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National Grid Makes $11 Billion Deal in Move to Green Future

Bloomberg logoBloomberg 3/18/2021 Rachel Morison and Will Wade

(Bloomberg) -- National Grid Plc agreed to buy PPL Corp.’s U.K. electricity distribution business for 7.8 billion pounds ($10.9 billion), a move that will transform the company as it prepares for a low-carbon future.

The biggest U.K. utilities transaction in a decade highlights how crucial grids have become as nations figure out how to navigate the shift to electricity from fossil fuels.

Distribution grids, the local networks that feed directly into homes and businesses, are at the heart of the energy transition. Smart homes with electric heating systems, as many as 30 million electric cars, and small-scale renewable generation will all be connected to local grids in coming decades.

“This makes an awful lot of sense for the U.K. and National Grid in terms of the energy transition,” Chief Executive Officer John Pettigrew said in an interview. “We believe that the growth that we’re likely to see in the distribution sector is going to be stronger and more certain and longer than other elements of the energy sector.”

chart: Shares have been trending downward amid pandemic © Bloomberg Shares have been trending downward amid pandemic

In a separate deal, PPL is picking up Narragansett Electric Co. from National Grid for an equity value of $3.8 billion. The transactions mean PPL will shed its international unit and can focus on running U.S. utilities. The Allentown, Pennsylvania-based company said in August it was pursuing such a move, with an eye to increasing shareholder value.

The sale follows those of U.S. rivals that sold or spun off non-utility assets in recent months while holding on to less-risky regulated power companies. Exelon Corp. said last month it would separate its power-generation business, and Public Service Enterprise Group Inc. is seeking to sell non-fossil fuel assets. Dominion Energy Inc. in July sold its gas pipeline and storage business to Berkshire Hathaway Inc.

PPL will likely continue this transition with the cash it’s gaining from National Grid, said Nikki Hsu, a utilities analyst with Bloomberg Intelligence.

“They probably will be acquiring more assets,” Hsu said.

Future Sales

National Grid also announced it intends to sell its majority stake in its gas grid business later this year, as the fossil fuel comes under increasing scrutiny from investors and activists.

The WPD sale drew interest from a wide range of companies. The government’s climate pledges are what’s attracting investors to distribution grids, according to Randolph Brazier, director of innovation and electricity systems at the Energy Networks Association.

“Ultimately, it’s driven by net zero,” he said. “Because people are connecting all these new technologies to the distribution grid.”

Local network businesses are about digitalization, decarbonization, and decentralization. They’re all underpinned by net zero, he said.

Net-Zero Target

Completion of the WPD deal, which will be funded with bridge financing through debt, is expected within the next four months and completion of the NECO aale is expected before the end of the first quarter of 2022. National Grid said it plans to start the sale process of its gas unit in the second half of this year.

chart: Plug In © Bloomberg Plug In

Once the deals complete, the National Grid portfolio will be 70% electricity and 30% gas, Pettigrew said. The fossil fuel is quickly becoming the next target of climate policies aimed at effectively eliminating emissions by 2050 in the U.K.

Western Power provides electricity to more than 7.9 million U.K. customers in the Midlands, South West and Wales.

National Grid has a commitment to reach net zero for scope one and two emissions. It plans to cut scope three emissions, on the energy carried through its networks to customers by 20% by 2030 from a 2016 baseline.

Reducing the carbon in the fuel carried in its gas network is possible through hydrogen. The utility is currently looking at how it can switch from piping gas through its networks to clean-burning hydrogen to heat homes.

“We view the transaction as a positive step for National Grid,” John Musk, analyst at RBC Europe Ltd said in a note. Adding that the market will need time “to digest” the deal.

Shares rose 0.5% to 835.6 pence a share at 2:34 p.m. in London.

(Updates with comment from analyst in eighth paragraph.)

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