Preparing the ground for an industrial revolution at National Grid

The Times
December 22, 2008
Steve Holliday, head of the utility company, has challenges ahead, but not necessarily that of recession
Robin Pagnamenta

It's a bitter December day and outside his office the chill winds of recession are blowing hard, but Steve Holliday is unfazed. Banks may be tumbling, retailers and airlines plunging into bankruptcy and unemployment soaring, but he is chief executive of what must be Britain's most recession-proof company.
From his office overlooking Trafalgar Square, Mr Holliday, a 52-year-old former rugby player, oversees Britain's biggest utility company — a £16 billion empire of pipes and wires that employs 17,500 people and distributes gas and electricity to tens of millions of people across Britain and a great swath of the northeastern United States. National Grid, Mr Holliday says, is doing fine. “By its nature, this is a very defensive business.”
As a provider of two things that many people take for granted, it is a company that is intrinsic to our way of life and, fortunately for Mr Holliday, one that remains largely shielded from the ups and downs of the regular economy. “Our cashflows are guaranteed, so the impact of the recession on our business is small,” he said, adding that about 95 per cent of National Grid's revenues come from fixed charges paid by power companies and consumers through their bills, with the levels set — usually for five years — by the regulator.
As a business model, this is about as steady as it gets. Mr Holliday is, therefore, at pains to point out that this does not mean that National Grid is a dull company. Quite the opposite, he argues, because of the vital role that infrastructure operators need to play in facing up to some of the toughest challenges facing society — those of climate change and energy security.

“This is an extraordinary time for the industry,” said Mr Holliday, who worked in the oil industry before joining National Grid in 2001 and was appointed chief executive two years ago. “Just look at the agenda we are facing: these are difficult problems that need clever people to help fix. This is an industry that is not evolving, it is in revolution.”
It would be hard to underplay the challenges. Britain is facing an energy shortfall in the years ahead as ageing coal and nuclear power stations, which have churned out reliable, inexpensive electricity since the 1960s and 1970s, are retired from service. By 2020, about 20 gigawatts of generating capacity, nearly a third of the present UK total, will have been lost, according to Mr Holliday. To avoid a future of blackouts and huge economic disruption, all of this will need to be replaced, at an estimated cost of £100 billion.
But that's not all. The UK aims to replace it with a completely different mix of lower-carbon fuels - including a vast expansion of offshore wind energy and a set of giant new nuclear reactors, up to three times more powerful than the existing fleet.
All of this is happening as supplies of North Sea gas — Britain's fallback fuel for a generation — are rapidly running out, leaving us increasingly reliant on imports.
Building the infrastructure needed for this transformation in the way we heat our homes and power our businesses will not be easy, especially in a severe recession that has dried up access to credit. “Clearly, investor confidence is a lot lower than it was a year ago,” Mr Holliday said. “No one had forecast the huge speed with which this recession has come about.”
The stakes could not be much higher. Although Mr Holliday insists that Britain's energy supplies look secure “for the next few years”, he argues that new laws will be needed to ensure that there is sufficient investment to avoid a supply crunch around 2015.
“When you look out to the medium term, there is not enough generation being built,” he said. “I continue to worry that we are not making enough progress on that front. How can we incentivise investments that we can all agree are the right thing to do and get on with them earlier?”
New planning laws that came into force this year should help, but Mr Holliday suggests that the Government will need to take a firmer approach by intervening in the market directly, placing a floor on the price of carbon or creating other incentives.
In particular, big new offshore wind farms - which the Government has earmarked as a key future source of power for Britain - will not arrive without legislative changes, Mr Holliday believes. “The regime that's in place at the moment for offshore wind does not in any shape or form,” he said.
Nevertheless, rather than retreating from these challenges, Mr Holliday put a positive gloss on them. “The reality is that we do have an energy system that is now quite old...but I think that is a fantastic opportunity,” he said. “We need to replace a third of our generation fleet. We need to green up our fuel mix. So what a great opportunity to replace assets that need replacing.”
For its part, National Grid has already agreed to invest £18 billion by 2012 reinforcing the network by tying in new power plants and wind farms and building a liquefied natural gas import terminal on the Isle of Grain in Kent. However, further investments will be needed to build links to remote wind farms planned off the coast of Scotland and potentially to bind the UK's power grid more closely to Europe, with new sub-sea power connections to Norway, Belgium and the Republic of Ireland.
National Grid plans to fund half of its current investment programme through cashflow, with the rest raised as debt. This is where the company's relative isolation from the turmoil in the wider economy starts to fray. “It has been significantly harder to raise debt in the past 12 months,” Mr Holliday admitted.
He pointed out that Grid has already managed to raise all the money it needs for this year and next, but that some investors have grumbled about the rising cost of all this debt. Others have complained about the performance of its American business, the former Keyspan, which it acquired for £4.2 billion just under three years ago and which some view as a drag on its more profitable UK operation.
Mr Holliday insisted that the US integration was “going very well”, with plans to strip out $100 million (£66 million) of costs this year, but such concerns may explain why he seemed keen to scotch any talk of further deals: “There is not a focus on further M&A activity. We don't have a growth profile predicated on buying something in 2009.”
Instead, Grid is focused on its investment programme and its pledge to raise its dividend by 8 per cent a year over the next few years. It is, again, an unusual position to be in.
Moreover, while most chief executives worry about cutting jobs, Mr Holliday is considering another rarity — hiring new staff. “We will hire 200 to 300 people in the UK this year and 120 next year — everyone from foundation engineers to finance and HR people,” he said. “You have to continue to bring people into this business. It's going to be here for a long time to come.”
Profile: Steve Holliday
Age: 52
Education: BSc in mining engineering, University of Nottingham
Career: worked for Exxon, the US oil group, overseeing variety of projects, and later British Borneo Oil & Gas before joining National Grid in 2001 as a board director. He was appointed deputy chief executive in 2006 and chief executive on January 1, 2007. Also a non-executive director of Marks & Spencer
Family: married with three children
Interests: Following the England rugby team, the arts