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Investing.com - National Grid (LON:NG) could see meaningful earnings upside from changes in UK electricity transmission grid regulations, according to analysis published Monday by Jefferies.
The investment bank examined Ofgem’s Draft Determination model to assess how lower capitalisation rates for pipeline project expenditure might impact earnings for National Grid, Iberdrola (BME:IBE), and SSE (LON:SSE).
Capitalisation rates determine how much of infrastructure spending is added to the regulated asset base versus expensed immediately.
Jefferies estimates that an 8% reduction in capitalisation rates from National Grid’s business plan assumptions could potentially boost the company’s earnings per share by approximately 7p (or 8% above consensus) on average over fiscal years 2026-2031.
This analysis is based on Ofgem’s theoretical maximum spend of £34 billion, though the actual outcome may differ.
For Iberdrola, Jefferies calculates a potential 4p or 3% earnings upside through its UK subsidiary Scottish Power under similar regulatory scenarios.
The impact for SSE appears less significant, as the company had proposed a blended capitalisation rate "no higher than 80%," while Ofgem’s current blended rate for SSE at maximum possible spend is slightly above that level.
The UK’s recent draft regulation highlights lower capitalisation rates as a potential short-term lever for cash flow and earnings, particularly for National Grid, though this comes at the expense of longer-term regulated asset base growth.
Ofgem’s Draft Determination outlines a maximum spending scenario of around £80 billion, including £10 billion in base expenditure and £70 billion in future pipeline projects for fiscal years 2026-2031.
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