National Grid plc – Annual report – 31 March 2019
Strategic Report | Our commitment to being a responsible business (extract)
We support climate change science. Reducing greenhouse gas emissions is an important area of focus for us and is one of our KPIs.
As a result, we also support the Paris Agreement and have made our own commitment to reduce our greenhouse gas emissions by 70% by 2030 and 80% by 2050. This pledge aligns with the trajectory required to limit global warming to a 2˚C temperature rise. We are currently reviewing our targets against limiting this rise to 1.5˚C and will update investors in next year’s Annual Report and Accounts.
Task Force on Climate-related Financial Disclosures (TCFD)
The TCFD’s voluntary framework for disclosure of climate-related information in financial filings is structured around four themes: governance, strategy, risk management, and metrics and targets.
We have committed to implementing the TCFD’s recommendations, demonstrating how climate change risk and opportunities form part of our business, with clear targets to measure progress.
Our disclosure is set out on pages 210 – 211, demonstrating how we are managing our climate impact and how our business is evolving in response to the risks and opportunities we see arising. We aim to publish a full disclosure in 2020 as our understanding and strategy evolves.
CDP A list
CDP is a not-for-profit charity that runs a global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. We are one of 126 companies globally, and one of only eight UK companies to achieve a position on the climate change A list (out of 7,000 submissions). We were delighted to achieve this accolade for the third consecutive year. It is clear recognition of our efforts to reduce our emissions and mitigate climate change during 2018/19.
Task Force on Climate-related Financial Disclosures (TCFD) (pages 210-211)
National Grid has committed to implementing the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures in full, and below we include our second set of disclosures following on from our initial disclosure in 2017/18.
In February 2019, the Executive Committee considered the current status of compliance with TCFD and three key areas where further work is planned in the next 12 months:
a) ensuring senior leadership has an appropriate understanding of the risks and opportunities associated with climate change;
b) the use of climate-related scenarios to inform our strategy (and disclosure of the possible outcomes under those scenarios); and
c) the development of metrics and targets to assess performance, and influence decision-making and remuneration.
The Audit Committee also considered our progress to date in March 2019. We continue to engage with investors, peers and other stakeholders and welcome feedback on these disclosures.
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. Our Group risk register contains a strategic risk around disruptive forces, which includes climate change.
Examples of relevant Board discussions in the last 12 months include:
i. understanding impact on electricity networks of decarbonisation of transport and National Grid’s role in advancing the build-out of electric vehicle charging infrastructure;
ii. strategic intent to enter large-scale renewables, directing capital towards build-out of low carbon energy systems, and we have recently announced our first acquisition (Geronimo Energy) due to close later this year;
iii. continual challenge and review of investment into UK interconnectors and US competitive transmission, which help provide the flexibility critical to managing a high-renewables electricity system; and
iv. discussions on future of heat and National Grid’s role in advancing heat decarbonisation pathways, with a focus on the consumer.
How does the Board delegate responsibility for day-to-day operational activity?
Responsibility for asset investment and maintenance planning is delegated to the Executive Committee and onto the core regulated businesses, each of which operate robust investment appraisal and review processes.
In the case of National Grid Ventures, responsibility for new investments up to £250 million has been delegated to the Group Investment Committee, chaired by the Group CEO. This Committee also oversees investments made by National Grid Partners, which over the last 12 months have included a number of early stage innovative businesses working at the forefront of climate change impacts as they concern utilities.
What is the oversight process for climate change related risks and opportunities?
The Safety, Environment and Health Committee (SEH Committee) is responsible for assessing how the Company adapts its business in light of climate change.
The SEH Committee does not have a remit to consider the financial implications of climate change. The Audit Committee remains responsible for reviewing and approving the content of our TCFD disclosures and will take an increasingly active role in overseeing disclosures around metrics and targets. A paper summarising our progress in our journey towards full compliance with the recommendations was considered at the March 2019 Audit Committee meeting.
In view of the centrality of decarbonisation of electricity and heat to our day-to-day operations, we believe we have a good base level of experience and knowledge within senior management (including at Board and Executive levels). However, we are not complacent and the Executive Committee will review and consider our position and any plans for enhancement, later in 2019.
What are the risks and opportunities from climate change?
We consider risks and opportunities in terms of physical and transition risks. Reports concerning our UK operations under the 2008 Climate Change Act were released in 2010 and updated in 2016.
In the short term, physical risks are most relevant, and we are principally focused on the risks from weather-related events in the US, and flooding events (in both the UK and US).
• Weather-related events in the northeastern US: Storm planning and preparation is core to what we do, given they are an increasingly regular feature of autumn, winter and spring seasons and the impact on our customers and other operating activities is significant. These activities are principally focused on our electric businesses (with above-ground wiring). However, we have also experienced impact within our gas distribution business since extreme temperatures can impact gas supplies throughout the continental pipeline network. As noted in the financial review, this year we incurred over $100 million of local and major storm costs, the majority of which are recoverable under our rate plans. Significant storm hardening activities for gas assets continue on Long Island and in New York City as a key element of our response following hurricane Sandy.
• Flood defence (UK and US): In the UK, at 31 March 2019, we had invested £88 million in flood defences and expect to invest additional amounts in RIIO-T2. The National Flood Resilience Review (NFRR) carried out in 2016 and agreed by government has resulted in flood resilience investment works being developed to cover over 100 sites in line with a sector-wide response to flooding. This is supported by assessment of further sites with increasing exposure of assets to geo-hazards resulting from climate change, sea level rise, changes to rainfall patterns and secondary impacts from increased flooding and surface water issues. In the US, Flood Contingency Plans (FCPs) are being developed for our most at-risk US substations and extreme weather is considered the ‘new normal’. Our coastal substations are being built and maintained to elevated levels in response to an increased risk of flooding.
• Other potential physical risks: We are investigating other potential risks such as the impact of rising temperatures and widening temperature ranges on the performance and operation of the equipment on our networks. Disruption to our global supply chain (continuity of supply) is recognised as a key risk within our global procurement division’s risk register.
Transition risks and opportunities
• Decarbonisation: Facilitating the transition to a low carbon economy is central to our purpose as a business and the Strategic Report on page 41 sets out certain key actions in relation to decarbonisation and decentralisation.
• Electricity grid reliability and peak capacity: Our principal focus is around ensuring that our electricity network is able to actively support and contribute to a future where demand for and supply of electricity are ever changing. With growth in renewables increasing intermittency on the network, and electrification of transport and heat likely, we are working with our stakeholders to ensure that grid reliability is understood, managed and planned at appropriate levels. Even with increased decentralisation of electricity, our long-term analysis demonstrates a key role for Electricity Transmission in the UK in a range of scenarios that meet the UK’s 2050 climate change goals.
• Electric vehicles: As we enter the key phase of discussion and negotiation around the RIIO-T2 Framework for our UK transmission businesses, the role of electric vehicles and the associated electric charging infrastructure in the UK is an area where we will continue to develop and evolve our strategy. For example, we are working with the UK Government on a build-out of fast-charging stations across UK highways to meet this demand, and ensure EVs can always find somewhere to charge, quickly. In the US, we are building an EV charging infrastructure, and to date, we have installed and manage 150 publicly accessible charging stations. We have filed a proposal with the MADPU to build nearly 18,000 charging ports by 2025 to reduce emissions in the transportation sector.
• Energy-efficiency programmes: Across Massachusetts, Rhode Island and New York our various energy-efficiency programmes (which range from installing wifi-controlled thermostats for residential customers to complex heating and lighting retrofits for commercial buildings) contributed to an estimated reduction in electricity consumption of 1.2 million megawatt hours and a 36 million therm reduction in gas consumption, lowering CO2 emissions by more than 800,000 tonnes.
• Facilitating zero carbon operation of the GB electricity system: In April 2019, NGESO announced its ambition to transform the operation of the electricity system by 2025. Our goal is to be able to operate the system safely and securely at zero carbon whenever there is sufficient renewable generation online and available to meet the total national load.
• 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 remains core to our strategy in both the UK and US, and we believe it will remain central to the energy mix in both countries for decades to come. In the US, we are working with regulators to understand how the pathway to cleaner energy sources will evolve, while in the UK we are specifically considering how our transmission network can best support a long-term future where potentially hydrogen becomes a mainstay of the energy mix.
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 20, with our principal risks set out on page 21.
Our risk registers typically include risks that are thought possible or likely to manifest within the short to medium, rather than longer term. Accordingly, weather-related event risks feature, as do transition risks associated with the decarbonisation of heat and electricity.
Risk registers form a key element of our governance framework and drive the agenda, focus and discussions of the various oversight bodies. There is an increasing focus and debate on climate-related matters throughout the Group. For example, at a recent risk workshop, NGV management discussed the risks and opportunities from climate change at different levels of their organisation.
Over the last 12 to 18 months the Enterprise Risk Management function has facilitated workshops with each of the core business areas to ensure completeness of risk capture. Over the next 12 months we expect to consider whether the individual or combined risks arising from, for example, increased variability in temperature, and/or greater wear and tear on assets under more extreme conditions, should feature more prominently. The Executive Committee will review the results as part of the regular semi-annual review of Group risks later in 2019 and as part of that discussion will specifically consider whether climate change is appropriately reflected.
How do we use scenarios?
Our long-term investment plans in the UK draw on forecasts from the System Operators’ Future Energy Scenarios publications (available on our website), which provide credible pathways for the future of energy supply in Great Britain out to 2050.
The scenarios are the starting point for our regulated long-term investment, as well as a reference point for other reports, such as the Gas Ten Year Statement, Electricity Ten Year Statement and the System Operability Framework. Our UK transmission businesses use this information to inform their long-term scenarios which are used to refine capital investment plans. The key inputs concern demand assumptions (contemplating EVs), generation assumptions (with particular views around offshore wind, interconnectors, gas, nuclear and transmission connected energy storage).
In the US, our long-term investment decisions are informed by internal and stakeholder views on the impact of changing environmental conditions and customer needs, and we also consider the range of possible regulatory and policy responses. Our regulators in New York are encouraging new incentive opportunities as part of their Reforming the Energy Vision (REV) proceedings and in 2016, we prepared an Electric and Gas Grid Resiliency Plan as well as a Distributed System Implementation Plan (DSIP) for the electric system.
We are currently developing our detailed scenario analysis and in future TCFD disclosures we will provide more information on the outcomes and sensitivities for our key businesses under various scenarios, including at least one 2-degree scenario.
What metrics are used to assess these risks and opportunities?
We recognise that the metrics used to assess the risks and opportunities arising from climate change need to consider not just the performance of National Grid, but also of the energy systems we influence.
At present the principal target we have is our commitment to reduce our own Greenhouse Gas emissions by 80% of our 1990 baseline by 2050, with interim targets of a 45% reduction by 2020 and a 70% reduction by 2030. As set out in the Strategic Report (page 41), we are making good progress towards achieving this. We recognise that many of our peers have now set more demanding targets for greenhouse gas reduction, aligned with a zero-carbon future. The Executive Committee is due to consider the case for a revised emissions reduction target in summer 2019.
In our UK electricity business, carbon pricing now forms part of the information used to assess options and sanction our capex, and we will continue to roll out this approach across our business in 2019/20.
Our sustainable construction programme continues to drive the carbon out of our construction projects and we are on track to reduce the carbon intensity of our construction projects in the UK by 50% by 2020 (from a 2015 baseline).
We plan to set a science-based target for carbon emissions and are currently reviewing our 2050 greenhouse gas target.
The Group has begun work on a programme to assess its total societal impact. Our analysis extends to consider our human capital contribution, and the role that innovation and reliability play in our wider contribution to society.
We plan to identify a number of metrics that measure our wider contribution in a meaningful way, and, as a result, will be used to drive decision making to ensure we can sensibly assess trade-offs between different stakeholders and take actions that benefit society as a whole. We expect to report further progress in next year’s TCFD disclosure.