National Grid plc (NG) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to our London headquarters for today's event, which is focused on our electricity distribution business. It's just over 2 years since we completed the acquisition of Western Power Distribution. It makes up a significant part of the Reshape Group and accounts for 20% of our regulated asset base. To get a sense of its scale as a stand-alone business, it could be a FTSE 50 company. At the time, we said that the acquisition together with all the -- with our decision to sell a majority stake in U.K. gas transmission will be transformational for our U.K. business. And we're even more convinced of that today than we were 2 years ago. And my hope is that when you leave this event, you will be excited about electricity distribution as I am as we move forward. In a moment, I'm going to hand over to Cordi O'Hara, who is our new Electricity Distribution President; and Darren Pettifer, its CFO. But a handful of key points before I do that. So since completion, we've done a lot to integrate and establish electricity distribution within the group. We've introduced a new leadership team. We've agreed RIIO-ED2, our new 5-year price control. And today, we're announcing that we're targeting 100 to 125 basis points of outperformance over the period. We changed the name from Western Power Distribution and rolled out our new brand. We've integrated our corporate and back-office functions, including financial reporting, treasury and procurement, and we've identified GBP 100 million of synergies, which will be delivered over the next 3 years. I'm particularly pleased that during this time of significant change, we've continued to deliver operational excellence and top quartile performance across all of our key metrics, demonstrating the strong foundations we have to build upon. And as I said, the strategic rationale that we set out at the time of the acquisition is even more compelling today. First is the U.K.'s largest electricity transmission and distribution owner. We've significantly increased our exposure to electrification and by doing so, materially improve the group's long-term growth outlook. Second, we have a critical role to play at the heart of the energy transition. Since the acquisition, we've seen clear opportunities to leverage complementary capabilities that will benefit customers and shareholders. And finally, with the strategic pivot we've maintained the benefits of geographic and regulatory diversity. So taking each of these areas in turn. First, our improved growth outlook as a result of the increased exposure we have to electricity. Most energy commentators in the U.K. are forecasting up to a doubling of electricity demand by 2050. To accommodate this huge growth, local distribution networks which, to be honest, remained relatively static over the last 50 years, will undergo a significant change over the next 2 decades. They're going to become smarter, multidirectional and flexible while it's also becoming much larger to accommodate the growth in electricity demand. Our strategic pivot fundamentally shifted the group from low-growth gas transmission to higher more visible longer-term growth in electricity. And we're already seeing this translate with a step change in investment for customer connections and reinforcements, including a 30% step-up in annual spend for RIIO-ED1 and -ED2. And we can see sustainable ways of investment over the next decade and beyond as we connect more renewables and enable the rollout of electric vehicles and heat pumps. Secondly, by adding U.K. electricity distribution alongside our existing businesses, we significantly enhanced our role in the energy transition. As the biggest energy network company in the U.K. We have the opportunity to take a whole system approach. This enables us to offer a broader range of solutions for our customers as well as support the development of local decarbonization plans. We're focused on building resilient and flexible systems that can ultimately lower cost for consumers whilst creating new jobs across the communities that we operate within. And this whole system approach includes finding opportunities to optimize investment across U.K. transmission and distribution. We're already doing this from collaborating on major projects like the Hinkley Connection to works on individual projects. As an example, recently, a substation in Coventry, we were able to accelerate the work and deliver 30 months early and save GBP 2 million. We're also bringing together the best of electricity distributions local operational strengths with our track record of engineering excellence and complex project delivery. And we're more focused on customers than ever. applying learning from electricity distributions leading customer satisfaction performance to drive improvements across all other parts of the business. Through seizing these opportunities alongside our focus on efficiency, we expect to deliver GBP 100 million of synergies across the group over the next 3 years. Three quarters will come from the U.K., helping to underpin the outperformance that I talked about. And the remainder from the U.S. helping to support achieve returns. And finally, with our diversified portfolio, our investor proposition is clear. We have a balance of assets that provide both attractive yield and growth, a resilient mix of real and nominal regulation within stable jurisdictions. The addition of U.K. Electricity Distribution has pivoted our business so that 70% of the group's assets are focused on electricity. And we have an asset base that's balanced across the U.K. and the U.S. This ability to achieve the best of both yield and growth has been fundamental to the delivery of a progressive dividend over the past 20 years and a total shareholder return that has significantly outperformed the FTSE 100 over the last decade. And as I said previously, there's never been a more exciting time to be part of this industry. And with the strategic pivot now complete and electricity distribution now well established within the group, it's great to have a chance today to talk about this part of National Grid. The benefits that have been achieved so far and the significant growth opportunities that will be delivered in waves for many, many years to come. Today is all about U.K. Electricity Distribution. And so I'm going to leave you in the very capable hands of Cordi, and I look forward to having a drink with you at the end of the presentations. Thank you.

Thank you, John. Good afternoon, and a warm welcome, everyone. I really want you to leave here today with 3 key takeaways. First, this is a fantastic business outperforming all of its metrics. Second, we have confidence in our ability to outperform RIIO-ED2. And third, we are preparing for the network of tomorrow today, and that translates into long-term waves on the investment for decades to come. It is great to be with you today as the new President of National Grid Electricity Distribution, I call it NGED, alongside Darren Pettifer, our CFO, as we move the distribution business forward through ED2. Together, Darren and I have a collective experience of 26 years in National Grid and 42 years in the energy industry. But I can tell you, there's never been a more exciting time to be leading the U.K.'s largest electricity distribution business than right now. We've got a full agenda for today with some interactive breakouts after this plenary session. Darren and I will share an overview of the business, an explanation of the ED2 price control and how it differs from ED1 and our priorities and financial outlook. After coffee, you'll meet more of the team as we break into groups focused on 3 themes. The first, the future electricity system how we assess the demand growth on our network and through our distribution system operator, facilitate the speed of connections and identify the need for strategic reinforcement. Second, innovation for growth, how we're preparing for growth in the utilization of the network. And you'll hear about some of the exciting scalable projects that we're delivering to build capacity for high-growth areas such as EVs and heat pumps. And then the third session, transforming our region, how we're building and unlocking relationships in support of growth, ensuring we're best placed to align the multidirectional network of the future to local priorities. We'll have the opportunity for Q&A after this plenary and then formally in the breakouts. So as I've already said, this is a fantastic business. We've got a proven track record of delivering great performance across the 5 key metrics for any distribution network. Safety, customer, reliability, environment and financial performance. Across all 5 metrics, we've outperformed in ED1, and last year, we delivered top quartile performance in each area. In safety, industry-leading performance with a lost time injury frequency rate of 0.076 compared to a world-class level of 0.1. Customer satisfaction was 8.99 out of 10 last year, and that reflects the excellent service we provide across everything we do from dealing with planned and unplanned outages, to our responses via our agents or text message in the way that we issue quotations and how we respond to general inquiries. World-class network reliability of 99.995%. When we measure that through customer minutes lost and customer interruption metrics, we've made significant progress, improving almost 30% since 2015, meaning our customers now on average, experience an outage once every 2.5 years for just 28 minutes. In environment, we've reduced the business carbon footprint of our operations by over 40% since the start of ED1. And our financials are strong. We delivered excellent ROE outperformance throughout ED1. And it's with these great foundations that we move into the RIIO-ED2 period with confidence. Now let's take a moment to get a sense of the scale of the business. We're the largest electricity distribution business in the U.K. with a regulated asset value approaching GBP 11 billion as of March this year. Every day, we're responsible for powering the lives of 25 million customers by 8 million connections and meters. And we operate across 55,500 square kilometers in the Southwest, South Wales, East and West Midlands. In other words, more than 1/4 of the country. Our service area stretches from the Aisle of Sully of Conwell to the West Coast of Wales and all the way east to Lincolnshire. And we serve some of the largest urban areas outside London covering amongst others, Birmingham, Bristol and Cardiff. We have 6,700 employees, around 70% of whom are field-based. Our network of overhead lines, underground cables and substations transforms power from the 400,000 volts supplied by National Grid Electricity Transmission, right the way down to the 230 volts in our homes and businesses. We work with regional government and councils, the devolved wealth government and local communities to understand and deliver their energy priorities. Last month, I shared a platform with Andy Street, he is the mayor of the West Midlands, and he was talking about his net 0 ambitions and targets. How he's enabling Midlands-based companies like Jaguar and Land Rover to drive the electrification of the automotive sector, establishing Coventry as the first U.K's. all electric bus city by 2025 and establishing an entirely net 0 neighborhood in Dudley through a combination of retrofits and newbuilds. Both Andy and I are clear, these priorities can only be delivered in collaboration with National Grid as their distribution network and system operator. You'll hear more about how we're deepening our local stakeholder relationships to facilitate growth in our breakout later. Turning to the work we undertake for customers. It's fair to say that customer service really is in our DNA and we respond to their needs, and we prepare for the future. And that's because their needs are changing. The fact is greater for electrification of transport and heat will create even more demand for our network. Customers will depend on us more than ever to deliver a clean fare and affordable energy to their homes. This is going to require greater levels of investment in our network to connect more low carbon technologies further reinforce our network, maintain asset health and digitally enable the grid. And here are 4 facts that get me really excited about what we're already doing now and what we will be doing. In the last 2 years, we've energized more than double the amount of new electric vehicle connections than in all previous years combined, going from a cumulative 29,500 in the years to 2021 compared to 66,000 in '22 and '23. Going forward, customers will add more than a second homes worth of demand as we move from mainly lighting their homes to fueling their EVs and providing heat. And this will trigger network reinforcement to ensure sufficient capacity. Our work on asset health in ED2 will see us replace or refurbish over 3,000 kilometers of cable, both overhead lines and underground, further than it is from here to assemble. We continue to focus on making things easier for our customers. As an example, we've recently launched our online EV connections portal, enabling customers to get a connection offer in 2 seconds where it would have previously taken 2 days. Given all of this, we're already starting to see an increase in connection requests. Last year, we saw a 13% increase. So we're not standing still, and we are taking action to ensure we can continue to meet our customers' needs in the future. Connections reform is a critical area of focus as volumes grow and we're already enacting reforms in our region, aligned with the Energy Networks Association and the other DNOs. We're updating our contractual terms to create better milestone management, working with the electricity system operator and transmission owners to unblock capacity at the transmission and distribution boundary as well as looking at modeling and network monitoring to ease new battery connections. So turning to ED2. In March this year, we accepted the RIIO-ED2 framework for the period April 2023 to March 2028, which sets the stage for the first wave of growth for distribution networks with a more than 30% increase in totex funding compared to ED1 spend. Today, I'm announcing that we're targeting ROE outperformance of between 100 and 125 basis points across the price control from totex efficiency and incentives. This performance will be underpinned by synergy benefits, part of the GBP 100 million across the group. Focus in ED2 is on totex efficiency with a move away from the high-powered incentives we saw in ED1. This aligns with the regulators affordability agenda and in prospect of significant investment volume growth. Whilst financial incentives remain, they offer lower reward potential. And Darren will go through the detailed plans we've developed to deliver under ED2, but I want to make some key points here. The scale and scope of ED2 is markedly different to what NGED has seen before. With a focus much more on asset management and long-term value growth, which is a core national grid strength. The package caters for an increase in scale and scope of capital projects needed by our customers. Asset management and CapEx delivery from an efficient supply chain, contract management and comprehensive asset risk management techniques is needed. Combined this with our -- with ED's current strong track record on shorter-term incentives, and I'm confident that we will outperform this price control. In fact, the new incentives on the distribution system operator and customer vulnerability play to National Grid strength. In terms of the DSO incentive, we have a deep history in complex system operation. In my tenure of leading the ESO, running the real-time operation of the U.K. electricity networks, we integrated 14 gigawatts of new renewable generation whilst reforming flexibility markets. And I'm really excited to see how this plays out at the distribution level, where we'll be the leaders in the creation of smart multidirectional networks needed for the future. We're already underway developing the new distribution system operator and associated regional governance, connections reform and expanded local flexibility markets and you'll hear more about these in the breakout. For the new vulnerability incentive, ensuring a fair transition, which leaves no one behind, sits at the heart of National Grid's vision, and our commitment to vulnerable customers remains. Last year, we directed more than 24,000 customers to over GBP 15 million of direct bill savings. That's equivalent to an average in-pocket benefit of GBP 621 per customer. We will build on this commitment as we enact further plans for vulnerable customers, adding the development of smart energy action plans. Before I close, I want to return to investment and customers' changing demand for electricity, this time focusing on the longer-term strategy. As I look past time scales, the target to decarbonize the U.K. electric system by 2035 necessitates continuing the current investment fund trends. As John highlighted, most energy outlooks are forecasting almost a doubling of electricity demand to 2050. The investment required to meet this demand will be proportionately higher at the distribution level because of the growth in demand behind the meter of electric vehicles and heat pumps. And the following 3 factors will lead to increased flows on our network into the future. Firstly, the electrification of transport, including rising numbers of electric vehicles. Secondly, the growth in domestic housing stock; and third, the decarbonization of heat, either through electrification and heat pumps or hydrogen. We'll explore more of these in the breakouts. But in summary, in our region alone, those expected to be a 3.9 million increase in the number of EV charges, over 0.5 million new homes and 1.3 million increase in electricity heat pumps by 2035. With the capacity load on our transformers from these flows, and the reinforcement necessary to keep the reliability high, I can see sustained growth through the 2030s and beyond. So to summarize, this is a very exciting time for electricity distribution and as the largest business of its kind in the U.K., we're in a unique position to take advantage of the accelerating trends we are seeing in the future growth in electrification. We have a strong ED1 performance to build on with strength in customer delivery and short-term incentive performance. ED2 creates opportunity to outperform, both on new incentive delivery but most substantially on totex outperformance and long-term value growth, which is a key strength of National Grid. As a result, we're announcing today that we're targeting 100 to 125 basis points of ROE outperformance across ED2. And I'm hugely confident in our ability to deliver and see the opportunities in front of us with both hands. Darren will now take you through the financials in more detail. Thank you.

Good afternoon, everyone. It's great to be standing here as CFO is the largest electricity distribution business in the U.K. at such a pivotal time. And it is really exciting to tell you about all our plans for ED2. Today, I'm going to explain how the ED2 framework differs from the last price control. The drivers, which will grow our investment by more than 30% in ED2 and what we're going to do to deliver the 100 to 125 basis points of operational ROE outperformance. Turning first to ED2 framework. So there are 4 parts of the regulatory framework, which need to be optimized to deliver well within the price control; totex allowances, incentives, financial framework, and uncertainty mechanisms. And we're confident about the opportunity to have in each of these aspects to deliver great outcomes for our customers and our performance for our shareholders. Totex allowances are more than 30% higher than ED1 spend with the upfront baseline allowances of GBP 5.9 billion in 2021 prices, equivalent to GBP 8 billion in nominal prices. There's a new incentive package, which extends customer and reliability incentives from ED1 and includes new incentives around a distribution system operator and customer vulnerability, areas where we have great experience and a proven track record. The allowed equity return of circa 5.3% is indexed annually to risk-free rates, and those are rebased debt mechanism, which tracks the prevailing market interest rate. And finally, we have a broad package of uncertainty mechanisms, which reflects our revenue based on external factors or level of customer outputs delivered. ED2 is different to ED1, which is a fact reflected in our delivery plans for the period. It's worth me focusing on 3 of the changes between the price controls. Firstly, totex efficiency now has a bigger emphasis than incentives. The high-powered incentive package from ED1 has been reduced in size and rebased to recent performance levels. A sharper focus has been placed on efficient delivery of growth with the sharing factor to totex efficiency remaining high. We're leveraging the wider group's engineering asset management capabilities to respond to this change. Secondly, our real return is now linked to CPIH inflation rather than RPI, which increases cash return in the ED2 period. The equity return is now also indexed annually to changes in the risk-free rate with a 1% change in gilt rates, producing a 20 basis points change in return on equity. And thirdly, we've got greater protection to changes in our external environment, [indiscernible] mechanisms. Of the 38 mechanisms, more than half are automatic. So to give you an example, we now have revenue indexation for equipment, labor and contract prices when they move differently to CPIH inflation. The remainder of the uncertainty mechanisms are reopeners where we can trigger additional funding during the period, many of which just act as insurance policies against changes. But whilst there are changes in the framework, the fundamentals of delivering output efficiently for our customers remains the same. These fundamentals are what we respond to well at ED1 and we'll do exactly the same in ED2. So looking at our spend in a bit more detail. Our total expenditure is broadly split into 15% operating costs and 85% capital investment. Our operating costs include regular inspections and maintenance activities, responding defaults on the network and operational support costs such as work scheduling. While we'll minimize the unit cost of delivery in our plan, there is marginal cost growth as we deliver higher volume of work. We are forecasting capital investment in ED2 of GBP 7.5 billion which is 30% higher annual investment than we delivered in RIIO-ED1. 95% of this is funded by our baseline totex allowances and all of this is green CapEx aligned to the EU taxonomy. So looking at the investment under the 4 main drivers. We've got GBP 2.1 billion of connection work which represents sustained annual growth of 10% from FY '23 levels. So with the projected spend, 75% of this is expected to be demand connections, mainly related to electric vehicle charging domestic housing growth and heat pumps. And the remaining 25% is expected to be generation related with solar and battery storage driving the majority. GBP 1 billion of our investment plan is to reinforce the network to accommodate the growth in connections. Over the ED2 period, total electricity demand across our networks is projected to grow by at least 10% and we need to increase capacity on the networks to meet this increase and enable local connections. As a result, annual investment in reinforcement will more than double from ED1 levels. GBP 3.6 billion of our investment is to maintain asset health. So this is 50% of our investment across the period and a 15% step-up from ED1. This is going to be critical in helping us to maintain reliability over 99.99% and also includes climate change adaptation investment, including increased resilience to flooding. And the remaining GBP 0.8 billion of our plan is for IT, digital and cyber work, which is more than double ED1 levels as we look to digitize our operations and build resilience into our IT. This investment growth underpins the group's 8% to 10% nominal asset growth to FY '26 in the 5-year frame with our figures at the top end of this range reflecting strong progress since the acquisition. The investment growth keeps our networks reliable and resilient while also progressing the energy transition. But we've got to do this being mindful of the impact on affordability and our customers. Today, our charges are just GBP 100 of a typical annual household energy bill, and our plans keep this flat in real terms while still delivering an appropriate return for our shareholders. As investment grows, we want to beat [indiscernible] efficiency benchmarks and deliver more for our customers through incentives. Our strong track record of delivery throughout RIIO-ED1 and our new efficiency plans give me confidence we will do just that. Delivering for our customers while also delivering ROE outperformance of between 100 and 125 basis points of outperformance. This outperformance will be delivered through 3 main levers: totex efficiency, synergy benefits and incentives. Around 70% of our performance will be driven through totex efficiency. We've developed a targeted program of efficiency work, which is being rolled out and scaled up throughout the period. The common systems and operations structure across our regions offers us the ability to trial approaches in individual areas before rolling them out across the organization. Using a data-driven approach we have high visibility to unit costs by job type and under each team leader. Within a matter of seconds, we can drill down to compare to unit costs of pole replacement in the center of Birmingham to those in Bristol and those in Cardiff. This means we can be surgical in moving unnecessary spend on labor, materials and unwieldy end-to-end processes. A new drumbeat on performance excellence is being led by Graham Halladay, our Director of Field Operations, who's here today at the back of there. And we're also implementing changes to our third-party contracts model, how we triage organize and schedule work, how we structure our local teams and embedding new monitoring technology to give better visibility to asset health. I'm confident we'll see unit cost reductions over the period with more jobs per day, less overtime and reduced contracted labor spend. As an example of one of the small but powerful things we're doing, today, around 10% of line faults reported into our call centers don't relate to National Grid lines and instead supplier meter issues. Our contact center operatives triage out many of these but we still have 2,000 call outs per month where our engineers arrive at site to find there's nothing to do. We're implementing new technologies to this process including the ability to switch to video on mobile phones, so the customers can show the operatives what they're seeing and be led through basic tests. This is going to reduce the number of nonproductive call outs, we have to attend but also increase the information available when our engineers -- where -- when engineers do at site and work is required. The second category where our ROE performance will come from is synergy benefits. We are targeting GBP 100 million of benefits in the next 3 years across the group. 1/3 of this benefit is within electricity distribution which contributes to our CapEx plans. This will include some procurement savings from utilizing the broader scale and category management capability of National Grid. So for example, the latest tender for our high-voltage cables, we've reduced costs by over GBP 4 million per year. We're also going to be leveraging National Grid's asset management and maintenance best practice, including implementing more condition rather than time-based maintenance techniques to reduce OpEx, maintain reliability, and we'll be reviewing our property strategy to leverage shared sites and personnel where possible. So through our future of work program, we'll be assessing consolidation of offices and depots and investigating new operations and maintenance shared sites. With the totex efficiency underpinned by synergies expected to deliver 70% of the performance. The remainder is forecast to be delivered through incentives. We enter the ED2 period as the top-performing network group in terms of our reliability incentives, customer minutes lost and customer interruptions. We will build on this performance through investment in areas such as automated reclose equipment to restore power almost immediately after a trip and reduce minutes lost. From a customer satisfaction perspective, we're aiming to push our top quarter performance as far as we can to achieve at least 9.3 out of 10. This will be aided by some digital developments in our contact center to better inform customers of old information, reforming our connections approach to improve customers' experience and introducing a new customer excellence team who will lead improvements to our customer touch points. We're also early on in the trial of using generative AI in our contact center to handle calls and give customer updates. The incentives package is completed then by new incentives around the distribution system operator and customer vulnerability. Activities were already ahead of the curve and in areas of great strength for National Grid. In addition to the 100 to 125 basis points of operational outperformance, we see further outperformance opportunity on financing. The debt funding tracker gives us good cover for current and future interest rates. And with Natural Grid's broad debt market reach and track record of financial performance, we're confident we can deliver further upside beyond our operational outperformance target. So to summarize the next 5 years, the ED2 framework is different to ED1 1, but the fundamentals remain the same with our revenue better adjusting for external uncertainties. Our investment levels are forecast to grow by more than 30%, driven mainly by energy decarbonization. And we've developed plans to deliver 100 to 125 basis points of ROE outperformance across the period. When this operational outperformance is added to a base return of circa 5.3% and an assumed long-run CPIH of 2%. We're targeting an operational ROE of at least 8.3%. This demonstrates our attractive mix of yield and growth, and it's just one of the reasons why this is such a brilliant business. And the growth opportunities don't stop after 5 years, the continued and accelerated connections of distributed renewable generation, electric vehicles and heat pumps means that we've got a good line of sight to continue Wave's investment over the next decade and beyond. I'd now like to invite Cordi back on the stage, and we'll start the Q&A.

Thank you, Darren. Thanks all for listening. We're going to open up the floor for questions as we move -- and we got some moving mic here. James, do you want to?

Pavan here from JPMorgan. I have 3 questions, please. Firstly, Darren, on returns. You were talking about the mechanisms through which interest rates change your allowed returns? I mean, interest rates have hiked quite a lot over the past few months, especially. Are you still comfortable that you can create value for shareholders in the current environment that the adjustment mechanisms are enough in that regard? Second question on operational bottlenecks given the ambitions of your plan, where do you see risks? Is it supply chain, being able to hire labor and how are you going to mitigate those? And then my last question was the labor parties indicated an ambition to accelerate decarbonizing the power grid, bringing it to 2030 instead of 2035. Is this something you think you'd be able to deliver?

Do you want to start with the inflation? Or for the risks and the progress.

Yes. Makes sense. So in summary, yes, we think the framework deals are the interest rate movements. So probably step back, there's obviously 2 trackers, the risk-free rate around the cost of equity, which will move with the gilt rates as we go through the years. And then the debt mechanism, we've rebased -- has been rebased from ED1 to ED2, it's now in a 17-year tracker, and it reflects the sort of latest interest rates to go through. And there's also an uplift that option put in the final determinations of the 55 basis points. So yes, we're confident we can get some good performance out of that as we move forward.

Thank you, Darren. I mean in terms of the sort of macro risk that we'll be managing and dealing with as we go through the controls, obviously, Darren spoken to inflation and the protection in the frame. Supply chain, we're all talking about supply chain. The benefit of VD now being within National Grid Group, that means we get to access our global procurement function. We get to bring together our category management strategies we get to have a deeper, more meaningful strategic relationship with those parties because we've got a huge volume load when it's combined. And so actually, through visibility to the 5-year deal now, we can really activate some of those supply chain category strategies. I think, in fact, that 2 weeks ago, I was with BRUSH Group, where the majority buyer of the transformers and switch gear, and we're able to now because of the price control, start having those longer-term order slots and bookings. So it's something to stay on top of, but something I feel very confident that we can manage. And then I think everybody is talking about connections reform, whether that's at the transmission or the distribution level. We've been very proactive with both the Energy Networks Association and working with the other DNOs on agreeing the major steps in reform that are needed to deal with the volume approaching the network. And I'm really pleased to say we've already been reissuing contracts for milestone management. That's very important to mean that the right projects move up the queue. As Jonathan Braley would say there's only one to get out of the way. And the real ones move forward to get the connection dates that they need. We do work with Allison in the transmission business on the better management of information and electricity between the transmission distribution boundary. And I'm very hopeful to see capacity releases there whilst the reinforcement work is done in the background. And then not all technologies interact with the network in the same way. So the work we'll do on battery storage, which is about half of the pipeline wanting to connect to us means we should be able to bring those forward with the right modeling and monitoring techniques and also some of the more flexible contracts we can offer those providers. So again, lots to do, but certainly keeping on top of those issues.

It's Dominic Nash from Barclays. Can I just ask a couple of questions on CapEx numbers, please? I mean I think in your presentation, you say can be up to 30% in ED2 versus ED1, but then you kind of got the last risk in nominal terms. What is it actually up in real terms? And the second question I've got here is that when you sort of read the general sort of press about what's going on electric distribution, say, in London, where new housing estates are now basically being having been on hold because they haven't got the capacity to put them on. Is it something that is impacting your areas at all where these heat pumps can't physically go on, especially the air source ones, which can be -- which could be quite demanding on power, and/or the secondary impact, which you might have award at the moment, which is the industry itself starts to work out that you're not fit for purpose and you need to investment and you haven't been investing enough?

Do you want to talk about the [indiscernible]?

So if you normalize for inflation, so often tend to talk about 2021 prices, when you look ED1 to ED2, it's around about 20% step-up in investment. So that GBP 7.5 billion is 30% up in normal terms, but then when you take that back and normalize ED1, ED2 around about 20% or so. Just a bit more.

I'll start with the last question. I mean I'm not here to sort of comment on terms and the specific issues there. But I don't see any read across into electricity distribution networks. Actually, when you look at our operational performance, whether you measure that by our reliability metrics, our customer satisfaction, we are -- this is a high-performing business, well-managed set of assets. And now we've got ED2, which is a robust financial frame within which we can make our decisions. In terms of the sort of growth on the network, whether that's new housing estates, more heat pumps, then, of course, we need to have very robust understanding of the nature of that growth and the timing of it. And that's where really there's a big focus through the distribution system operator. So -- and you'll hear about a little bit about it later, but we're already working on very detailed forecasts for the growth that's coming, and it's really supplemented by working with a lot of local stakeholders, whether that's housing the newbuild sort of housing players. But certainly, the local authorities and councils because each of them has got road maps to -- with different sort of time scales for decarbonization. And what we found is actually through what we call local area energy plans, which we'll be doing extensively through ED2, we can get a very, very good understanding of the growth and the nature and type of the technology that's going to connect. And what you'll see in the innovation breakout is that those technologies have different characteristics on the network that we need to cater for and manage to. They're not -- we don't have a major heat pump technology deployment. At the moment, most consumers are -- we're seeing the real big pickup in the EVs and we were understanding the characteristics of their interaction with the network back in 2012, 2015. Now we're doing innovation work, and you'll hear about it our Equinox project, looking at the distinct technical characteristics of heat pumps how they'll interrupt the network and how we'll then manage the mass adoption and management of them. So I don't see the issue, but we do need the innovation as we onboard more volume, and the planning will help us manage the timing and phasing of it. You've got a cluster here.

I had 2 questions. Maybe the first one is more for the group level. So the synergies. So what is that GBP 100 million? And how come you're seeing synergies in the U.S.? Is it some common equipment or whatever? So what's that GBP 100 million? And is that accretive to the EPS? Or does it get eaten away by some regulator somewhere. So that's the first question. And second one, just on your last point on the CapEx forecast that you've given and you have all of this data. So is it almost automatic. So if you forecast that there's going to be x number of heat pumps or EVs, you can already start preemptively doing the work? Or do you actually need to wait for a specific customer request and how smooth is the process with Ofgem and how much anticipatory investments can you do given that, that might be the flex part?

Okay. I'll do U.S. anticipatory investment. And then do you want to cover just the synergy part?