with SSEN Distribution ranking as the most improved DNO for customer satisfaction.
A key milestone this year was reaching a final settlement with Ofgem on the RIIO-ED2 price control. Our final settlement of GBP 3.6 billion represents a 22% increase in allowed expenditure compared to ED1. Attention has now turned to improvement in business-as-usual operations, the focus is on ensuring we have the people, systems, and plans in place to hit the ground running on ED2. We're working hard to digitalize the network and adapt it to the impact of climate change. As with any networks businesses, the nature of the price control means that no one reporting period gives a complete picture of financial performance.
In distribution, the price we charge per kilowatt-hour is set 15 months ahead of the regulatory year, which means that the inflationary pressures which we are seeing in the cost base will not be reflected in revenue until the financial year 2025. As a result, we expect a reduction in adjusted operating profit into financial year 2024, but still expect average annual operating profit of at least GBP 450 million across the five years to financial year 2027. Turning to renewables, despite being behind planned levels, wind speeds were up year-on-year, and the hedge price achieved benefited from converting gas and carbon hedges into power when the spark spread was high. Meanwhile, our flexible hydro assets captured high prices whilst balancing the system to ensure secure supplies. These were offset by hedge buyback costs and the electricity generator levy.
All in all, SSE Renewables had a mixed year. A critical measure of performance is how we are progressing our major construction and development projects. I'm pleased to say that we reached a long list of milestones in the financial year 2023. Offshore foundation installation and onshore works continue at Dogger Bank ahead of expected first power this summer. Weather permitting and all, though supply chain delays mean the completion date for phase A has been pushed back a few months, the commissioning volumes remain unhedged, which limits financial impact. There has been setbacks at Seagreen due to vessel availability, amongst other things. With first power achieved in August 2022, the last of 114 foundations installed in April, we're on course for full commercial operation in the summer of this year.
Clearly, projects of this scale and complexity are not without risks and challenges. It's been a big year for offshore wind strategically, with one highlight being the consent application admission for Berwick Bank, a major milestone for one of the biggest offshore wind opportunities in the world today. Onshore, at Viking on Shetland, we saw the first of 103 turbines erected last month, and construction is well underway on our Irish onshore projects. The acquisition of SGRE's onshore development platform in Southern Europe this year is starting to deliver, with a number of projects aiming for a final investment decision later this year. Finally, Hydro is part of SSE's DNA, and is therefore particularly pleasing that Foyers performed so well and that phase one of the refurbishment of Tummel has gone as planned.
Our approach to hedging means that we have secured some value in hedge volumes several years ahead in wind and hydro, but retained some flexibility to help manage volume risk. We anticipate an immediate step up in financial year 2024 volumes of roughly 25% to around 12.5 TWh, as we expect weather conditions to normalize following three consecutive unfavorable years, and as the business benefits from the best part of a year's output from Seagreen. As hedges entered into during the current elevated price environment start to be delivered, we also expect an increase in the average hedge price of around 35% year-on-year. Output from Dogger Bank will remain unhedged until construction has been largely completed, and we've excluded any commissioning volumes from the 12.5 TWh guidance.
In thermal, the low wind speeds noted on the previous slide are one reason the market has needed flexible generation plant. Equally, with the disruption to international supplies, gas storage has been required to flexibly manage national imbalances, both in Great Britain and Ireland. At SSE, we choose to maintain and invest in these technologies when others mothballed with years of lower earnings across the flexible thermal asset base. In the context of last year's market conditions, it was clearly a good time to add around 700 MW of net capacity to the portfolio through the Triton Power acquisition. With an acquisition cost of only GBP 123 million, it enabled an immediate payback to our investment. The real prize will be its low-carbon future. We also entered commercial operations in Keadby 2 in March, following a four-and-a-half-year construction program.
With an efficiency of around 63%, making it the most efficient plant of its type in Europe, and the ability to reach full power in just 30 minutes, Keadby 2 will provide flexibility to the electricity system for many years to come. Finally, gas storage has continued to provide important protection for the group against the ongoing volatility in gas prices. The previous slide demonstrates quite clearly the value from maintaining a flexible generation fleet. As Martin will explain later, we believe these assets will sustain future profits above historic levels. We've invested in over 1.5 GW of additional capacity, ready to respond to the realities of the higher medium-term price environment. As markets continue to transition towards increased intermittent low-carbon power over the next decade, and customer demand rises, the flexible response from these assets will become increasingly important to the energy system.
As illustrated by the graph on the left of the slide, these assets have opportunities to earn income through being flexible, not only when the weather is still and the output is required, but also when it is windy and the system does not need previously sold electricity generation, which can be bought back at generally lower prices. Taking all of this into account, we expect that the thermal business, including gas storage, will deliver more than GBP 750 million operating profit in the financial year 2024, and around GBP 500 million average operating profit annually over the four years to the financial year 2027. I don't intend to go into the detail of this slide, but these businesses are part of a very deliberate operating model, and each has a role to play in contributing to delivery of our net zero focus strategy.
It's worth emphasizing, however, that the profitability reported at the half year for Airtricity has been largely reversed, with tariffs being kept as low as possible for all consumers and reflecting other measures to help affordability. In April 2023, SSE Airtricity administered a EUR 35 rebate to each customer, fulfilling its commitment to return profits to customers in recognition of the cost of living crisis. Both Airtricity and SSE Business Energy have important strategic roles in the group, and we expect them to return with stronger profitability in the financial year 2024. SSE's strong balance sheet continues to be underpinned by high-quality assets. After the year's record capital investment, adjusted net debt was GBP 8.9 billion at 31 March, with just over 90% of debt held at fixed rates.
Net debt to EBITDA fell to 2.7 x, mainly the product of a very strong earnings, clearly well below the original NZAP target of 4.5 x. Our credit ratings already compare favorably to peers, S&P have SSE on positive outlook, reflecting the resilience of the business mix and its ability to create value. Meanwhile, our pension schemes have weathered volatility well, with no additional liquidity required. Both defined benefit schemes remain in accounting surplus, with a combined surplus at the year-end of GBP 541 million. Our cash collateral remains comfortably within existing facilities, we've had good liquidity despite an increase in collateral requirements during the year. The strong financial footing provides a foundation for the group's upweighted investment plan and enables the projects to create long-term value.
Before I hand back to Alistair, let me spend a moment on the outlook for the remainder of this financial year. Clearly, financial year 2023 has been a strong year, with EPS in excess of our original guidance of at least GBP 120 pence that we gave in May of last year. There have been some headwinds. Looking to the financial year 2024, when we take into account the expected increase in renewables volumes, continuing volatility in market conditions, increase in transmission and decrease in distribution operating profits, we have confidence that we will exceed GBP 150 pence adjusted earnings per share. As ever, final performance will be dependent upon market conditions, plant availability, and weather. We'll provide further guidance later in the financial year.
Alistair Martin will outline our updated plans shortly, but clearly investment is ramping up, and CapEx in the financial year 2024 is expected to be more than GBP 2.8 billion record investment delivered in this financial year. I'll now pass you on to Alistair.
Before we move on, I'd like to take this opportunity to thank Gregor for his 21 years of financial stewardship of the SSE Group. He should be very proud, not only of what he's achieved during his time here, but of the very strong position he leaves us in. We're losing one of the FTSE's finest FD's. After a rigorous selection process, we have a highly capable successor in Barry O'Regan. Barry has been integral to SSE's growth story for many years now, particularly in terms of reshaping the group, and we all look forward to working with him through the transition. Barry will join us for the interim results presentation in November, which will be Gregor's last update to the market.
The NZAP saw us build on our position as a national clean energy champion by committing to enhanced investment in renewables, networks, and flexibility, while beginning to explore our capabilities overseas. Today's NZAP Plus will see us invest GBP 18 billion net out to financial year 2027, with a reallocation of capital that reflects the options we have in thermal and networks, while enabling the expansion of our renewables pipeline. That incremental investment will continue to be fully funded, as strong cash flow generation from assets will drive an expected GBP 6 billion of incremental cash versus the previous plan. That also means we expect leverage to be lower than previously targeted, at 3.5x-4 x net debt to EBITDA. Although our balanced and asset-backed business still has the capacity to reach 4.5 x and comfortably retain a strong investment grade credit rating.
The strength and balance sheet, combined with a well-balanced investment plan, means the fully funded NZAP Plus no longer includes a distribution stake sale. Based on performance to date, the wider economic and market outlook, and the high-quality opportunities that are coming through, we now expect adjusted earnings per share to grow between 13% and 16% annually from a financial year 2022 base. Our confidence in this earnings growth means we're setting out an updated dividend plan of between 5% and 10% growth per annum to financial year 2027 from the rebased dividend of GBP 0.60 in financial year 2024. This updated dividend, combined with increased clarity on growth, balances our commitment to shareholders with our ambition to invest more in the assets that will be needed to reach net zero.
The technological solutions to energy security are very much the same as those for net zero, and despite a shift in political focus, our business remains fully aligned to society's goals. Whether your motivation is to reduce long-term prices, cut carbon emissions, or increase energy independence, the answer is the same. It's unsurprising that the global response to the Russian invasion of Ukraine has been a drive for more renewable to wean the world off gas. With the new renewables ambitions rising, so too is the requirement for electricity grids to connect them and for flexible solutions to balance variable output. Clearly the IRA in the U.S. has led to more change there and across the rest of the world. This accelerated global green transition can only be positive for a company with SSE's capabilities, reputation, and firm financial footing.
This is a tailwind that will propel us for decades and hits every part of our group. We'll now turn to our business by business strategic update. SSEN Transmission is a network responding apace to the renewables revolution occurring throughout Scotland. The business has been delivering its investment program under the T2 price control in line with plan. In addition to this, Shetland construction is going very well. As indicated on the Gantt chart at the top of the slide, projects at Skye and Argyll are progressing through the uncertainty mechanism processes. Moreover, we were pleased with Ofgem's provisional approval in March of a sub-sea link to Orkney. We've had planning delays in Argyll, but recent positive signals from Ofgem on a final needs case give us confidence that an acceptable solution will be achieved. Ofgem's ASTI framework is a game changer.
It has confirmed the need for the eight projects in the lower section of the chart, which have been identified by the electricity system operator as required to meet 2030 offshore wind targets. It gives us visibility of a growing investment pipeline. Ofgem has provided much-needed certainty to support timely and accelerated delivery, including early supply chain engagement. The chart on the side illustrates the significant ramp up of spend required this decade in order to deliver the program of investment. While we welcome the impetus that the ASTI framework is giving to investment, deliverability is subject to risk, including planning issues like those we've seen recently in Argyll and supply chain constraints. With this in mind, SSEN Transmission is working with all stakeholders to ensure their views are heard and factored into decision-making around this critical program.
SSE now has increased visibility over an investment pipeline across the next five and 10 years. It is a decade that will see us invest significantly in a network that will help the whole of the U.K. to decarbonize. While mindful of the risks associated with complex infrastructure projects, we now expect the transmission growth RAV will reach between GBP 8 billion and GBP 9 billion by 2027, and exceed GBP 15 billion in 2032. These targets are only going in one direction. With current system operator plans enabling only 11 GW of ScotWind's 28 GW offshore wind ambition, a follow-up exercise is now underway, which will set out how ScotWind's full ambition can be realized. Further reinforcement could be required to accommodate additional onshore wind capacity.
The Scottish government are also consulting on its draft energy strategy and just transition plan, which includes proposals for an additional 8 to 12 GW of onshore wind to be accommodated on the system by 2030. This all means transmission is a significant engine of growth, and we're very well placed to fully realize its potential. Gregor has already mentioned the supportive distribution price control that we've agreed with Ofgem. As with transmission, the business has significant scope for additional growth. Our baseline ED2 plan provides a strong starting point, and net zero will be driven by homes and businesses with demand predicted to surge to accommodate the rising uptake of EVs, heat pumps, as well as continued growth in local generation and battery storage.
Ofgem has been clear that DNO should make use of available uncertainty mechanisms. We'll be looking to the regulator to translate those positive signals into action to enable us to secure the anticipatory investment needed to strengthen the grid. Through automatic volume drivers and reopeners, there is scope for up to GBP 700 million more of additional TotEx to ensure ongoing network resilience as net zero draws closer. Moreover, I was pleased to see the recent strategy and policy statement from government, which proposes Ofgem consider the cost to consumers of delays to infrastructure delivery and significantly expedite the approval process for strategic upgrades. This is a very important step. We'll seek to test this new direction and how it can apply at a distribution level in the coming months.
In terms of our forward strategy for distribution, this is set around three clear aims: further improving our performance for customers, growing the RAV for our shareholders, and helping to deliver the future energy system that society requires. Operationally, the distribution executive team are making good progress with implementing a business-wide transformation program aimed at securing further efficiencies as we deliver increased levels of capital investment and embedding performance improvements through digitization and process change. The RAV outlook is also strong with a strategic focus on supporting decarbonization of homes and businesses, and our latest expectations of low carbon technology growth out to the end of the decade.
We now expect the distribution RAV to reach between GBP 6 billion and GBP 7 billion by financial year 27, and in excess of GBP 9 billion by financial year 32. We also recognize our critical role in enabling smart and flexible networks. Distribution is at the forefront of delivering net zero at the local level, through our DSO responsibilities, we aim to deliver 5 GW in flexible services over the 5-year ED2 period, a tenfold increase on levels today. Our regulated electricity networks are high-quality engines of value, creation, and growth. They're also key enablers of growth in large-scale renewables and flexible generation that Martin is now going to tell you more about.
Thanks, Alistair, good morning, everyone. The medium and long-term operating environments for SSE's current and future portfolio have never been more supportive. French nuclear availability and system response issues in Northwest Europe drove higher spark spreads in the year just gone, this, alongside higher prices more broadly, contributed to the group's strong financial performance. It showed that the ability of our fleet to respond to volatility and provide vital system services is extremely valuable. Forward markets suggest that higher power and carbon prices will persist over the medium term, which would clearly sustain higher generation profitability. For the purposes of the NZAP Plus, however, we have assumed that the long-term base load price for renewable output is closer to GBP 75-GBP 85 per megawatt hour nominal.
As time goes by, more intermittent renewables come onto energy systems, volatility is likely to become a more regular fixture of the market, and that means flexibility will continue to be highly valued. This is being reflected in government policy. It is noticeable the reports ranging from the Climate Change Committee to the International Energy Agency all call for more of both renewables and flexible low-carbon thermal assets. While the latter are likely to run infrequently, they will be needed to balance a renewables-led system and to provide security of supply in the event of extreme weather patterns. This gives us confidence that our approach of investing in a balanced mix of new low-carbon technologies will create real long-term value.
We now expect SSE Renewables to deliver enhanced earnings growth over the five years to financial year 2027, growing adjusted operating profit by around 20% per annum. This is before taking accounts of any developer profits on project sell downs. Part of this growth can be attributed to power prices remaining much higher than when we launched the original NZAP in November 2021. The real drivers are the incoming 2.8 GW of capacity we have under construction and our increasingly diverse pipeline of development options. By FY 2027, we expect our flagship Seagreen, Viking, and Dogger Bank projects will be joined by onshore wind, solar, and battery projects in our home markets, alongside the first onshore Southern European wind and solar projects from our new development platform.
Correspondingly, as part of the NZAP Plus, we forecast a rapid build-out in SSE Renewables with more than 5 GW net installed capacity growth in the five years to FY 2027, taking capacity to more than 9 GW, with expected investments of around GBP 7 billion over the same period. Our renewables pipeline goes from strength to strength as we continue to develop domestic options whilst working with our platform, as well as local partners, to do the same in international markets. The left-hand slide, side of this slide shows our secured renewable pipeline when we first launched the NZAP, and on the right, our pipeline today, which is already at our NZAP target of 15 GW and significantly more diverse than it was 18 months ago in terms of both technology and geography. Onshore, you'll see a slice of the pie chart belongs to hydro.
Foyers' performance this year demonstrates the increased value that pump storage can bring as a tool for system balancing, and that's why we believe Coire Glas' time has now come. Its value in a system dominated by intermittent renewables is obvious, and it could play a key role in enabling the U.K. government to reach its target of a net zero power sector by 2035. Having recently committed over GBP 100 billion to further exploration works to move us closer to FID, we are eagerly anticipating development of a policy mechanism to provide revenue stabilization for long duration electricity storage, expected to be in place to enable investment decisions by the end of 2024. You can also see here that we have integrated the standalone solar and battery business that previously reported alongside SSE Distributed Energy into our onshore SSE Renewables portfolio.
This adds just over 1 GW of projects. It makes sense to have SSE Renewables developer expertise overseeing our efforts to build and operate solar and battery technologies at scale. Finally, we now have wind and solar projects coming through in Spain, France, Italy, and Greece via our Southern European acquisition, which I'll expand on shortly. Meanwhile, offshore, our pipeline continues to both progress and grow. It is hard to see government's offshore wind targets for 2030 being met without the 4.1 GW of capacity that Berwick Bank can provide. We submitted planning documents in December. We continue to target quality and value over quantity when we bid for new projects. Last year won our ScotWind project, Ossian, which has increased its potential capacity to 3.6 GW following geophysical surveys. While Seagreen 1A has also received revised consent for increased capacity.
In addition, the North Falls extension to Greater Gabbard is due to submit for planning consent next year, and we are exploring options for a phase four at Dogger Bank, subject to Crown Estate consent. Also at Dogger Bank, we are exploring the potential for green hydrogen production. We expect green hydrogen to be a key route to market for wind generation and have a hydrogen electrolyzer pilot in development at our Gordon bush project, which was recently shortlisted for funding by U.K. government as part of its Net Zero Hydrogen Fund. We are also seeing increased appetite for other routes to market, with SSE Business Energy signing its first corporate PPAs on behalf of SSE Renewables this year. Internationally, we are making headway too.
In the Netherlands, one of the leading offshore wind markets in Europe, we continue to explore tender options and are partnering with APG, who acts on behalf of the Netherlands largest pension fund. We look forward to entering the next bidding round in early 2024. Further afield, SSE Pacifico gives us an entry into the Japanese auction processes, and we have offices, partners, and interests in geographies, including the U.S., where we continue to market monitor market entry options. As I mentioned earlier, our Southern European acquisition is starting to deliver on its promise, with projects in France, Spain, and Italy aiming to move towards construction. With a 50 strong development team and extensive experience of delivering projects, the platform has around 2.4 GW of secured projects progressing alongside a long list of further prospects.
In Ireland, while Arklow was not successful in the first offshore auction, it remains a well-progressed project and we are looking at options for future ORESS auctions as well as other routes to markets. While we are keen to get building at Arklow, it is right that we maintain our discipline when it comes to project returns. Looking beyond Arklow, the up to 1.2 GW Celtic Sea array is aiming for the second round of auctions in 2024, and we have further options for future auctions when it comes to project returns.
We stand today with around 4 GW of potential offshore wind projects in Irish waters. As you can see here, a host of onshore projects and opportunities too. With our wind ambitions and complementary hydrogen, solar, battery, and other options, we stand ready to grow our businesses across Ireland and continental Europe. In a volatile world, flexibility is king. We are clearly in a transitional market period as the system leaves behind coal and older nuclear stations. There is also a time lag as government progresses new low-carbon flexible technologies, which will take time to build. In the meantime, SSE's fleet is ready to bridge the gap. The supportive market conditions I described earlier mean that we expect to continue to earn a premium over the forward peak spark prices for the medium term, including income earned from the balancing mechanism and ancillary services.
The need for this flexible generation is also very clearly demonstrated by the out-turns of the recent U.K. and Irish capacity market auctions, which have set record levels. Our own fleet has grown in the past year with over 1.5 GW of additional capacity from the joint acquisition of Triton Power and the commissioning of Keadby 2. However, the real prize of the Triton acquisition will be its future low carbon flexibility. Gregor has already talked about the contribution to earnings from gas storage. The criticality of these assets as a system balancer was highlighted this winter, and we remain committed to working with policymakers on a role for our caverns in future hydrogen storage. Carbon capture and storage and hydrogen hold the key to the long-term decarbonization of industrial clusters, as well as the future provision of clean, flexible power.
While the Humber will not be the first region taken forward in the cluster sequencing process, we believe that Keadby 3 and Peterhead CCS in Scotland will both need to be built for net zero to be achieved whilst maintaining security of supply. Supportive policy does need to accelerate. Our plans will also deliver a just transition as we repurpose our assets for the net zero world. Tarbert is a case in point. To meet Ireland's pressing flexible generation need and at the government's request, construction has now started on a temporary 150 MW emergency generation plant at Tarbert that will close by the end of 2028. Separately, last month, we also secured 10-year capacity contracts for two new low-carbon power stations at Tarbert and Platin, which will initially run on sustainable biofuels.
We are also looking at battery storage at the site, as well as an up to 1 GW offshore wind farm in the vicinity. Tarbert is just one example. SSE Thermal is developing other projects on existing sites such as the Aldbrough Hydrogen Pathfinder, which looks to bring hydrogen production, storage, and power generation together into a single ecosystem and was also shortlisted under the government's Net Zero Hydrogen Fund. In summary, we have an enviable portfolio of assets and opportunities across the electricity value chain at a time when the world is looking to accelerate the clean energy transition and when the market is beginning to value flexibility. I'll now hand back to Alistair.
Thank you, Martin. We've just explained to you how SSE has a wealth of opportunities right across the net zero electricity value chain. Our business units create a group with a leading presence and a wealth of growth options. Each of these businesses can and will decarbonize, guided by science-based goals that they are aligned to the energy sector's 1.5 degrees C global warming trajectory. The SSE group of businesses continues to create increased investment optionality over the five years and beyond. This slide shows these investments beginning to come through and the comparison with our original NZAP. You can see on the left the sheer scale of investment per annum anticipated and the ramp-up we expect as we enter the second half of the decade.
On the right, a reminder that although, as you would expect, our estimated supply chain costs have been impacted by inflation, a significant proportion of the step-up in our CapEx plans relates to new growth projects across networks, renewables, and thermal. Under our new plan, we'll be investing GBP 18 billion or around GBP 10 million a day in the infrastructure needed for net zero and energy security, compared to the GBP 7.5 million a day under previous plans. In line with how we have presented investments previously, the GBP 18 billion plan is net of the project financing and partnerships, which are essential to ensure diversity and appropriate leverage as we optimize investments and use of the balance sheet. Amidst the wealth of opportunities, we must remain highly disciplined in selecting those that we will take to financial close.
Across the group, we have a robust governance framework that ensures the projects we pursue align with our strategy, are sustainable credentials, and meet investor present expectations and deliver strong risk-adjusted returns. These return expectations are applied internationally as we continue to expand our renewables business. Along the top of the slide, you can see our returns targets, which have been adjusted today. Renewables will remain broadly unchanged since November 2021 as we hold our long-term course despite the turbulent times. Along the bottom, you can see the value SSE brings to investments as an experienced developer, builder, and operator. The returns we achieve are based on the amount we invest in our business and are therefore more dependent upon the quality of the assets and our capabilities than the headline RAV or megawatts installed.
Capital costs on low-carbon generation projects have undoubtedly risen in the past year, and so too have power prices, which Martin explained are likely to remain higher over the longer term. As we've set out today, we have a wealth of high-quality projects in our pipeline, which provides us the optionality to maintain financial discipline by only progressing the best projects. This, along with more than 20 years experience of adding value, as set out on the page, gives us the confidence that we can build on the strong returns we have visibility on for existing and in construction assets, and achieve attractive returns on the next generation of assets as we look out to financial year 2027. Financial returns will always be the critical driver of each individual investment.
When we bring these investments together and look at the five-year plan, we're also targeting a balance of merchant and regulated revenue, producing strong earnings growth. On the chart on the left, you can see our expectation that as new renewables projects begin to produce high-quality earnings, and the flexibility of the thermal fleet continues to be more valuable than it has been historically, this will outweigh earnings in networks, despite the significant capital being deployed. However, the RAV continues to grow on a risk-adjusted basis. Networks can be expected to perform well, and they counterbalance the group's market-based businesses.
All in all, this translates into an adjusted EPS CAGR over the five years to financial year 27 of 13%-16%, far higher than earnings growth expected under the original NZAP, and still representing positive medium-term growth from the strong set of financial year 23 results we've presented today. This financial year 27 target is underpinned by the strong asset growth across the group outlined today, but also the relatively reasonable GBP 85 a MWh nominal base load power price covered earlier. As an assumption that we do not make developer profits on project sell downs in financial year 27, alongside the other assumptions you can see outlined on the slide. In summary, SSE is a company producing high-quality, diverse and robust earnings.
Back in November 2021, we highlighted that well-chosen partnering is a key element of SSE's financial strategy, allowing the group to balance earnings mix whilst unlocking increased investment for growth. Earlier this year, we successfully completed the 25% stake sale of SSEN T ransmission to Ontario Teachers, a supportive long-term partner who we have worked with successfully over the past 18 years through our investment in SGN. With the transmission business remaining core to our strategic direction, the GBP 1.5 billion of proceeds from that sale will support the significant growth expected. SSE consistently reviews the group's strategic direction, challenging the optimum pathway to long-term growth and value creation.
The original NZAP also included a minority stake sale in SSEN Distribution, a significantly strengthened balance sheet and an investment plan that remains well-balanced are the main factors contributing to the board's assessment that continuing to hold 100% of SSEN Distribution is the right strategy at this time. This is now reflected in SSE's fully funded NZAP Plus plan. Distribution is a high-quality core business for the group, and with the support of RIIO-ED2 financial determination and the potential for further investment, we expect it will make a significant contribution to delivering sustainable long-term value. We were clear in our initial NZAP announcement in November 2021 that while the dividend policy would continue to reward shareholders, it was very much growth enabling.
This rebase to GBP 0.60 in 2024 was to support our ambitions to invest more in the assets that will be needed to reach net zero. It was accompanied with a commitment to increase that dividend by at least 5% per year to 2026. In line with the NZAP Plus, we are now extending that dividend plan out to 2027 and reflecting our confidence in the earnings growth delivered by that plan. We're also setting out a clearer commitment to grow the GBP 0.60 rebased dividend by 5%-10% per annum to 2027, whilst retaining the 25% cap on script dividends. It is the right choice for these times and appropriately balances rewarding shareholders while maintaining our clear focus on growth.
As you can see from our NZAP Plus for the five years, it is a marked increase as we pursue disciplined growth. Just as importantly, it continues to be fully funded. The sources and uses chart shows the updates to our funding plan. There is over GBP 6 billion of incremental operational cash flow compared to the original NZAP. After GBP 2 billion of additional interest and tax payments, we're reinvesting the remainder and more into further low carbon infrastructure investment. The plan is balanced, continues to be aligned with a strong investment-grade credit rating, whilst also providing sustainable earnings growth and alignment with a 1.5 degree pathway. It strikes the right balance between financial strength and financial discipline, whilst maximizing our increasing opportunities for investment. Before taking your questions, I'll summarize the key messages from today's presentation.
Today has been a story of strong results in the face of volatility and an upweighted NZAP Plus that enables us to maximize our value-creating potential. There is always more to do as we build a cleaner, secure, affordable energy system. We're taking the right action right now. We're leaning more into networks and flexibility. 18 months from now, we might be leaning more into hydrogen. Thanks to our balanced business model and strength, we have the optionality to make different choices in the future, whilst retaining our core focus on low carbon electricity infrastructure. Our plan promises even more balance than the original NZAP, with more geographical and technological diversity, but also reflects a shift in the capital mix, with slightly higher CapEx percentages going into regulated networks.
Back in November 2021, we anticipated spending around GBP 25 billion in the U.K. and Ireland over the coming decade. 18 months on, our sights are raised higher. We see ourselves investing around GBP 40 billion in the critical infrastructure needed for net zero and energy security. Quite simply, we are one of the FTSE's largest capital investors, investing more than we earn in profits. In conclusion, a year of delivery and a strong balance sheet, combined with enviable ESG credentials and a balanced business mix, underpinned with our upgraded NZAP Plus plans. They mean more value for shareholders and society, more financial strength, more investment, more jobs, and more growth to come over the next decade. The NZAP Plus is still a floor, not a ceiling to our ambitions, and we're just getting started. Thank you for your time this morning, and we'll now take your questions.
We are now going to proceed with our questions on the phone. The first question come from the Ajay Patel from Goldman Sachs. Please ask your question.
Good morning, thank you very much for the presentation this morning. I guess I have two questions, please. Firstly, when you look at the plan and the leverage at the end, can compare it with your debt capacity. There's clearly an opportunity to utilize capital for further investment. I just wanted to understand what the priority is. Is it more to build pipeline on the renewable side? Is it internationally, domestically? Just a little bit of more detail there would be really helpful. Secondly, more just to understand the mix within renewables. If we to deliver the 9 GW for 2027, it looks like you'll need a decent amount of step up in onshore wind.
I just wondered, with that point that you made about diversifying route to market, would more of that onshore capacity be merchant, or is there any sense of split that you could give us for 2027, so we have an understanding of the risk profile of those assets?
Both really good questions. Thanks, AJ. I'll let Martin deal with some of the mix 'cause he'll definitely be thinking about that with his teams. My overall point was let's build optionality, and let's see what comes. Some things get accelerated, some things don't. I think in terms of the balance sheet, yes, the business performance, and Gregor's management of that have put us in a very strong position. As you note, we remain far stronger in terms of our balance sheet than we originally envisaged. And we've certainly got capacity there to do things. We've obviously got a significant uprating of the plan today. That's about a 40% uprating in core capital that we see investing, and that's very strong.
Going forward, though, we maintain flexibility. We can look at further acquisitions if they make sense, and we can look at further ambitious expansion on a core basis. We have said this is essentially a floor to what we want to do. It's not a ceiling. And that's important, but just pay testament to the management of what we've done, the growth that we've generated that gives us those options and that flexibility going forward. I would, however, be remiss in saying, well, I'll give Gregor a chance just in case he wants to note that we will maintain discipline, and I think we've clearly shown that over the last few months. Is there anything else on balance sheet, Gregor?
No, I don't. Look, AJ, I think, clearly we've got more capacity as we go out, but in the second half of the plan, we just have to balance that up. As I've always said, SSE is about optionality. We look at evolving and as opportunities arise, you know, we take them forward. The two acquisitions that we made in 2022-2023 weren't in our plans, you know, a year before. We have to evolve, and that's why a strong balance sheet is really important to give us flexibility.
Just on the broader perspective, obviously a year on from, or a year and a half on from the NZAP, a lot of things have happened in the world. Most jurisdictions have increased their renewable ambitions and, particularly in the EU, some of the ambitions of individual countries that we're now working on developing in are pretty aspirational and pretty high. How to create possibilities. To answer directly to your question about where the additional two is coming from, through to 2027, obviously the SGRE platform acquisition gives us optionality in Southern Europe and we'd hope to have 500 MW away by operational by 2026 and then obviously more to follow.
We've mentioned the solar and battery move to renewables and a 1 GW plus pipeline there, which we think has really, really strong possibilities. We would expect other options to potentially come up as different national states, including our home markets, mature their overall renewable aspirations.
Just to follow up there, is there any chance you could give us what the merchant volumes are, would be expected in 2027?
We can take that away and have a look at it. We're certainly looking internally. Generally, our plan, certainly if you go back a year, we'd be increasing the non-merchant volumes looking forward. I think we have headroom to look at more merchant volumes and/or to look at, you know, corporate PPAs that might not be 15 or 20 years, but might be a little bit shorter. I think that's generally there. We can probably either come back or maybe Martin-
Just a general point just on the corporate PPA market. We talked six months ago about how we were seeing volumes and interest increase. We've continued to see that. Perhaps kind of market volatility perhaps created a bit of a stall in that process maybe last winter, definitely interest is increasing and picking up. We also referenced in our presentation that our customers division had started signing quasi corporate PPAs as well. We're pretty confident that is an expanding route to market for renewables going forward.
Okay. Thank you very much.
Thank you.
We are now going to proceed with our next question. The questions come from the line of Harry Wyburd from Exane BNP Paribas. Please ask your question.
Hi. Morning, everyone. Thanks very much for taking my questions. Two from me as well, please. Firstly just on the thermal business and the sustainability of profits there. I'm just looking at slide 21, and you gave the very helpful guidance in the bottom right. Sort of suggesting you'd be earning north of GBP 400 million of EBIT from 2025 and beyond. I just wanted to check, is that right? And I'm interested in how you, how you budget for that because that's sort of nearly quadruple, I think, the historical run rate. What gives you the confidence to sort of assume that's gonna be structurally higher and how did you arrive at your GBP 400 million figure for that part of the business?
Just to increase the 60p base, which I guess you could have done given your current balance sheet position. Just interested in the dynamics there. Thank you.
We'll let Martin go first on thermal. Greg and I will fight it out for the dividend given how committed we've been to it over the years.
Yeah. Hi. It's GBP 500, we said on the slide.
On Thermal, Gregor and I will fight it out for the dividend given how committed we've been to it over the years.
Hi. Suppose it's GBP 500, we said on the slide. There's lots of different remuneration strands on thermal. Firstly, the capacity mechanism, which has obviously been clearing higher, and actually last year cleared at record prices for T-4. We're obviously getting earnings from that. The intrinsic spark spreads have clearly picked up on some of the issues we discussed during the presentation in terms of a system relying on perhaps aging nuclear, potentially vulnerable imports, and also just demand and renewable patterns which are a bit more uncertain. We're seeing intrinsic spark spreads a bit higher than we would've seen them six months ago down the curve.
On top of that, very clearly, regardless of fuel and gas supply issues, independently, the electricity market is experiencing its own level of volatility that just comes from the inevitability of an intermittent-led system and how that plays out on a daily basis. We have invested historically significant amounts of money in our thermal fleet to ensure that it can respond for a reliability to those volatility signals. We expect some of that intraday volatility to continue regardless of the fuel price context. That option value or extrinsic value goes back to our thermal P&L and our calculations for the long or the medium-term outlook for that business.
Okay. Well, I think given this will be the last time that Gregor announces a significant change in dividend policy, or even a slight tweak to it, shall we say, I think I should give him the first word.
Yeah. Look, Harry, I, you know, dividend's clearly been growth kind of time with the CapEx. We're announcing another average of one point shows you that we have confidence in the balance sheet and the strength of the business. When we go back 18 months ago, when we did NZAP in November, clearly the outlook on profitability wasn't as good as it was as today. Therefore, we felt that it was right to reflect on that and give shareholders a bit more the potential for a dividend growth. I think it recognizes the strength of the earnings growth of the business and the strength of the balance sheet. That was the kinda basis behind it.
Going forward, we as a management team recognize that dividends do reward shareholders for their capital and their patience with us, and therefore we're very committed to paying them. With stronger growth in earnings, we wanted to signal stronger growth in dividends to people. I think we've done that. Also we know shareholders were very supportive of the plans that we had in the original NZAP and the updated version, and obviously we've been able to add to that today. If we can deploy capital effectively and create more value, then I think shareholders will support that. That's why we that's why we've maintained the original dividend, but just indicated greater growth to reflect the greater earnings growth that we think we'll be getting.
Got it. That's very clear. Thank you.
We are now going to proceed with our next question. The question's come from the line of a Deepa Venkateswaran from Bernstein. Please ask your question.
All right, thank you so much. Congratulations on today's results and a good update for the plan. I had three questions. The first one was on renewable returns. I was just comparing it to some of the numbers you've laid out previously. On onshore and solar, the spread over WACC seems to have compressed from 100-400 basis points to 50-300 basis points. Could you explain what's driving that? Is that the mix shift more towards batteries and solar driving this down or anything else? How much has your WACC kind of gone up so we can compare that? Secondly, you've also said that the returns for offshore, on the other hand, are slightly better from greater than 11% versus 10. That change in return.
That's my first question. A second question is on the Irish. Last, the business plan with the GBP 85 per megawatt hour assumption, are you assuming at that point around 12 TWh of merchant exposure, just so we can run up the sensitivities in case power prices end up being different? Thank you.
Okay. We'll split that. like I know, I'll have a first go at the return. Look, the 50 to 300 is compressed slightly. I think there's, you know, there's competition in the market. cost of financing have gone up, things of that nature. You've got that. Yes, we have more solar in there, so solar's likely, given it's generally less risky to put it up and to operate it to be at the lower end of that. Some slight compression there. Returns on offshore, that just reflects the risks that I think are out there and that people have seen. I don't think there's too many people building offshore wind, getting bigger and bigger with leading-edge technology that's getting bigger and bigger.
We've just reflected there the fact that we think returns need to be higher. Returns on the existing assets are, you know, roughly in line with what we've said pre-
3 GW, as you say, Deepa, we're on a pretty disciplined view about our anticipated CapEx on that. Maybe that meant we were a little bit higher. Secondly, just in terms of general Irish policy, there was a clear policy intent from the Irish government to deploy significant amounts of offshore wind. There are other possibilities for Arklow going forward. Not least, 5 GW by 2030 and 20 GW by 2040 requires a big offshore wind build. We were mindful of that as well.
The volumes, Martin can may correct me, but I think we'll be over 10 TW unhedged 2026, 2027.
Yes. A bit more, actually.
Yeah.
Final. Yeah. Yeah.
Okay. Unhedged, overall the GBP 85 is for the achieved price, right? The overall, is that closer to GBP 12?
The achieved price, that's the base load price.
The base load price in line with that graph goes from GBP 75-GBP 85. You can see it on the years there. That is the base load price. Then the achieved price will be our own assumptions about whatever you get for wind capture levels coming out of a base load price.
Oh, okay. Your actual assumption might be lower than 85, right?
Yes.
Well, it'll just be different based on whatever our wind capture view is.
Okay. Okay.
Okay. Thank you.
We are now going to proceed with our next question, and it comes from the line of Mark Freshney from Credit Suisse. Please ask your question.
Hello. Good morning. Thanks for taking my questions. Can I ask on the GBP 2 billion supply chain increase, how much of that pertains to in-flight projects? You know, thinking Dogger Bank, et cetera, that cannot pass it through unlike networks. Secondly, can you confirm whether as part of the aborted electricity distribution grid sale, you had received any offers, and whether they had informed your decision not to sell? Thirdly, just on, you know, your plan here. You know, it's very admirable, and you have a lot of ambition, as do the U.K. government. It's clear that the U.K. government's ability to put through policy sometimes doesn't meet that ambition.
I guess my question is, if you can't get, you know, an FID on Berwick, Coire Glas by the end of next year and CCUS over the line, what are the options for capital deployment and actually spending GBP 18 billion on decarbonization? Thank you.
That's great. Look, on electricity Distribution, just briefly, as you can see, we've got a very strong plan there. Net Debt to EBITDA is down to 2.7. It's gonna be much lower. We decided now wasn't the time to sell that business. We don't need to sell it right now, and we can just get on with the transformation programs, delivering ED2 and getting the additional spend that we expect to see there in a similar way to ASTI, where which offshore will be pushing forward with. I think we'll see something similar within Distribution. I said we don't comment particularly on processes. I'm not gonna comment on whether anybody gave us a bid or didn't give us a bid, but it just wasn't the right thing for us to do.
That's a highly valuable asset, and we obviously had a highly successful sale of the other asset before, which helped bolster our financial strength. At some point, we may come back and decide to do that, we may come back and decide to do that deal later on in the decade. Gregor?
Mark, your question, the GBP 2 billion impact supply chain, roughly half is in networks and actually about a half a billion in each of distribution transmission. GBP 1 billion is in renewables. You know, our renewables projects, we've got about 30-plus projects running. Some, you know, in construction, some, pre-FID. And we will see some supply kind of pressures coming through there. On the likes of Dogger Bank and Seagreen, we'll see a bit of extra cost coming through, but because, you know, we went into FID before a lot of the price pressures started coming through, it won't be significant. The other thing I'd say is that those contracts or the projects
Haven't hedged a significant amount of inflation, like other developers have, and therefore, through the CFD pricing, we will benefit from higher inflation in our revenues, which will offset, more than offset any kind of cost pressures that we see.
Just on ambition, I'm sure both Mark and I have got points. I think my overriding point is this government and opposition parties are pretty united in their desire to hit some ambitious targets for the U.K. by 2030. They now need to get on with the delivery phase of that for things like CCUS. It's clear from the Climate Change Committee, we need another seven or eight plants announced. We need probably four to six of those announced later on this year in the autumn, so we're fully expecting that to happen. The U.K. is gonna benefit enormously from assets like Coire Glas going into financial close and going into start of build next year. There are various pathways that we have to get these things to market.
Berwick Bank, which you also mentioned, the U.K. will miss its 50 GW target and may even struggle to get to its 40 GW previous target without Berwick Bank being built. These are things that people have to find a way through in essence. We're doing all we can to go through the consultation processes and to deliver them. In the event that some of these assets are delayed slightly and we end up spending the money fractionally later, we're very fortunate that we have an enormous number of assets currently in build and already sitting there. Any delay in this will, you know, probably mean that those assets earn more money ultimately.
I think just to give people the impetus they need to make sure that we invest and we bring down the cost for consumers, which is what we're very focused on.
That. I mean, just to add to that. I mean, I agree with the point about, firstly kind of government understanding of the need to progress some of these technologies to achieve Net Zero and indeed the political consensus that exists. I mean, just on a bit of a more micro detail, I mean, clearly the government is consulting on how to get long duration energy storage away, which would go to Coire Glas. Clearly, there are quite big programs on carbon capture and how you get remuneration for CCS and also how do you start hydrogen deployment. There's some quite big kind of policy ambitions which kind of on the, on the ground, the government is doing the work on how to unlock some of these technologies.
Just also got big kind of policy ambitions which kind of on the, on the ground, the government is doing the work on how to unlock some of these technologies. Just also gotta say that successive U.K. governments have been pretty successful in achieving quite big technology deployment that perhaps other countries are slightly behind on right now. I slightly trust in the process and the policy.
Okay. Thank you. Mark?
Thank you. Thank you very much.
We are now going to proceed with our next question. The questions come from the line of Robert Pulleyn from Morgan Stanley. Please ask your question.
Hello. Thank you very much. One main question and a follow-up from earlier if possible. Firstly, given the array of investment opportunities in the U.K. and the fantastic growth plan you've outlined, could you talk a little bit about why SSE is looking to allocate capital outside of the core U.K. market? In the slides I see obviously references to continental Europe via the acquisition you made recently. Ireland has been discussed. As related to that, you know, can management provide confidence it can open up some of these new areas, given again, the attractive opportunities you have in the U.K.? The follow-up from a previous question is on thermal.
Would you be able to give a little bit of a split in terms of that thermal performance EBIT between how much is absolute power price related and how much is related to system balancing? I think that would be very interesting for the valuation discussion on that rising value of flexibility. Thank you very much.
Okay. On capital allocation overall, I think we've seen in the past that sometimes the U.K. slow down on its ambition. I don't necessarily see that happening anytime soon at the moment given what they've done, but they certainly did that in onshore back in 2015 as part of a manifesto commitment. Indeed, if they do, we end up not having a big enough canvas to paint on. We've got a lot of assets. We've got a lot of skilled teams who can build amazing assets. What we need to do is make sure that we've got enough opportunities to do that.
We've been very clear that we want to create the opportunity set that allows us to choose to deploy our capital where we're doing sensible returns, and is valued by government society, in order to get on the journey to decarbonization. We remain very committed to the Irish market that we've been in for a decade plus, and probably even more so from first of December when Barry steps up onto the board, given that he's an Irish citizen. Equally, we think there are lots of attractive places to do business in Europe and even further afield, and we'll continue to develop our businesses there.
In terms of operating those businesses, we're buying expertise where we can, and we're delighted with the team that we've got with Ángel, and the rest of his team over long enough in the individual geographies and technologies that we're investing in. We just need that diversity, so we can keep that. That's why the international, and some technological diversifications are moving more into solar and battery, for instance, are important to us. I don't know whether you wanna say anything on the... I don't think we give numbers, particularly on the split of prices. Well, we can have a think about that.
There's undoubtedly flexibility is important. You get both sides of that. I mean, flexibility is the key thing, I think, driving the profitability of that thermal business, given it's got a gas storage asset, which is a big option. All of our thermal plant don't run at huge load factors, and therefore, there are options that come on when, you know, the wind isn't blowing, the sun isn't shining, and maybe when French nuclears aren't working too well.
I mean, just add on that. I mean, in terms of overall flexibility, there are 1,000 different scenarios which create 1,000 different outcomes, which create 1,000 different reasons for flexibility on any given day, whether it's high wind or reduction in imports or surprising demand shapes. The way our thermal fleet is set up and engineered is very deliberately to be able to achieve best-in-class flexibility against some of those market outcomes, and I think we're pretty confident we do that. Obviously, you have the capacity mechanism as well, which is known. You have the fact that you've got a T-4 that cleared, I think off the top of my head, about GBP 60, and the contribution that gives to our thermal business for 2027.
That's obviously a number that's already out there. You can see, down the curve, peak spark spreads, are substantially higher than it would've been a year ago, that are potentially available to trade liquidity allowing.
Well, we'll.
Thank you very much.
We'll keep that under review for trying to figure out how we split that between capacity fees, forward sparks, and balancing market. It's an interesting question, appreciate that.
Yeah, thank you. That'd be great. I'll turn it over.
We are now going to proceed with our next question. It's from the line of Ahmed Farman from Jefferies. Please ask your question.
Hi. Thank you for taking my question, and congratulations on a very strong set of results. Just firstly on the medium-term guidance. If I look at your previous plan, you know, the mid-range CAGR implied 132p EPS for 2026. Now you've rolled it forward one year, and at the midpoint, it's 186p impact. That's quite a huge step up, albeit with one additional year. I was just hoping if you could give us some color on that bridge, how much of that is coming from scope effects around networks? How much is, you know, in the thermal and how much is the power price impact coming through outright generations? That's my first question.
I have a sort of quick follow-up question on capital allocation and opportunities outside of the U.K. Again, it does seem you have a lot of options within your core markets, plus you have been doing renewables. You know, it's an integrated generation. You have gas fleet as well. You are investing in networks as well. Do you think that just stepping out of your sort of core market and pursuing renewables as a developer in outside, you know, international markets, do you see that as a different risk proposition to how you're doing renewable development in the U.K.? Thank you.
I'll do the capital allocation. Yeah, there are different risk profiles for those things. You can have different policies and regulation. You can have different market structures, or you will have different market structures that provide you with different rewards. You may indeed have different things around supply chain. If you're going to offshore wind in America, you've got things like the Jones Act, which will impact on what you do in terms of renting boats and other things. It's important to have local expertise or knowledge in these markets. Therefore acquiring that is important, which is what we did in both both in Japan and with our SGRE acquisition.
I still maintain that a company for our size and with our amount of success, we need to have some diversification of what we're doing. We remain disciplined. You saw that in the Irish auction. We think we'll ultimately build Arklow, and we'll get a better price than the EUR 86 a megawatt hour that was implied by the average winning bid within that auction, ultimately. We'll deal with that. I think hopefully you can take that on trust. For us, you know, equally, if the U.K. comes through, which is we expect it to, that's why we're seeing a big part of the increase in the spend that we have. Gregor.
Yeah. Look, we're not going to get into year-by-year kind of growth. Look, we've already said, a lot of that drivers, renewables where we've got a CAGR, EBIT CAGR of 20%, so you can work through the numbers there. You'd expect transmission with a lot of the growth coming through to show increasing profits as we go out to 2027. We've got, we've given you some numbers on the distribution business and thermal.
You know, the fact that we've moved that CAGR up, you know, from, you know, when we did the NZAP, it was 5%-7%, then we increased it to 7%-10%, and we're now at 13%-16%, I think shows the confidence we have in the business going forward. The final thing is the combination of our businesses, particularly in energy, means that, you know, we don't want to be kinda too precise between thermal and renewables because that combination is a very strong combination going forward in a very volatile
Commodity market.
Okay. Thank you.
Thank you.
A follow-up on the thermal part. The first question is on the EPS. Can you comment on the shape of the Five and your thermal EBIT is gonna peak at above GBP 750 next year. Is it right to interpret that as your EPS will be a bit higher in the period and then maybe closer to GBP 2.00 you're guiding to and a bit probably lower towards the end in that 13%-16% CAGR period. Just any comment or color on the shape of the curve, that'll be helpful. Just a follow-up on your thermal guidance.
I know you sort of normally hedge six months in advance. I'm just trying to understand, I guess the first thing is that most of that GBP 750 million above GBP 750 million guidance all locked in now. How much have you locked in the kind of following years? Or is that just your kind of calculation based on the current market forward curve? Appreciate you pointed out as a structurally more profitable business, but just thinking about the downside risk to that longer term guidance. Thank you.
The way I would think about the EPS guidance is that we've guided to greater than 150 for the year that we're currently in. That's the 2023-2024 year. We've guided to essentially, if you take the 13%-16% CAGR on the number we've guided that financial year 2027 will be between essentially 175p and about 200p. As you say, at the top of it, we'll either be close or at 200 pence. I think in between you might see some ups and downs, but equally we're expecting all of those years to be in excess of 150.
Obviously over the five years and then hopefully beyond over the decade, we'll continue to see a positive trend and a strong trend in the performance of the business.
Yeah. Look, as you know, it's fairly lumpy in terms of distribution. You know, we've said distribution profits will be down this year compared to last year. Then we see the benefit of our inflation catch up coming through in 2024, 2025. As Alistair said, you're better looking at the kind of 2027, and that's what we've kind of done the numbers on.
Just on kind of general thermal remuneration, I mean, to try to avoid repeating yourself a little bit, but obviously the capacity mechanism is out there. Worth also thinking about the role of gas storage, which you haven't mentioned, but obviously that plays an increasingly important role in terms of kind of international defending, kind of U.K. balances from international gas market surprises, and that's obviously done well this year. We'd expect that to do well in future years. On top of that, just to go back to this point about intrinsic spark spreads on the market versus extrinsic. You'll know that power market liquidity beyond the front year is actually a little bit difficult. Our experience is that lower intrinsic possibly creates more extrinsic option value for the thermal plants.
Perhaps the best way, the simplest way to illustrate that is we saw pretty much a GBP 0 per megawatt hour base load out turn in the end for the winter just gone. That had a peak spark spread of maybe, I think it was GBP 25, but probably had a distribution of daily spark out turns of sometimes quite negative and sometimes quite positive. Obviously thermal is able to trade that arbitrage between those outcomes.
Thank you.
Thank you.
We are now going to proceed with our next question. The question's come from a line of Martin Young from Investec. Please ask your question.
Yeah. Good morning to everybody. Before I dive into a question, and I know he's got one set of results yet to go, but I think on behalf of all of us, all the very best to Gregor and thank you very much for everything that you've done over the years. Then in terms of, you know, the question, and I guess in part it's a follow-up to what Mark was asking earlier. I think on slide 41, you have suggested that 60% of the investment plan is already nailed down.
Could you please be, you know, a bit more granular across the key businesses as to how much is already, you know, locked in and how much is dependent on mechanisms various, whether they be ASTI, RIIO-T3, success in renewable auctions and so on. Related to that, you've commented already on some of the things that, you know, government is working on. I feel maybe you're being quite generous on the ability of government to get these, you know, over the line because things do appear to be shifting, you know, to the right. I just sort of wondered, you know, what you see the risks of some kind of sort of policy paralysis as we go through the next, you know, general election.
Totally get that, you know, all parties are aligned on what needs to be done, but that doesn't mean that as we go into that election process and as we go into purdah, that things progress with the pace that perhaps we would all like these things to happen. Some comment around that as well would be extremely helpful, please. Thank you.
Okay. Well, I'll try and deal with the politics, given that's a lot of different shades of gray, as well as being shades of blue and red. Look, you may be right. It's a reason why we're looking to diversify and make sure that we've got more opportunities in other geographies and other technologies, that there's certainly some policy we're expecting to see, a lot of the ambition and a lot of the hard work the government have put in on carbon capture and storage and hydrogen, backed up by a lot more announcements in relation to projects coming out in the autumn of this year. If that doesn't happen, that'll be disappointing, and probably costly for the U.K. consumer, ultimately.
I think on Coire Glas, if government regulators can't get some of their work done in parallel, that'll see that go back a little bit in time. I think we've all seen, and I think some of the questions here have been probing away at the value of flexibility within the U.K. market. We obviously have a lot of that flexibility anyway currently, through both our thermal fleet and also our flexible hydro fleet. You know, I think that'll continue to, you know, earn good money. From an analyst and investor perspective, I think we're very well hedged against that, but we're also well hedged against people building new things, because we've got a lot of great shovel-ready projects that we would wanna put forward.
I can't legislate for where government are. If we don't make significant progress on offshore wind, if we don't get projects like Berwick Bank off the ground shortly, we'll be nowhere near hitting the targets that government have for renewables by 2030. Those projects take a long time to get going. You know, it's a critical period of delivery over the next literally 6-12 months across a whole number of areas. If it doesn't happen, we'll be painting, you know, or putting our money into other things, and I still think we'll be benefiting from the amazing assets, one that we own currently today, and two that Martin and his team are building in the energy business.
Just quickly to add, I mean, I think most commentators, most analysts, most people think a lot of these things will ultimately come. I mean, it's difficult to see a net zero system without an awful lot of offshore wind, low carbon, flexible generation, hydrogen, long duration pump storage. I think everybody knows that. I mean, part of our job is to position our options so they're ready for when that wave of government policy comes through, and that's exactly what we're doing.
Yeah, on committed spend, Martin, thanks for your kind comments. Much appreciated. I think you're one of a few analysts who've been around a fair little time. Good luck as you continue your career.
Thank you.
On committed, for the regulatory businesses, distribution is per the plan. For transmission, it's the majority of the plan, including ASTI. In 2027, we just make a kind of assumption that some of that spend could drift a bit, predominantly, most of the regulatory kind of CapEx is in there. For the rest of businesses, it's what we've got through financial close. You know, in renewables, obviously it'll be Seagreen and Dogger Bank. It'll be the GBP 100 million we've committed on Coire Glas on the development spend we've committed on Berwick Bank.
On thermal, it will be, you know, what we've committed to date, which is relatively low as we come through the KB2 process.
Yeah. It includes some plants in Ireland as well.
Yeah.
Some low carbon investments in Ireland, low carbon thermal investments in Ireland as well. They're, yeah, they're not the quite the huge numbers you'll get out of offshore.
Okay.
Okay. Thank you.
Thanks, Martin.
Thanks.
Thank you.
We are now going to proceed with our next question. It comes from the line of James Brand from Deutsche Bank. Please ask your question.
Hi. Thanks for the presentation. Well done on the good results and guidance. I had a few questions just on thermal. Firstly, on the 2027 outlook, I'm sure you don't want to put out kind of alternative numbers out there, but I'm just kinda curious what the range of outcomes looks like in 2027. I'm sure you've done a kind of, you know, a range of modeling exercises, the world could look quite different under different scenarios. I presume you've picked a relatively conservative one for your guidance.
You know, if we do see capacity payments continue to go up, you know, more volatility to, from renewables, like the energy markets don't fully calm down, have higher, you know, gas and power prices than we had previously, you know, is there anything you could share with us in terms of what a more, you know, upside case could look like for thermal? That's the first question. Secondly, I was kind of curious on your hedging for the current year. If there's anything you could share on that? I know it's obviously to some degree commercially sensitive, but I'm kind of just interested in how much you've locked in and whether you locked in spreads for this year when they were ridiculously high, you know, at points last year, or whether you're less hedged than that.
Thirdly, on thermal, you've talked about the benefits of flexibility and how you're very happy with your new generation capacity. Would you consider building any new CCGTs? Thank you.
I think Martin can pick up the, but I'll bookend them. Flexibility, we clearly think is good. We would build new CCGTs, but they need to be abated or they need to be running on hydrogen. We've got a Hydrogen Pathfinder. That's an OCGT in all fairness that we're looking at. We've obviously got three or four CCS CCGTs either where planning has been approved or where we're moving that through as part of our response to where we think government has signaled it wants to be and needs to be. I think on thermal outlook for 2027, you're talking four years out. Given what's happened in the last three years, you could be looking at a lot of scenarios.
The key thing for us is that, we want to see, deployment of, of government policy that allows people to build. In the event that less is built, and that, and that you've, I don't know, more French nuclear underperform, and you rely more heavily on existing plant, then obviously you can get to some probably fairly racy numbers, for where we are. We saw some very, very high prices in the market as the French nuclear struggled last year, and Europe struggled, to come to terms with the fact that it wasn't getting anywhere near the amount of gas it was expecting from Russia.
We're obviously signaling that we're not expecting as big a profit to come from that thermal business in the year we're in currently, but it'll still be very profitable. We've given you a, you know, a guidance for the average, but speculating on where those things are, it's, you know, I suspect you can, you can run models. It could definitely be a lot more than we're saying and maybe be slightly less. If it's slightly less, that means some of the volatility is gone, but we've probably built lots of assets, and we'll be getting on with a lot of our investments. That's how I would characterize it. Martin, you know, whatever you wanna say about all three items, but maybe focus on the middle one on hedging.
Yes. On hedging, we don't actually disclose, as you know, our thermal hedging for reasons you pointed out, except to say that we look to trade six months out the economic delta effectively. That is slightly dependent upon market liquidity, and which as I mentioned earlier, is okay for kind of front seasons, but poor further out. I hope that kind of slightly kind of answers that question. Just in terms of CCGTs, I mean, we are very focused on Keadby 3 CCS, Peterhead CCS, Keadby 4 hydrogen. We've got 2 biofuel plants. We've contracted for in Ireland 300 MW at Tarbert, 150 MW at Platin.
We obviously acquired with Equinor the Triton assets last year immediately said that part of our logic on that, and indeed mentioned it in our presentation, was the ability to put hydrogen blending into that and turn that into a low-carbon flexible station from 2027 onwards. The team is very focused on all of those opportunities, less so on kind of new CCGTs.
Yeah. And just on the earnings, we've given you some indication of where we think next year is. That probably gives you some indication of where we might have hedged or where we might expect markets to be. Otherwise, Gregor, perhaps in his last full year update, but not his last interim update, probably wouldn't be banding numbers around that he wasn't comfortable with.
Okay, great. Thanks. That's really useful.
We are now going to proceed with our next question. It come from the line of Sam Arie from UBS. Please ask your question.
Thanks. Hi. Good morning, everybody. I've been listening to my fellow analysts ask all the questions that I had on my list, so I have almost none left. I thought I'd stay on the line and just add my, first of all, my congratulations to Greg and Barry, of course, and I think also to Sally and Michael, given your other release this week. It's been a pleasure working with you, and we look forward to continuing to do so with the new team.
Thank you.
In terms of questions, I think really maybe just one thing that I might give you an opportunity to bat away, sort of fairly high-level question. You just answered a question, I think, from James about like potential upsides to the 27 guidance. I see you talked about it a lot as a, as a floor, not a ceiling, so that makes sense.
On the assumption that guidance is guidance and not a guarantee, can I maybe just ask you to go through the thought exercise, if you were forced to imagine a scenario in which you had trouble getting to the bottom end of that guidance or in which you dip below this GBP 150 million that you mentioned a few minutes ago, that would be a floor for sort of two years in between, if I understood you correctly. What would that scenario be? Do you think it's very far-fetched? or even, you know, give you the opportunity to say there's no such scenario if you think that's, you think that's the case. I'd love to hear your thoughts on that. Thank you.
After the last three years, I don't think we'd say there's no such scenario. There's been a lot of odd stuff that happened. We obviously caveated some of the things we said with there's gotta be reasonable performance. If half of our fleet falls over for some unknown reason or some disaster befalls it, that's clearly not gonna be good. If weather significantly impacts us, again, that's gonna drag down the numbers. We wouldn't have put it out there as guidance unless we felt pretty confident that we'd get there. I think, you know, I think we've made clear some of the key underlying assumptions. I'm sure Gregor will put ones in there as well.
It's basically does the stuff perform, and is the weather okay, and do we not have very unusual, you know, interference like expropriation of assets and things of that nature. You know, if we keep our assets and we keep going, we have a lot of confidence in the numbers that we put out there.
Look, I have to be careful what I say 'cause I won't be here in 2027.
Free, free shot, Gregor.
Exactly.
Free shot.
Lee, I think
Ultimately, you know, over the 20 years I've been at FD, I've always said, you know, commodity prices are a big part of our business and so that's a bit up and down could impact. I mean, the tailwinds are very clear on where carbon prices are going, probably where kind of demand and security supply are going. We're pretty confident on getting to the upside of that range. You know, we've all been in this sector for a long time, and know things can go either direction. On the balance of probability and looking at all the scenarios, I'd be surprised if the team don't achieve that. Martin, on to you. Well, like what you said I mean, clearly we talked about a stronger price outlook.
There are very good reasons on the power market to assume that for the medium term. The market at the moment relies on some CCGTs, which are beginning to age. It's reliance on nucleus, which are also suffering issues. It's got growing demand possibilities, increasing intermittent renewable generation coming on and all of these things combine to present opportunities to parts of our portfolio. I'll just reiterate what Alistair said, over the last three years, we've seen significant volatility, significant swings in prices. We've always performed pretty well through that. I mean, I think there are kind of outlier scenarios which could surprise, but I'm pretty confident.
The one thing I'd say is because I've suffered as a finance director with where our returns have been on our CCGT fleet, et cetera. With that volatility and intermittency going forward, I'm pretty convinced that when it is windy and we have hedged our thermal fleet, we will make more money than we have in the past. I think that gives you a good kind of floor for where kind of profits could go. Thank you.
Makes sense. Very good. Thank you.
We're now going to proceed with our last question. This come from the line of Dominic Nash from Barclays. Please ask your question.
Hello there. Well, there you go, I'm last. Two questions from me, please. Firstly, when I'm comparing your renewable targets from the target gives 18 months ago, you've gone from 8 GW to 9 GW. You say that you actually had a 1 GW increase in solar and batteries. Is it fair to say that there is really no underlying increase in your one year rollover in target? The question I've got is, what has changed? If you can, you know, correct me if I'm wrong here, is that the percent coming from international expansion is now 30%, and I think 18 months ago it wasn't. Does that mean that it.
You're recognizing that the U.K. is definitely slowing down. Is Round 5 going to be a failed auction? The second question I've got is, just clarity on the EPS, please. You've given us good guidance for 2027. It's lovely, and I think it's a clean 2027 number, i.e. no developer gains in it at all. That's something that sort of like I said, I'd love you to drop that completely. Can you just give us clarity on the 8 GW or 9 GW numbers that you've given us for installed renewable capacity, is that pre or after sell downs? Is that net ownership developed or net ownership installed?
What is kind of the quantum of earnings that we should expect coming through in the next five years on sort of sell downs or quantum in gigawatts from sell downs? Thank you.
All right. I suspect my two colleagues wanna take these. Do you wanna do the EPS clarity and sell downs and net ownership, Gregor?
Yeah. Like, I mean, We obviously assume within our modeling, you know, that we will be selling down if on an offshore wind. We haven't brought any of that into the earnings. The 9 GW is actually our net developed, i.e. what we own. You know, that's driving forward the profitability. As you say, there's no developer gains in there. That doesn't mean to say we won't assume that we sell down to develop opportunities. Most of those opportunities that we do in sell down will come through in the second half of the 10-year plan.
There may be one or two small ones that come through earlier on. Those two would probably be potentially Coire Glas. If we bring a partner in there and we get to financial close, and possibly Arklow Bank. If Berwick Bank moves forward, that would be a possibility as well.
I just. Hi, Dominic. Just in terms of the 9 GW, I mean, I think probably year-over-year our pipeline has firmed up. I mean, obviously we've talked about the acquisition of the Southern European platform. We're looking to hopefully take three projects through FID this year. Obviously that's coming through.
On top of that, our battery pipeline has really matured over the last 12 months, including we've taken FID on Ferrybridge 150 MW, and we're working, you saw the list on the slide earlier, working on bringing forward another few projects there. I think you had a question about AR5. I think you asked is it going to be a failed process? I mean, we're not in that from an offshore perspective. We are in, though, from an onshore perspective, bit difficult to comment on the offshore as a result. Obviously, we'll see how onshore works through the various ways that mechanics of that auction work.
Slightly different to previous auctions?
Prices look tight, obviously. Capping, the cap in Ireland at EUR 150 a megawatt hour, somewhat higher than the cap in the U.K. at GBP 44 a megawatt hour. Ireland cleared at EUR 86 a megawatt hour on average. Tight cap in Spain on their auction earlier this year. They got less than 1% of what they asked for, 30 MW out of 3,500. I presume that's what's driving your question. It'll be very interesting to see. You know, I think the real question about failed auctions to me is, auctions aren't a success because somebody agrees to take a contract. What government needs to do is get assets built, auctions are only a success when the assets are actually built and producing.
That's the real test of success in my view. Just finally on the sell downs. Gregor noted that in there, things like Berwick Bank, we would expect ultimately to sell down 50%. Things like Coire Glas, I would expect to sell down some of that as well. These very big multi-billion GBP projects, where we can achieve project finance would probably do so. And obviously we've done it in the past and got attractive returns for that, but they're not the base underlying earnings, as we said. Okay. Look, Dominic, thank you for that and the other 10 questions before him.
I'll just finish by saying today has been a story of very strong results and an upweighted NZAP Plus that strikes the right balance between financial strength and financial discipline, and we really want to emphasize that, whilst maximizing our increasing opportunities for investments and building that pipeline that Martin just talked about. As I said earlier, the NZAP Plus is a floor, not a ceiling to our ambition. It just remains me to thank our moderator and to thank you all for your time this morning. I look forward to seeing you, or several of you over the coming days and couple of weeks when we do, when we do updates with investors and stakeholders. Thank you, and have a great rest of the day.