Management report, climate change, TCFD disclosures, CDP

National Grid plc – Annual report – 31 March 2020

Industry: utility

Strategic Report (extract)

Task Force on Climate-related Financial Disclosures (TCFD)

National Grid has committed to implementing the recommendations of the TCFD in full, and below is our third disclosure which builds on our previous two.

This year we have continued to make good progress on the recommendations, aided by developments in the markets we operate in, with aggressive ‘net zero emissions’ and renewable targets set in the UK, New York State, Rhode Island and Massachusetts in the last 12 months, as well as increasing public scrutiny and focus across the sector and in corporate boardrooms. This year, we have progressed our scenario planning work, elevated climate change as a principal risk to our Group risk register, issued our first green bond, and evolved our greenhouse gas emission reduction targets. Our work was recognised by CDP as we were named on its climate change A List for the fourth year in a row.

In our 2018/19 disclosure, we outlined the areas we planned to focus our attention on during 2019/20. The table below outlines those actions, the progress we have made against each during this financial year, and our areas of focus for the upcoming financial year.

How do we approach the governance of climate-related risks and opportunities?

The Board of Directors is responsible for the oversight of climate-related risks and opportunities impacting the Group. During the year, there has been an increased focus on climate-related matters as the landscape evolved with regulatory developments and changes in stakeholder expectations. The Board was involved in the following discussions relevant to climate change:

  • Approving the Group’s commitment to achieve net zero for our Scope 1 and 2 greenhouse gas emissions by 2050 replacing our previous target of 80% reduction by 2050. In addition, we have set the following interim targets: 80% reductions by 2030 and 90% by 2040.
  • Climate change was elevated to a principal risk during the year, with the risk now being owned by Alison Kay, a member of the Executive Committee who has responsibility for Group Safety, Health and Environment. The governance process that was undertaken to upgrade the risk from an emerging risk to a principal risk is described in the case study on page 23.
  • Strategy sessions were held, which included discussions related to climate change and considered the scenario testing performed this year (discussed on page 26). Topics discussed included the clean energy transition, the future of heat, as well as our strategy for renewables and electrification of vehicles. In addition, the Board held four sessions to consider our role as a responsible business and our role as a key facilitator of the energy transition featured.
  • Approving the RIIO-2 submissions which reflect our investment proposition for supporting the UK energy transition.
  • Quarterly review of performance on our environmental sustainability metrics and targets.

Responsibility for asset investment and maintenance planning is delegated by the Board to the Executive Committee who then further delegates the responsibility to the core operational businesses.

What is the oversight process for climate change related risks and opportunities?

The Safety, Environment and Health Committee (SEH Committee) is responsible for assessing the Group environmental sustainability strategy and performance, as well as how the Company adapts its business strategy considering potential climate change risks and opportunities. As part of this, the SEH Committee tracks, challenges and seeks assurance for the delivery of the plans approved by the Executive Committee.

The Audit Committee remains responsible for reviewing and approving the content of our TCFD disclosures and is taking an increasingly active role in overseeing disclosures around metrics and targets. The Committee considered papers in September 2019, November 2019, March 2020 and May 2020 summarising the financial reporting and disclosure considerations in respect of climate change.

The Finance Committee is responsible for overseeing our financing strategy. This year, the Committee reviewed and approved our Green Financing Framework. This framework, published in November 2019, aims to facilitate the disclosure, transparency and integrity of our Green Financing for our stakeholders.

A TCFD steering group oversees progress against the TCFD recommendations and the publication of our annual disclosure. The group reports to the Chief Financial Officer, Andy Agg.

Future Intent

As the climate change landscape is evolving, we will continue to build upon the good base level of experience and knowledge within senior management (including at Board and Executive levels), as well as consider climate change expertise in our Board succession planning. The SEH Committee will continue to monitor our environmental sustainability performance quarterly and approve updates to our environmental sustainability strategy and targets annually. The Audit Committee will continue to oversee the programme to evolve the assurance model for our responsible business reporting. The Finance Committee will consider the financial impact of environmental factors on our credit metrics and relevant considerations with regards to debt investors.

What is our strategy for responding to climate change?

Our strategy focus is three-fold: tackle the climate crisis by helping the markets we operate in transition to a net zero economy, while reducing our own impact on the environment and ensuring our networks operate reliably under changing conditions. Our strategy is informed by the evolving climate change policy and ambitions of the states and countries in which we operate, by the risks and opportunities identified during our continuing climate change scenario testing and by our ambition to have a positive impact.

Our financing strategy, which includes us issuing debt from our operating companies, is focused on aligning the debt issuances to the business purpose of each of our regulatory deals. As part of this strategy, we launched a Green Financing Framework to enable us to issue green bonds, loans or other financial instruments in November 2019. Green bonds allow us to access new capital pools and engage with investors who are keen to work with asset owners to facilitate the clean energy transition. In January 2020, we issued our first green bond in the UK, with the €500 million proceeds being used to finance projects with an environmental benefit across our UK electricity business. We are currently evaluating issuing a green bond in the US in 2020.

Regulatory Framework

The next 10 years are a crucial period with expected rapid change in the energy system, and therefore it is vital that the funding and regulatory framework is in place to deliver against these targets. Across our business, we are developing proposals for our regulatory rate filings that support our strategy to enable the transition and reduce our own impact.

UK RIIO-2 Business Plans

Our RIIO-2 Business Plans were developed through a comprehensive stakeholder engagement programme throughout the RIIO-2 process and have also evolved to reflect the UK government target, announced in June 2019, to achieve net zero emissions by 2050. Our plans cover a crucial period (2021 – 2026) for investment to help deliver the UK’s net zero target. The route to net zero emissions is not yet clear but our plans are flexible enough to deliver the investment needed in the 2020s. We have built a plan to align with the pathway to net zero by 2050.

In our Electricity Transmission business, we propose £1.35 billion of expenditure to connect new generation and transport electricity across the country to where it is consumed, connect us to neighbouring electricity markets and support the Electricity System Operator in being able to operate a zero-carbon electricity system by 2025. Whilst consistent with Ofgem’s business plan criteria, we recognise that these investments alone are insufficient to deliver net zero targets and have therefore proposed whole system options to accelerate progress towards net zero, for example through ultra-rapid vehicle charging at motorway service areas. As the optimal path to achieving net zero is unclear, we developed a series of uncertainty mechanisms that allow our plans to flex to deliver against the range of low-carbon system developments our customers could bring forward.

In our Gas Transmission business, we recognise that natural gas has an important role to play in supporting the transition to a low-carbon future. Natural gas, hydrogen and biomethane can help to decarbonise heat, the biggest source of UK carbon emissions. Our business plans cover a period where developing options and understanding choices is key. We will focus on leading the development of options associated with gas transmission, specifically hydrogen, to facilitate the decarbonisation of heat, industry and transport.

In our ESO business, our business plans focus on facilitating the transition to net zero. For example, our business plans aim to deliver new architecture and systems in our control centres to be able to operate a zero carbon network by 2025, and new monitoring and control systems to ensure power system stability in a low-carbon world.

Across all our businesses our plans include targets and commitments to manage our own environmental impact, with £530 million of investment planned across Electricity and Gas Transmission. We have committed to reducing NOx emissions from our gas compressors, and achieving net zero construction emissions by 2025/26. We are targeting investments to replace leaking SF6 (an insulating gas and source of GHG emissions) equipment to reduce emissions by 50% by 2030, phasing out the procurement of new assets containing SF6 and introducing SF6 free technologies.

In the UK, there is uncertainty on what further measures will be needed to adapt to climate change and meet the UK goal of net zero by 2050. We welcome Ofgem’s Decarbonisation Action Plan and the shift to a more flexible, adaptive regulatory price control regime with a system-wide net zero re-opening mechanism. US Rate Cases

In the US, we have ongoing and upcoming regulatory rate case proceedings. In all proceedings, gas and electric, we are focused on including proposals to support our climate change strategy and enable the net zero transition of the states in which we operate. In the US gas distribution businesses, we are focused on decarbonising our gas networks and the heating sector. We are doing this by reducing emissions related to natural gas through energy efficiency and demand response, continued investment in our leaking pipe replacement programmes and advancement of the future of heat. For example, we included a $90 million future of heat proposal in our April 2019 KEDNY/ KEDLI filing which combined expanded energy efficiency and demand response programmes, renewable natural gas interconnection investments, geothermal investments, and a hydrogen blending study. We plan to include future of heat proposals and continued pipe replacement programmes in our next Niagara Mohawk and Massachusetts gas rate filings. This work aligns with the Rhode Island Heating Sector Transformation, launched by the Governor in July 2019 to identify how the heating sector needs to change to meet the state’s climate objectives. This initiative concluded in April 2020 with recommendations provided to the Governor. Those recommendations included increased energy efficiency, electrification through air and ground source heat pumps, and fuel decarbonisation through renewable natural gas and renewable oil.

In the US electric distribution businesses, we are focused on climate change and the new energy landscape. For our next Niagara Mohawk rate case filing, we will submit a proposal that focuses on three key areas: grid modernisation, customer engagement and supporting the state to achieve its clean energy goals outlined in the Climate Leadership and Community Protection Act (CLCPA). We will also leverage these grid modernisation investments to enable customers to engage with their energy consumption in an informed and seamless manner. Enabling New York State’s clean energy transition is a common theme across all the above-described proposals and will be further enabled by our work in the electrification of transportation. The Massachusetts rate filing, approved in October 2019, includes work to advance Massachusetts’s climate objectives including a climate change mitigation and adaptation plan, an off-peak rebate programme for electric vehicle owners, approval to include up to $50 million in energy storage in our 2021 grid modernisation plan filing, and a path forward for a significant investment in electric vehicle charging infrastructure in 2021. In Rhode Island, we launched an electric vehicle infrastructure and off-peak rebate programme and will be filing a Grid Modernisation and Advanced Metering Functionality proposal in the second half of 2020/21.

Future Intent

We are in the process of updating our budgets and forecasts to reflect the detailed financial impacts of our net zero strategy.

How have we advanced our climate change scenario analysis?

This year, we have advanced our scenario analysis work that considered both the transition and physical risks to our business. This work is and will continue to inform our strategy and investment plans.

Transition Risk Analysis

To further understand the risk that climate change could have on our business, we have undertaken a high-level scenario analysis. We used two scenarios: the first assumes that the global response to the threat of climate change is enough to limit global average temperature increases to no more than 1.5ºC above pre-industrial levels (as set out in the Paris Agreement) by 2100 (the 1.5ºC scenario). The second scenario assumes that the 1.5ºC target is missed by some margin, comparable to a 4ºC global average temperature increase (the 4ºC scenario).

To facilitate business planning, we have considered scenarios out to 2030. In this analysis, we assessed the impacts of the scenarios without factoring in activities we might take to adapt to the threats of climate change, or the opportunities of decarbonisation.

We made the following simplifying assumptions:

  • In the 1.5ºC scenario, rapid changes are made to progress decarbonisation goals: coordinated policy, regulation and customer behaviour favours bans on polluting technologies, and support for low-carbon solutions. We have assumed that transition impacts in this scenario would be focused around technological shifts to support decarbonisation.
  • In the 4ºC scenario, changes are less rapid and less comprehensive, and emissions remain high, so that the physical ramifications of climate change are more apparent by 2030. In rationalising this slower global progress, our 4ºC scenario assumed fragmented and ad hoc policy (within the Group’s operating territories and globally).

The main transition impacts of the 1.5ºC scenario were:

  • A trend towards more large-scale renewables in the generation mix: this would be a positive development for the Group, but for our electric network businesses the rate of new connections could increase beyond today’s levels: this could increase costs or, without investment ahead of need, lead to a backlog.
  • A trend towards electrification: increases in electricity demand would likely trigger electricity network upgrades and investment. Although network costs are a very small proportion of the customer bill, spikes in spending would need to be managed in conjunction with our regulators to ensure that customers, especially lower-income customers, are not unduly adversely affected.
  • Public pressure on gas: in line with the Committee on Climate Change and other external sources, we do not believe substitutes to methane gas for space heating can reach scale in our territories by 2030 (or even 2040, unless extensive new policy is rapidly deployed). However, in this scenario we anticipate that, without mitigating action to reduce and offset emissions, there is a risk of pushback against the use of gas by environmental groups or concerned citizens. We are already experiencing growing resistance to building new gas infrastructure in our US business from politicians, concerned citizens and environmental groups.

The main impacts of the 4ºC scenario were:

  • Physical ramifications of climate change: in this scenario we expect extreme weather events of escalating severity and frequency, which could increase disruption to our assets and our customers. This would require investment to ‘harden’ assets and would heighten the safety risk to our field employees. Our approach to physical climate risk is discussed in more detail below.
  • Lower system visibility: as this scenario sees less coordinated policy and regulation in pursuit of decarbonisation, we would anticipate a greater variety of solutions being deployed across our networks. This could increase overall system costs and reduce visibility over the network, potentially slowing our responsiveness to disruptive events. We do note, however, that a greater number of distributed assets would increase the potential for local balancing, which could mitigate this.
  • Inequality of access: without carefully designed policy, we believe decarbonisation activities have the potential to leave some sectors of society behind: for example, heat pumps and the energy efficiency upgrades they typically require are currently cost-prohibitive for many. As well as the ethical implications of this, there is a risk to the Group, especially for our US businesses, that a proportion of our customers would struggle to pay their bills.

Analysis shows that, without action, both scenarios present risks to us. However, while these would need to be managed, we would not need to materially change our business model. We also note that for a group in our position, some of these changes represent material opportunities.

Physical Risk Scenario Analysis

We recognise that, due to the amount of carbon already in the atmosphere, some escalation of extreme weather events is likely in both the ‘1.5ºC’ and ‘4ºC’ scenarios, especially under a longer-term view. This year, we began Group-level work to assess our physical risks to ensure that any necessary measures to defend our assets are identified. We ran an initial workshop with the US, UK and NGV teams and the UK Meteorological Office (Met Office) consultancy team to define the key areas of focus (e.g. flooding, icing and hurricane frequency for the US and UK regions) and define how the climate science can answer the questions we have on the weather conditions our assets will have to operate in up until 2100. Using the output of this work, we will develop and progress a scope to analyse weather data specific to the regions we operate in and assist in developing an understanding of the vulnerability of our assets as well as the mitigating measures that will be needed to protect them.

We are also undertaking work with a team from the Massachusetts Institute of Technology (MIT) to study the impacts of weather changes related to climate change in the northeastern US.

What are the risks and opportunities from climate change?

The rapid changes in the energy market and demands to meet net zero emission targets present several challenges that are both a risk and opportunity for us. In addition, the changes in temperature and weather patterns have and continue to present challenges and risks. These risks and opportunities, along with a summary of the work we are doing to address them, are presented in the table below.

Future intent

We will continue our physical risk analysis in 2020/21, including a review of the effectiveness of adaptation measures to date, identification of future areas of vulnerability, and assessment of these against future weather conditions and the likelihood of that happening. We will complete the scenario testing and determine any further adaptation measures that need to be undertaken. While financial provision has been made in the UK business plans for flood measures based on 2019 climate science data, additional adaptation measures can only be determined after this exercise has been completed and will be considered under the uncertainty mechanism provisions in the RIIO-2 business plans. The US business plans also include actions to harden our networks against expected weather conditions in the nearer term, but this work will help us better plan for future conditions.

What is the process for identifying and managing climate-related risks?

Our approach to identifying and managing the risks in our business is set out on page 22. During the year, a Group-level bespoke climate change principal risk was developed and added to our Group risk register, as described in the case study on page 23. The newly added climate change principal risk is underpinned by a series of Group controls and actions to mitigate the risk (this is further described on page 24). Several of the Group-level controls have been implemented while others are in progress. Ongoing work includes establishing programmes to develop the skills in our current and future workforce. Our recent report, Building the Net Zero Energy Workforce, looks at the skills and expertise the energy sector will need to help the UK reach its emissions target. It also identifies the need to recruit for 400,000 jobs in the sector between 2020 and 2050 to meet the target. Supported by the #jobthatcantwait campaign, we will be recruiting new talent who can help deliver the transition to net zero and adapt our networks accordingly. We have seen a marked increase in applicants in response to this campaign.

Following the adoption of the Group-level climate change principal risk, the US and UK businesses developed bespoke climate change risks on their respective risk profiles. These risks are being cascaded to the underlying operating business units to develop to ensure their risks and control actions are specific to them.

Future intent

The Executive Committee will review the results as part of the regular semi-annual review of Group risks in early 2020/21 and as part of that discussion will specifically consider whether changes need to be made to the Group climate change risk.

Case study: extreme weather-related planning

Ensuring network reliability is core to our business and we are constantly undertaking actions, often referred to as storm hardening, to improve our networks’ resilience to the increasing frequency of strong weather events, given the significant impact this can have on our customers. These activities have focused on both our electric and gas businesses. As noted in the financial review (see page 30), this year we incurred $98 million of major storm costs, the majority of which are recoverable under our rate plans. Examples of ongoing efforts in 2020/21 include hardening efforts for our gas assets in Long Island and New York City. We worked with a collaboration of New York State and New York City representatives and other key stakeholders, to develop recommendations for future storm hardening and resiliency projects for our gas network, strategies for addressing climate risk factors, and guidelines for incorporating climate change projections in long-term capital planning. Another example is our annual investment in our electric distribution infrastructure to improve resilience and grid modernisation work to increase speed in knowing outage locations and improving our ability to restore supply.

In the UK, flood defence has been a keen focus for the business. Our target is resilience to 1 in 1000-year flooding events in the UK or a 0.1% chance in any given year. This resilience level was developed through consultation with Ofgem and BEIS via the ENA Flood Working Group and recognised in the National Flood Resilience Review 2016 as being best practice for critical local and national infrastructure. As of 31 March 2020, we had invested £71 million in flood defences with work completed or in progress at 37 sites and expected to be completed at a further 12 sites in 2020 and 2021. Our RIIO-2 (2021 – 2026) plans aim to protect a further 100 sites from surface-level flooding and recommend further investments to manage the risks posed from the secondary impacts of flooding, such as erosion and subsidence to our tower and cable routes.

What metrics are used to assess these risks and opportunities?

We have continued to advance our environmental sustainability strategy, focusing on three key areas: climate change, responsible use of natural resources and caring for the natural environment. We have metrics and targets that allow us to measure our impact on the environment, demonstrate our commitment and monitor our performance. As previously discussed, the cornerstone of our suite of metrics is our commitment to reducing our impact by achieving net zero for our Scope 1 and 2 emissions by 2050, with interim targets of an 80% reduction by 2030 and a 90% reduction by 2040. Numerous underlying metrics support this goal and our broader sustainability ambition, including reducing the carbon footprint of our operating facilities, enhancing the natural value of our properties, recycling and/or reusing our recovered assets and reducing our office waste. These are discussed in more detail on pages 50 and 51.

We have also included enhanced disclosures in the financial statements prepared under IFRS to explain how we have considered the financial impacts of climate change, in particular evaluating the impact of new net zero commitments in our territories, and the effect this has had on judgements and estimates such as the useful economic life of our assets. See notes 1 and 13 to the financial statements for details. This remains a recurring area of focus for the Audit Committee.

Case study: the future of heat

The transition to a low-carbon economy is and will continue to change the sources of energy used (e.g. heat pumps and hybrid solutions), and the way energy is supplied and consumed (e.g. building retrofits to improve energy efficiency). Gas distribution in the US and gas transmission in the UK and US remain core to our business strategy, and we believe it will remain central to the energy mix in both countries. There is likely to be a mosaic of solutions, including reducing emissions from the natural gas transmission and distribution networks, as well as conversions to both electric and lower carbon gas heating (renewable natural gas or gas blended with hydrogen), focusing on cost-effective solutions and meeting different consumer needs.

In conjunction with government agencies, other utilities and key stakeholders and other gas networks, we have developed a programme of work to gather evidence and help us understand what is required to incorporate hydrogen and renewable natural gas into the gas supply. We are also working with industry to consider what improvements and changes are needed to maintain well-functioning, liquid gas markets throughout the transition, and ensure security of supply and delivery of natural gas, renewable natural gas and hydrogen. Refer to page 13 for further details on the future of heat.

Future intent

We continually review our metrics and targets, as needed, to ensure that the data we are measuring is meaningful, aligns with our strategy, and is providing the information the business and our stakeholders need to effectively monitor our performance and demonstrate our progress. In 2020/21, we will be laying out our pathway to achieve our net zero by 2050 emission reductions and setting targets to align our ambitions and provide better visibility to our progress.

We are also evaluating development of a meaningful Scope 3 target that enables us to align to Science Based Targets Initiative (SBTI) criteria, specifically focusing on our customers.