SSE plc (SSE) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the SSE Half Year 2022 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to SSE's Chief Executive, Alistair Phillips-Davies. Please go ahead.

Good morning, everyone, and welcome to our interim results presentation. I'm joined today by our Finance Director, Gregor Alexander; and Chief Commercial Officer, Martin Pibworth. By the end of this presentation, 3 things will be clear: our strategy is more relevant than ever and is delivering results. Recent market conditions have validated our diversified business mix, enabling us to create value for shareholders and society. And we are delivering on our record CapEx program, investing more in large capital projects than we are making in profit. Global and domestic events in the past 12 months would have tested any company's strategy, but our NZAP, as we refer to it, and the strategy that underpins it have stood up extremely well. Our planned cement SSE standing as a clean energy champion, positioning us to invest around GBP 25 billion in critical infrastructure this decade while delivering sustainable long-term value. Our diverse and well-balanced business mix is helping us navigate turbulence with its natural hedges and synergies providing stability against a volatile backdrop, and we are making good progress in executing our investment program. This morning, you'll hear updates on flagship projects at Dogger Bank, Viking, Seagreen, Keadby 2 and our Shetland Link as well as progress on ED2. You will also hear how our acquisitions in Southern Europe, Japan and in the hydrogen space are creating further growth options, complementing our growing project pipeline in Transmission. We're accelerating into growth. And we'll cover how all this, combined with strong operational performance, has led to good financial performance, therefore benefiting shareholders as well as wider society. People are our most important asset, and our first priority is to ensure everyone gets home safe each working day. Our record investment program comes with increased construction activity, so we're pleased to have had 4 less injuries than the same period last year and a small decrease in our total recordable injury rate. But, of course, devastatingly in June, we saw the death of Bam Nuttall contractor in Liam Macdonald, and his loss remains very much front of mind. The future energy landscape has electricity at its core and brings decades of opportunities. Clearly, in the short term, this year's energy crisis has led to market and policy uncertainty, and we're hoping for clarity on some of the key issues in the Chancellor's statement tomorrow. However, for our part, we've proactively proposed interventions that help households while not damaging investor confidence or impacting energy security. Over the medium term, we see real opportunity for market reforms that will encourage investment and benefit consumers. We called for the base REMA process and have advocated for evolving successful existing mechanisms to accommodate more renewables whilst breaking the link between wholesale gas and electricity prices. And over the longer term, U.K. policy ambition remains high, which plays to SSE's strengths and Britain's comparative advantage, most obviously in offshore wind and CCS, where seabed and storage options are the envy of much of Europe. And in Europe, long-term policies strengthened, too. The Repower EU package has inspired upping of clean and renewable energy ambitions in Ireland, the Netherlands, Germany and other markets. While challenges clearly exist in the short term, our ends out looks even better than it did a year ago because it is geared firmly, at tackling the critical long-term issues of energy security and climate change. Our business mix enables our strategy. Following significant reshaping, we've created an ESG-aligned group comprising an attractive blend of regulated and market-based businesses, offering optionality across the electricity value chain. Our core businesses share common capabilities in financing, development, building and operation of highly technical electricity assets. Our assets enable electrification and decarbonization, containing huge flexibility critical to energy security. We are diversifying via technologies and markets while adapting to change. In the last 6 months, we strengthened this business mix via the acquisition of an onshore renewables pipeline in Southern Europe and the Triton Power portfolio. The political, economic and social context has led to a genuine cost of living crisis, underlying the criticality of energy to society. However, cheaper energy is on the way. Had the U.K.'s 2030 renewable targets been met in 2022, Britain would have saved approximately GBP 30 billion of spend on gas this year alone. Our primary role is investing in the infrastructure needed to prevent a repeat of the energy crisis. We're doing this as fast as we can, and we'll invest more if we can. We have taken immediate action to advocating for solutions to smooth energy costs and supporting electricity customers by freezing prices and helping the vulnerable. And we ensure our approach to sustainable development has a social impact, whether through paying fair value tax, investing into communities, increasing local content or creating 1,000 jobs a year. These are just some of the ways we create growth and value for both shareholders and society. I'll now hand over to Gregor to cover financial results.

Thanks, Alistair, and good morning, everyone. Unprecedented energy commodity price volatility, combined with inflationary pressures, interest rate increases and currency fluctuations have made this one of the most challenging operating environments I've seen as Finance Director. But we have performed well and delivered a solid set of results. Our balanced portfolio means our regulated networks businesses are insulated from energy price movements, whilst our thermal and renewables generation fleet and our gas storage and customers' businesses provide offsets that help manage volatility. Our strong balance sheet with high levels of available liquidity have enabled us to navigate fluctuating collateral positions without affecting our commercial strategy. Our business mix is also better placed than many to manage inflationary pressures. Networks RAV and revenues are index linked, and so too are our renewable CfDs and generation capacity payments. Our stable debt profile and ongoing careful financial management, supported by our disposals program, mean the group expects minimal refinancing or funding requirements until financial year '25. These factors, alongside our established approach to hedging and our risk management procedures have helped limit short-term volatility exposure whilst maintaining the strong balance sheet and liquidity required to execute on our NZAP. In terms of our results, around 50% of adjusted operating profit was driven from our regulated Networks businesses, with around 35% from energy generation and gas storage. Whilst Renewables profitability was hit by hedge buybacks in a higher price environment and lower volumes against plan, Thermal & Gas Storage have responded to system demand as well, providing their value after a period of limited returns. Our Networks businesses have also performed well as they built out and reinforced the networks for net zero. And whilst our Customer Solutions businesses have generated a profit, this is largely due to phasing, and we expect these businesses to be around breakeven for the full year. Overall, at the group level, adjusted operating profit increased by 90% to GBP 716 million. Adjusted profit before tax increased by 221% to GBP 559 million, and our adjusted EPS was GBP 0.418, in line with pre-close guidance. In these volatile times, it is no surprise that unrealized fair value remeasurements are driving the reported loss before tax at 30 September. And I will discuss these shortly. However, there were a number of other items reflected in that reported number. Sustained forward power prices have resulted in impairment reversals for gas storage and our Great Island CCGT, and higher power prices also meant a net gain was realized on the Triton acquisition. These gains, which do not impact cash, evidence the strategic value of flexible generation in times of volatility and the merits of investing in these assets during more difficult years to ensure they can respond when needed. Higher commodity prices have also resulted in a gain being recognized on the revaluation of a residual gas production decommissioning obligation. The majority of the movement in unrealized fair value remeasurements, however, relates to forward commodity contracts entered into under our established hedging approach. This approach secures value for the business by reducing exposure to short-term commodity price movements, which would drive variable operating and financial performance. And whilst the hedging in place removes that unpredictability from future profits, the accounting standards require us to include the mark-to-market of some contracts as an unrealized remeasurement at the end of each accounting period. This remeasurement is unrelated to underlying operating performance, and therefore, the group has consistently shown a change in the fair value of these contracts separately. The group has continued its approach to hedging in the year, and despite reduced market liquidity has been successful in securing stable long-term value backed by its operational assets. Counterparty credit risk and cash collateral requirements have always been a focus for the group when entering into hedges, and the recent volatility has only sharpened that focus. I will cover liquidity later. We have successfully managed collateral requirements to date at limited additional cost with liquidity headroom to allow for further volatility. Before moving on to the business segment results, I wanted to briefly update on the Networks minority interest disposals. As stated last November, the key to delivering our NZAP is ensuring investment is targeted to give the optimal mix of returns across a blend of assets. We will retain management control, and the minority stake disposals will enable the significant growth we see in Networks whilst maintaining an attractive balance of capital allocation and returns across the group. The Transmission transaction is progressing well, and we continue to target signing in the next few weeks with completion falling shortly thereafter. For Distribution, the business has been focused on securing the best ED2 outcome possible, and we therefore expect to commence this process at the start of 2023. In terms of SSEN Transmission performance. Adjusted operating profit increased by 15% to GBP 208 million, mainly driven by increase in allowed revenues under the T2 price control, partially offset by cost increases as the business positions itself for future growth. While investment levels remain high, CapEx has slightly reduced from the prior period to GBP 271 million as large capital projects have been rephased. SSEN Distribution has also continued to show growth with adjusted operating profit increasing by 14% to GBP 175 million. This reflects higher allowed revenues for the current regulatory year, including an additional GBP 40 million of allowances which were not recovered in the financial year '21 due to the impact of coronavirus. However, the half year operating results reflects under recovery on expected volumes. And investment has slightly increased in the prior period to GBP 176 million as the business entered the final year of ED1. In Renewables, adjusted operating profit decreased marginally to GBP 22.5 million. Having experienced exceptionally still and dry weather last summer, volumes increased by 0.8 terawatt hours or 28% in the current year but were still 0.5 terawatts hours or 13% behind planned levels. This was partly due to unfavorable wind conditions but also reflects delays in achieved first power at Seagreen, resulting from a crane failure on an installation vessel earlier in the year and subsequent poor weather. Undelivered volumes paired with extremely high market prices led to an increase in hedge buyback costs, of which GBP 57 million related to Seagreen. For SSE Thermal, adjusted operating profit for the full year increased to just over GBP 100 million, reflecting not only higher prices and increased output but also plant availability and flexibility in volatile markets. However, the business has had a number of unplanned outages, most notably for the Great Island CCGT, which did not generate for the majority of the period due to a cooling system fault and subsequent turbine overhaul. Recent volatility has resulted in higher achieved spark spreads, and we believe that these assets will continue to provide highly valued future flexibility. SSE's Gas Storage Business is operated to capture positive gas price spreads which typically occur between summer and winter prices. This year, the usual seasonal price spread was inverted, with summer gas prices higher than winter due to lower Russian supplies and focus across Europe on building up stores for the winter. By selling stored gas into that price environment, the business captured the higher summer prices whilst providing liquidity into the market to reduce the peak gas prices. Combined with normal trading activity, which has intensified in the recent market environment, the business has achieved an adjusted operating profit of GBP 148 million in the period. This follows many years of challenging financial performance. And with almost 150 million therms of gas stored at 30 September, over 80% of SSC's capacity, the assets are well placed to capture the winter spread whilst providing vital energy security in times of high gas demand. Business Energy recorded an adjusted operating profit of GBP 60 million in the period, which reflects the phasing of customer contract margins in the first 6 months of the year. In a higher price environment, the seasonality has been amplified, particularly for fixed-price contracts, and we therefore expect that the profits will reverse into around breakeven position for the full year. Electricity recorded a small profit in the period. But as Martin will cover later, we do not expect this business will recognize a profit this financial year. EPM has delivered an adjusted operating profit of GBP 30 million in the period, as it has worked hard to manage the group's commodity positions. And finally, losses from distributed energy and Neos continued in the period as they build out their asset base. However, corporate costs have reduced following a review of the corporate cost base. SSE's strong balance sheet continues to be underpinned by high-quality assets and following continued capital investment in long-term infrastructure. Adjusted net debt was just under GBP 10 billion at 30 September 2022, with 92% of debt held at fixed rates. Our S&P credit rating remains at BBB+ stable outlook, and our Moody's rating remains at Baa1 having been updated to stable outlook following the publication of our well-supported NZAP in November 2021. These compare favorably to peers and reflect the group's business mix, funding plans and future dividends. [ Post ] has been a turbulent time for pensions due to their exposure to the liability-driven investment portfolios, our schemes have relatively low levels of leverage on their LDIs and, as such, no additional liquidity has been required from SSE. Both defined benefit schemes remain in surplus with the combined surplus having increased in the period to GBP 649 million. We prudently utilize capital markets where we saw opportunities, issuing EUR 1 billion of hybrid capital at a coupon of 4% in April, a GBP 350 million 10- and 15-year dual tranche private placement in June at an average rate of 3.19% and a EUR 650 million 7-year green bond at a coupon of 2.875% in July, well below current market prices. And we have recently entered into GBP 1 billion of new revolving credit facilities for our Transmission and Distribution businesses to support their future growth plans. Our cash collateral requirements are comfortable within existing facilities. At 30 September, SSE had around GBP 2 billion of available liquidity. And whilst volatility in the market has continued and the group's cash collateral requirements have increased by around 70% to around GBP 1 billion at November '22, the majority of liquidity facilities still remain unutilized going into the winter. We remain on course to report full year CapEx in excess of GBP 2.5 billion, including acquisitions, and continue to expect leverage to be well below our target of 4.5x net debt-to-EBITDA ratio. It is a strong financial footing that enables the group to invest in its major projects, creating long-term value. SSE's balanced portfolio means that we are performing well in volatile market conditions. Whilst the higher price environment provides opportunities for value creation, it also increases risk when generation output is lower than expected. Most of SSE's profits around in the second half of its financial year. And in the context of the prevailing market conditions, SSE's guidance of adjusted EPS for financial year '23 of at least 120p remains unchanged. As well as outturn market conditions, SSE's results will be determined by potential policy interventions, plant availability and weather conditions. Correspondingly, SSE does not expect to provide further detail on profit expectations until later in the financial year. We remain fully committed to our dividend plans and continue to target increases in line with RPI for this year. As such, we are declaring an interim dividend of 29p. In line with the 2023 dividend plan, we will rebase our dividend to 60p in financial year '24 before targeting at least 5% dividend increases in financial year '25 and the financial year '26, taking into account earnings growth. This rebasing will enable growth across the group as we invest for the long term. So to conclude, in the face of market volatility, we have continued to perform well with solid earnings whilst delivering our ambitious investment plans. We're fully financed. The balance sheet is strong, and we continue to project adjusted EPS CAGR growth of 7% to 10% by March '26 from an 87.5p baseline. I'll now hand you over to Martin to cover developments in our market-based businesses.

Thank you, Gregor, and good morning, everyone. We are building more offshore winds than any company in the world right now. These mega projects always bring specific challenges, but we continue to make progress. Seagreen will be Scotland's largest Offshore Wind farm and the deepest fixed bottom projects in the world. We achieved first power in August with 65 turbines and 78 jackets installed. Full commercial operations are now expected in summer 2023. Delivering Seagreen through coronavirus and overcoming the issues already mentioned by Gregor underlines the huge capabilities of our Renewables team and partners. At Dogger Bank, the world's largest wind farm, offshore work is progressing with a successful installation of the first monopiles and transition pieces and the 175-kilometer export cable, putting us on track for first power next year. All phases are expected to be operational in 2026. In Shetland, on the Viking project, we are completing one of the most productive onshore wind projects in Europe. We have now poured all of the 103 concrete basis ahead of schedule with turbine installation expected to commence in early 2023. COD is then expected in the second half of 2024. The project was awarded a 15-year CfD, covering 50% of its output at around GBP 60 a megawatt hour in today's prices. We have prudently derisked these projects by locking in the prices of major contracts, hedging 100% of direct exchange rate risk and fixing 100% of interest rate exposure on project finance developments. In addition to these flagship projects, construction continues in Ireland at Lenalea and 104-megawatt Yellow River projects, where ground was broken earlier this year. We have a very strong pipeline in our core domestic markets, helping meet the huge policy ambition there. Berwick Bank alone would account for over 1/3 of Scotland's 2030 targets. We are working towards submitting a consent application by the end of 2022 for the up to 4.1 gigawatt projects and aiming to be operational around the end of the decade. As well as Berwick Bank, Seagreen 1A and North Falls, our GB offshore pipeline has also been complemented by our ScotWind win, Ossian, where we plan to deploy floating technology. We see it as one of the premium ScotWind sites, and following additional seabed surveys and revised grid connection offer, we have increased the potential capacity from 2.6 to up to 3.6 gigawatts. Onshore, we've made excellent progress in Scotland with the actual 100-megawatt Bhlaraidh extension receiving consent in August and the acquisition of the 50-megawatt Aberarder project last month. We have a rich heritage in hydro and continue to invest in the portfolio recently through the ongoing repowering works at Tummel Bridge and Coire Glas developments. At 1.5 gigawatts, Coire Glas would be the first large-scale pump storage scheme to be developed in the U.K. for more than 30 years and would bring a sway of system benefits. With Coire Glas, the industrial logic is overwhelming, and we are targeting financial close in 2024, subject to clarity on government policy. Meanwhile, in Ireland, Arklow has received a marine area consent under their new leasing process and is well placed for the inaugural Irish offshore auction with our Blue Sea projects, Braymore and Celtic Sea Array following later in a decade. Whilst GB and Ireland remain our core markets, our recently completed Southern Europe acquisition from SGRE provides valuable geographical diversity as Europe accelerates into renewable generation. Southern Europe provides many fast-growing adjacent markets where our capabilities are readily transferable and where wind and solar are set to provide the vast majority of bulk energy. The acquisition has helped grow our secured pipeline from 11 gigawatts to around 14 gigawatts in the last 6 months, plus over 10 gigawatts of future prospects that we are actively pursuing. The platform has a strong footprint across Spain, France, Italy and Greece, with 3.8 gigawatts of onshore wind pipeline and prospects and a further 1.4 gigawatts of hybridization potential in co-located solar. 2.2 gigawatts of this, we consider secured pipeline with material land or permitting rights. But the platform is more than gigawatts. It's a highly experienced team and a beachhead from which to explore other opportunities in Southern Europe. In Japan, our SSE Pacifico platform is readying projects for upcoming offshore auctions in a market with huge potential; whilst in Northern Europe and the U.S., we're working with local partners to gear up for future auctions. We remain laser-focused on our domestic markets in the U.K. and Ireland, but these achievements internationally mark a measured approach to exporting our capabilities in order to create opportunity, optionality and diversity. A year on from launching our NZAP, the pipeline has seen significant expansion through organic growth and acquisitions. We are delivering on our goals to 2026 whilst growing our pipeline at the necessary speed for our subsequent 13-gigawatt target by 2031. We're simultaneously building the capabilities needed to increase outlets for renewable power. This includes launching projects to progress hydrogen as a route to market whilst expanding our corporate PPA capabilities to enable sustained international success. In competitive markets, optionality is king, and our approach means we can pick and choose where best to deploy capital to achieve our targets and robust return aspirations. SSE Thermal is playing a critical role supporting the government, the regulator and the ESO in their obligations to ensure security supply. And our investments in recent years have created the U.K.'s leading fleets of high-performing flexible generation plants. In tight and volatile market conditions, our plant is responsive, agile and hugely complementary to the rest of the portfolio. Keadby 2 is one of the most efficient CCGTs in the world and will displace older, less efficient plants. Commissioning started in October 2021 but has been delayed slightly. Siemens is making final adjustments to the generator before expected handover to SSE Thermal in January. By then, Keadby 2 will already have been supporting energy security this winter with final commissioning expected from mid-December onwards. The portfolio of assets purchased through the Triton acquisition with Equinor will also have an important role this winter, but their decarbonization potential is the real price, particularly at Saltend, where plans are progressing to blend up to 30% hydrogen. And in Ireland, at the request of the Irish government, we are engaged in discussions on temporary emergency generation and exploring other options to help the government deliver security and supply sustainably. While other operators have exited the thermal generation sector, SSE is taking responsibility for the decarbonization of its plants to enable an orderly and just transition to net zero. Our Keadby 3 CCS plant is at the due diligence stage of the U.K. government's cluster sequencing process, whilst our Peterhead project is progressing as part of the Scottish cluster held in reserve by government. We have also been rapidly advancing our hydrogen ambitions within Thermal and have provided more detail of this in today's results statements. Our NZAP aims for 3 gigawatts of low-carbon flexibility for financial year '31, and whilst we are reliant on government to achieve this, our targets remain highly credible with multiple options available. Gas Storage has not historically been a particularly profitable business for us. Indeed, over the last 10 years, we have taken impairments of around GBP 350 million against these assets. Successive governments have provided limited support, but we recognized both its system-wide importance and its potential to SSE as a long-term risk management tool. We hold around 40% of the U.K.'s onshore underground gas storage capacity at our 2 sites in East Yorkshire, and we have invested significantly to keep our salt cabins available. This year, the country has needed storage more than ever. And after years of being undervalued, these assets are now importantly making a financial return. This shows the need to consider the investments and remuneration of such assets over the longer term. Our Attic facility has 9 cabins and can store around 100 million therms of gas. Whilst Aldbrough, a joint venture between SSE Thermal and Equinor, also has 9 cabins with the capacity to store around 118 million therms. Through timely investment and optimization, we have increased storage capacity for this winter. We also have consent to increase capacity further to support advanced plans for hydrogen storage in Aldbrough, well located for the Humber Cluster. This year, these assets have delivered when society needed them, protecting consumers from price peaks then building stores to provide vital security over the winter. SSE's customer businesses are an important shop front for our green power and low-carbon solutions, offering a route to market and valuable diversity for the group. As a responsible company, we recognize the cost of living pressures being felt by consumers. We froze SSE electricity prices for financially vulnerable customers from June 2022 until the end of March 2023 and launched a EUR 25 million customer support fund. Correspondingly, we do not expect to record a profit within our Airtricity business this financial year. even accounting for any additional returns from Airtricity renewable contracts resulting from REFIT 1. In GB, we have been helping our business customers too and have worked closely with BEIS to support the new energy price guarantee scheme. Whilst this carries implementation challenges given the urgent time scales involved, it will make a significant difference for all our business customers this winter. Ultimately, we expect that the profits recognized by Business Energy in the first half of the year will be reversed in the second half, driven by the higher price environment. We have repositioned our enterprise business over the past few years to focus on distributed energy, solar and batteries. The solar and battery teams have been busy growing their capability and pipeline this year, adding further diversity to our future portfolio. We are building our first 50-megawatt battery in Salisbury, our former coal-fired sites at Ferrybridge and Fiddler's Ferry are both home to battery developments, and we have added a number of other early-stage solar and battery storage projects. In all, we have doubled the secured pipeline to 700 megawatts with more than 1 gigawatts of additional prospects in development. Elsewhere in distributed energy, our EV fleet site portfolio has increased -- significantly increased through our new partnership with the pan-European asset manager, M7. To conclude my section, our unique portfolio of market-facing businesses provides an unrivaled combination of supply, demand and flexibility. In uncertain markets, this provides protection from liquidity risk and offers valuable risk management qualities, whilst SSE's strategic alignment with policy direction ensures its long-term future is bright. I'll now hand back to Alistair to cover Networks.

Thank you, Martin. SSEN Transmission has a central role in net zero. We have one of the fastest-growing regulatory networks in Europe underpinned by one of the most well-respected regulatory frameworks. Operationally, the business is now into the second year of RIIO-T2 with our capital investment program on track, and construction of the Shetland HVDC link is well underway with 100 kilometers of the 260 kilometers of subsea cable already installed. Work at Kintore substation has entered the second phase, including the world's first SF6-free 400 kV gas-insulated switchgear. We're also progressing additional investments through Ofgem's uncertainty mechanisms. In July, we received Final Needs Case approval for the Eastern Greenlink II, a joint venture between ourselves and National Grid, which will see a 2-gigawatt HVDC subsea link from Peterhead to Drax. In addition, we submitted a Final Needs Case for the upgrade of the Fort Augustus to Sky transmission line, which will support security of supply and connect renewable generation. Ofgem has also recognized a clear need for reinforcement in our [indiscernible] to support the region's forecast growth in renewables. With our program of investment and the continued momentum of our customers' needs. We are on our NZAP pathway. Today, our network has around 9 gigawatts of connected generation. But for achieving net zero, all credible scenarios point to a 14 to 15 gigawatt system by mid-decade. We continue to expect to deliver RAV of GBP 6.5 billion to GBP 7 billion by financial year '26 and are now more likely to be near the top of that range given current levels of inflation. Looking further out, there is a lot of work to be done in terms of generated commitment, planning and Ofgem approval. But we continue to forecast a double-digit RAV CAGR and expect gross RAV to exceed GBP 12 billion by financial year '31. Moreover, the upcoming publication of Ofgem's accelerated strategic transmission investment framework should provide greater confidence in achieving this level of growth. plus the system operator's second iteration of the holistic network design early next year, this should highlight further growth potential. Alongside this primary function of delivering a safe, reliable and resilient network to 3.8 million homes and businesses. Our Distribution business has a crucial role in helping consumers to achieve net zero and enabling low carbon investment locally. Despite real economic pressures, local decarbonization is accelerating at pace with connection of core low-carbon technologies now tracking on or above the most ambitious forecast in our distribution future energy scenarios publication from 2019. We're seeing a greater than anticipated rush for electric vehicles with connections of domestic charge points and EV hubs up 75% year-on-year. And our teams have connected around 500 megawatts of local renewables in the past 12 months alone, equivalent to a large offshore wind farm and have twice the volume of the previous year. This accelerated trajectory looks set to continue with our recently published early insights scenarios, highlighting that despite economic headwinds, the consumer proposition for low-carbon technologies is strengthening during the energy crisis. Fundamentally, this growth underlies the need for a supportive regulatory environment so that local distribution networks can be an enabler rather than a blocker in the delivery of net zero for communities. We need to move from a reactive regime to one that ensures that within reason, sufficient network capacity will be available there for customers at the time they wish to connect. A strategic investment approach must be firmly embedded, and we hope Ofgem responds to the clear signal set by government policy in distribution as indeed they have in transmission. In July, Distribution received Ofgem's draft determination and since then has been constructively engaging with the regulator to ensure the final settlement delivers for all stakeholders. Our draft plans sought to keep pace with stakeholder demands, proposing around GBP 4 billion in gross baseline total expenditure, an increase of around 1/3 on an equivalent ED1 period, a planned balanced investment in the smart flexible networks that will facilitate net zero with the need to keep costs down. Ofgem's initial determination was disappointing. And while it represented an increase of 18% on equivalent allowances in ED1 and recognized the innovation proposed to additional customer value propositions, we were clear that work was required to ensure the final settlement fully reflected customer and stakeholder needs. In August, we submitted a comprehensive response with additional stakeholder-supported evidence, and we also sought to address some of Ofgem's material areas. The key focus is striking the right balance between reactive uncertainty mechanisms and baseline allowances that allow us to plan and mobilize to meet local net zero acceleration and resilient needs. We think that's an area to fix, but acknowledge that ED2 will, by necessity, be a more flexible price control than we've seen before with significant opportunity for in-period investment and RAV growth. We await Ofgem's publication at the end of this month. In the recent gas distribution and transmission rounds, we saw a closing of the gap between draft and final determinations. I believe our strong case to the regulator will help deliver positive change as demanded by our stakeholders. A lot has happened in the world since we announced our NZAP, but it remains the optimal pathway to consolidate SSE's position as a clean energy champion, positioning us to deliver around GBP 25 billion of investment by the end of the decade. In a year of progress, we upgraded several of these targets in May to reflect our increased confidence in delivery. Each of our targets is a step closer than a year ago, and the acceleration of our investment program is in line with societal needs domestically and internationally. There are short-term challenges, but we are positive about the medium-term outlook and beyond, where policy ambition has never been higher. This means the NZAP remains a floor rather than a ceiling to our ambition, and we stand ready to continue delivering record investment. By investing more than we're making in profit in the solutions that society needs, we're building a more sustainable, secure and affordable energy system when people need it most. Our NZAP could see the delivery of 20% of both the electricity networks and offshore wind needed in GB for 2030. It would provide much needed flexibility to the energy system, helping the U.K. become energy-independent. But while SSE's focus aligns with the U.K.'s comparative advantage as a European energy center, SSE's horizons stretch beyond the U.K. and Ireland. We continue to diversify and export our capabilities in targeted markets overseas. Every step of the way, we're leading on the energy transition and the just transition. Put simply, we have the right strategy at the right time is creating value for shareholders and society now and driving attractive fully funded earnings growth over the longer term. Despite the market turbulence, we've delivered half year results in line with guidance and our financial position provides headroom to continue investing in excess of profits. In volatile times, our integrated business has a fantastic business mix, balance sheet strength, natural hedges and an abundance of options for long-term growth. At SSE, we're powering change. Thank you. We'll now take questions. But before I hand over to the operator, I wanted to briefly cover recent media speculation around tomorrow's U.K. autumn statement and a potential additional tax on electricity generators. Many views have been put forward on what government might or might not do with a wide range of possible outcomes and implications. However, right now, we do not have clarity. We will need to see the details of any policies announced tomorrow before we can start to form a view on the potential impact on SSE. To be clear, we have no intention of speculating any further on what might be announced. We believe in paying our fair share of tax. However, in the event that additional tax and electricity generators is announced tomorrow, it is essential that it is sensibly designed so as not to undermine investor confidence, jeopardize security supply or damage the U.K.'s ability to meet its net zero targets. It is absolutely paramount that we do not throw away the progress that has been made in the last decade in making the U.K. a world-leading market for clean energy investment. Put simply, SSE is part of the solution here, and while we are happy to pay our fair share of tax, our primary focus is on delivering the investment the country needs to reduce our reliance on imported fossil fuels and tackle the climate emergency. Hopefully, that addresses the issue. So I'll now hand over to the operator for questions.

[Operator Instructions] The first question from Robert Pulleyn from Morgan Stanley.

Two questions, if I may. So firstly, if we could talk about capital allocation and whether the changing environment since the strategic update last year where you indicated the CapEx of 40-40-20, whether this changing environment would alter that capital allocation between Renewables and Networks, obviously, against the backdrop of your announced or reiterated minority sales in Networks and, of course, what we're seeing across the rest of the sector. And the second one is related to that, and following up on your point around transmission RAV for 2031 exceeding EUR 12 billion. Given the investment options, government targets and inflation tailwind, could you try and put a little bit of color as to how we should think about the upside optionality to that longer-term time frame, which is a key part of the growth story?

Okay. Thank you for both those, Robert. So I would say on the capital allocation, we're still very focused on the balance that we had. So the 40-40-20 that we set out then is still very much what we're targeting. We've seen significant progress in some of Martin's businesses, particularly around renewables and the expansion into Southern Europe and also the opportunities in CCS and hydrogen, where we've been selected as a key part of the Humber Cluster. But also, we've seen significant progress in Robert McDonald's businesses over in Transmission where the HND has come through. We're also seeing HND 2.0, which we're expecting early next year, and we're now also seeing possibilities for growth where the regulator is looking for us to start the build-out of the offshore transmission grid networks in conjunction with other transmission operators. So personally, I think that allocation will remain roughly similar. We're certainly aiming for a reasonable balance going forward. But at the moment, there's no particular upgrade or additional guidance on that. But during the course of the winter and certainly as this regime settles down and we see more work coming in from the regulator on what's happening in transmission, there will no doubt be opportunities for further information in pre-close statements and when we come back in May next year. I think if I move to Transmission, RAV for 2031, you're right that we've certainly seen a lot of positive news on the transmission front. You ally that to some inflation and new projects coming, which we expect to come early in the new year on the back of additional transmission that will be required for ScotWind and in order to start the critical build-out of the offshore transmission networks, I think that's definitely an area -- or 3 areas where we could see potential upside over the coming months to the -- in excess of GBP 12 billion number that we've already put out there. I don't know whether, Martin or Gregor, you've got anything to add.

Just on Transmission, I think the big kind of thing to consider will be how quickly we can get planning and the supply chain moving. If we can get that moving, then I think you'll see certainly some upside in that number of GBP 12 billion.

We are taking the next question from Mark Freshney for Credit Suisse.

I have 2. Firstly, on inflation, CapEx inflation, I think you alluded to the 2026 RAV being more like GBP 7 billion than GBP 6.5 million to GBP 7 million, partly on higher inflation. If we look across the cost base, I mean, National Grid, your competitor, upgraded their plans partly on inflation. Can you talk about what that does to the GBP 12.5 billion and whether you're seeing inflation certainly in some areas like batteries and wind equipment running ahead of where you expected it to be? And just secondly, on your overall GBP 12.5 billion plan, I mean, we're only 1 year into a 4-year plan, but it's something that generally constantly gets revisited. So can we expect another 5-year plan roll forward in a year? And going into that, what are the kind of things that you're expecting to see in potential upsides?

Do you want to do inflation, Gregor?

Yes. I mean, basically, yes, that's why we've pushed that number up. We've got some inflationary pressures coming through, but that's coming through on the growth in the RAV. A number of our projects, as you're aware, are already going through construction so we're relatively protected. We may see a bit of inflation pressure coming through, but we're relatively protected there. Round about 25% of our CapEx plan out to '26 is still uncommitted so we have flexibility there. And part of the potential increase will depend on where we see some of those pressures coming through and returns. And I would expect us to be in a better position in May to update you on that.

Okay. Great. Look, I think you're right, Mark, that we've obviously got a huge number of opportunities across the business. Gregor and I both referred to Transmission. I think we'll leave Distribution at the moment because we're going to get the price control at the end of the month, but I think Distribution has got a huge role to play in terms of getting consumers connected up so that we can get out of the energy crisis and get on with net zero. But I'll perhaps let Martin comment on some of the opportunities that he sees out there in his businesses now, whether that will lead to a full new 5-year plan. I think we'll just provide more clarity on that GBP 25 billion and the 10-year plan that we had previously with Martin.

Yes, Mark. I mean, I guess, we had a number of opportunities clearly 6 months a year ago. including batteries, we're thinking about hydrogen and obviously very keen on carbon capture and have been for a while and, of course, as the extension of our kind of onshore and offshore renewable options that we've been looking at. The world has obviously substantially changed over the last 6 to 12 months, and that has led to a bunch of policy acceleration, shall we say, or policy ambitions coming through. I mean, you'll be very aware of Repower EU and some of the implications of that for onshore wind, et cetera. And obviously, the timing of our acquisition of the Siemens Gamesa renewables portfolio in Southern Europe is very complementary to that. But we'll see. I guess we're hopeful that the best strategy will be followed through against this backdrop, and that will lead also to opportunities opening up for us. And I guess the last thing I'd say is in kind of 6 months on from when we last spoke about this, it feels to carbon capture and hydrogen ambitions remain as strong in the U.K. as they were 6 months ago, if not slightly stronger.

Okay. So just a follow-up. I guess we can assume that there may be an upgrade to -- or a roll forward of this plan, perhaps next May?

Well, we'd like to think so. We stand ready. I think we've got the right businesses, the right people at just the right time for the U.K. If we're going to get out of this energy crisis, we need to build, build, build. And we've got exactly the kind of assets and projects that are there. Gregor rightly highlighted consenting and supply chain. We're working hard on both of those areas. And we'd obviously love to come back here at the end of the year and prove that the GBP 12.5 billion, the GBP 25 billion were minimums. They were where we were starting from, not where we're finishing.

Next question is from Deepa Venkateswaran for Bernstein.

This is Deepa Venkateswaran from Bernstein. My 2 questions are as follows. Firstly, just on refinancing and divestment, you've highlighted that you don't see the need for additional refinancing until '25. I just wanted to recap if the amount of divestments you are expecting over the plan period has changed. So last year, you said GBP 4.5 billion, of which LGN was GBP 1.2 billion, so that leaves GBP 3.3 million from Transmission, Distribution and then I think telecoms and something else. So can you confirm whether you're still expecting that same sort of number over the planned period? And second question. I know, Alistair, you said you don't want to comment on speculation, but this is more about principal. Would you rather prefer a European-style energy price cap or an oil and gas style windfall tax with ring-fencing for investment? Do you have a preference one way or the other, assuming both took hedging and all the other things into account?

Yes. On the first point, Deepa, yes, absolutely. Our plan that we put out a year ago, which was 65% funded from free cash flow, 25% from disposals and 10% from debt. The 25% is still -- that GBP 4.5 billion, we still expect to get a free forward. We may get a bit more in free cash flow, just be where power prices are and a bit less in debt. So, yes, that's all part of the package.

On caps and windfall tax, I think the European price cap was reasonably well thought out as long as you assume that the EUR 180 was essentially a infra-marginal rent rather than an absolute cap on prices because it would have taken all the oil plant off across most of Europe, which wouldn't have been good for sort of peak demand times for generation. So I think there are issues with caps. Indeed, there can be issues with taxes as well. But a well-thought out tax and particularly one that rather like the oil and gas tax takes significant allowance of investments that are being made, I think could indeed even be beneficial for SSE. And I think we've seen one of the oil majors in this country is certainly paying more tax as a result of the windfall tax imposed on the oil and gas companies, but another one is paying no taxes because the investments they're making. And for us, obviously, it's a very high investment company. We'd rather see full recognition of the huge investments that we're making to bring the U.K. out of the current energy crisis.

We are now taking the next question is from the line of Martin Young from Investec.

A couple of questions from me, please. And clearly, a very clear message on your keenness to crack on with the much needed investment that this country needs. And not wishing to speculate on tomorrow's events, but could you shed any light on any discussions that you might have had with government over the issue, and in particular, where we stand with the possibility of voluntary CfDs because there's some suggestion that they may have slipped off the agenda. And then the second question, given everything that's going on at the moment, we have the Energy Prices Act, we have RIMA, we have a delayed Energy Bill. If I look at who might be driving the bus, BEIS or Treasury, who do you think is driving the bus at the moment?

Okay. So in terms of discussions with government, I think we've had extensive discussions during this year, as we always do with government, on a whole variety of issues. Some of those would have been helping them understand and think about the European price cap and also how they might deal with windfall taxes that I think we first talked about earlier in the year. In terms of what's happening tomorrow, I can only reiterate what we said at the end of the presentation, which is we really don't know. So I have no idea on voluntary CfDs or indeed any other matter. Hopefully, within 24, 48 hours, we'll have a much clearer picture, and we'll obviously try and update you and the market as soon as we can on that. In terms of who's driving the bus, I think on energy policy and where things are going overall, like RIMA, that's definitely within the remit of BEIS in terms of trying to deal with energy security and making sure that this country addresses the big issues of the energy crisis by investing or how those investments happen, what market designs are there, again, that's BEIS as ever. And all these things need to be costed out. Treasury needs to look after all the consumers in this country and needs to make sure that there's a fair and equitable allocation of costs. So I think at the moment, and particularly given the slightly fever nature of financial markets a few weeks ago, treasury will very much want to be ensuring that whatever policies are put forward by any department, BEIS or otherwise, are in the best interest of consumers in the short, medium and long term. So I would have thought treasury who have been making announcements tomorrow will have the biggest say on what's going on. But I'll clearly be wanting to listen to BEIS to make sure that we continue to develop successful markets like offshore wind and push forward with CCS hydrogen and other matters, which are critical to hard journey in getting a more resilient and secure energy system in this country.

We are now taking the next question from John Musk from RCM.

Two questions on the Renewables business from me. Firstly, you recently lost out in Holland on the offshore wind auction to RWE, who seem to put in a relatively innovative bid. Can you just outline how you may have differed from them and if there are any learnings you've taken from that process? And then secondly, more on numbers in the short term in the Renewables business in H1. You've outlined the buybacks for Seagreen at GBP 57 million. But what other buybacks -- or what was the quantum of other buybacks in that business? And also, can you put a number on the weather impact in H1 as well?

Yes, sure. Martin, please.

John. So I'll take the question on Dutch offshore, if I may. Yes, I mean, we saw what RWE had won with, and I agree, it's a fairly innovative bid. We obviously still are hoping that we will be competitive in -- as that process continues, and we expect seeing further results by the end of the year. We don't necessarily want to disclose necessarily what's in there. But that whole process is obviously designed to attract innovative forward-thinking progressive solutions and think about how you can deploy new technologies and perhaps new partners as well. And obviously, we've been considering that for some time as we put forward our proposal.

Well, I was less closer than Martin, but I certainly thought for the parts of the still outstanding, we had a pretty good innovative bid. So hopefully, we'll be looked upon favorably. And we see it as a good learning process, that's the first one. But I think the second one, the team always felt like they had a better chance there. Gregor?

Yes. Yes. Look, on the Renewables business, there would be more buybacks clearly for the other parts of the business in terms of hydro and offshore. If you -- but then we would have achieved higher prices when we've been available. So I think if I took Seagreen and the other buybacks, we're probably just into 3 figures millions for the Renewables business, something like that. It's not an exact science, but that will be the number. And then if I look at the impact from the lower output, clearly half of that lower output against plan was Seagreen. So we've covered that with the buybacks. I would say, for the balance -- because of mix of hydro, which is quite a high value, and then offshore wind, which is sort of safety able, you're probably talking about low to mid tens of millions in terms of impact.

We are now taking the next question is from James Brand from Deutsche Bank. .

I have 3 in slightly different areas. So firstly, on Ireland, you mentioned you were in discussions with the government around kind of emergency measures there. And there's been press reports about power system there being very, very tight. I was wondering whether you could just elaborate a bit more on what's going on in Ireland and what your role could be in helping solve the challenges that they are there. Second question is on hedging. In the statement, you had language that said you'd updated the hedge prices in the second half following the conversion of gas and carbon trades into electricity. I wasn't quite sure how to read that. Should we read that as you've converted all those trades, now you've kind of -- you've switched your hedging into vanilla power hedging or that you've just updated them? So are you hedged still against leaving the sparks open? Or is that locked in now? And then thirdly, on the Transmission sale process. You said the process has been in line with expectations, and you're obviously very advanced now. There's been a few concerns in the market, the fact that bond yield has risen so much might be a negative and might have affected interest. But on the other hand, you've obviously got huge investment now that's going very positively. So I'm not sure I'll get an answer to this question, but are you still seeing very high interest in that sale process?

It's a fantastic asset, but I'll let Gregor comment. Martin, do you want to do the first 2?

Yes. So let's do with Ireland first. So you're right, James. I mean, clearly, Ireland has had various market issues. It's been running pretty tight for some time now, and the government and EirGrid have looked to try and intervene to ease some of those market pressures. As part of that, they've got an emergency generation process going on, where effectively they've asked us to deploy effectively capacity at target on a temporary basis to enable for the next few years, a little bit of extra cover. So we're working well on that. There are longer-term solutions going on in Ireland as well. Clearly, Irish policy has been updated. So there's a big targeting of additional offshore. They're now talking about 7 gigawatts by the end of the decade, they're talking about increasing over there their solar ambition and also the potential looking at greener gas for some of their plants as well. So there is a kind of relatively progressive policy backdrop in Ireland, which will perhaps go to resolving things in the medium term. But in the short term, they are looking for people like us to provide additional generation to just cover the markets. In terms of the hedging question, you're actually right. We say in our hedging statements that just because of relative market liquidities, gas and carbon markets are clearly more liquid going forward than power markets. So therefore, we hedge our renewables on the basis of some gas and carbon and sometimes as direct power and sometimes through kind of own use. And obviously, that leaves a spark spread open, and that spark spread has largely been closed for this winter, subject to kind of normal caveats about normal renewable delivery, et cetera.

And generally, spark spreads have probably been strengthened during the course of the year as well. I think that would be the one other comment I would make. So, Gregor?

Yes. Look, I'm not going to comment specifically on a process that we're running at the moment. What I will say is that, yes, it's a fantastic business. I've always said the growth in this business is going to go through into the next 2 decades. Connecting green energy to the North of Scotland and delivering that energy to customers in England, Wales, that's really attractive for a number of investors. And I'm very confident that we will get a transaction through over the coming weeks.

[Operator Instructions] We're now taking the next question coming from Dominic Nash from Barclays.

I've got again another 2 questions for you, please. The first one is on the final determination on Electricity Distribution due 30th of November. Obviously, the draft was 4.75% real return on equity. What do you think in light of what's happened since then should be the return on equity there? And if the regulatory contract doesn't meet your expectations, would the CMA referral delay the sale of the stake in Electricity Distribution? And the second question is on inflation. Obviously, we're running probably 10% ahead of the sort of regulatory expectations on inflation. And on my numbers, that's basically a GBP 1 billion extra RAV or getting close to GBP 1 billion extra RAV coming on your RAV base, which is a GBP 1 billion extra cost for consumers that was beyond expectations. Is this a windfall? And do you think that after the government is sort of focused on retail than generation, that it might start focusing on the network windfall sort of potentially coming your way with the high inflation?

Dominic, I'm sure Greg will answer these. But I don't see it as a windfall inflation is something that's there that governments obviously have a lot of control over and deal with. It's a key part of the regulatory bargain that those networks get inflation and then that's been changed from RPI to CPI recently as well. So that, I think, is providing benefit. But I think I would reject any claim of a windfall. All we're dealing with is exactly what's been the case for 30 years, 30 years plus in the U.K. in terms of the regulatory bargain between investors like us and people who support us, who put money in good faith into the industry to support rollout of build of -- and particularly in the case of Transmission and, soon to be, Distribution, the build of vast amounts of assets to transform the networks in this country to make us to make us fit for net zero and particularly during this decade to help take us out of this energy crisis. But, Gregor?

Yes, I'd agree with Alistair on inflation. And you have to look at inflation in the long term around kind of spikes up and down. And we have actually been in a very long-term low inflation environment. And I'm sure if we look over the next 10 years, it will even itself out. That's where the Bank of England are looking to achieve. On cost of equity, clearly, 20-year yields have moved up over the last few months since the draft determination. They moved to peak over 5, come back a bit. We would expect that to be reflected in the cost of equity. I'm not going to put a number on it, but we would expect that to be reflected, plus we think Ofgem didn't focus specifically on some of the risk factors that they should have. So we will take what Ofgem produced in the 30th of November, we'll look at it in the round with the business plan, and then we'll see whether we take that forward. On your point on whether we go to CMA delaying the Distribution says it depends if we did go to CMA what we were going to CMA on, and we'll reflect that at the time. But I'm not expecting that, that should delay the Distribution process unless it's a detailed CMA point on the business plan.

We are now taking the next question. It came from the line of Ahmed Farman from Jefferies.

A few from my side, just a few firstly, just a follow-up on the Ofgem and ED2 process. Could you talk a little bit about outside of sort of cost of equity, what other aspects of the proposal are you seeking improvement on as part of the sort of the consultation you've been engaged in? Then my second question is Ofgem raised the question about how inflation is treated within regulation and how sort of the fixed cost of debt is indexed. Where are we in that process? And are you expecting any update on that anytime soon? And then finally, given -- assuming you do sort of commence the process of Electricity Distribution sale -- a minority sale next year. Given the experience on Transmission side, when do you think you may be able to announce a deal to the market?

Okay. Well, Greg, you may want to comment on all 3, but certainly the second 2, sort of cost of equity will be a clear one. I think there's a formula there. We've all been to the CMA on that recently in relation to Transmission. So I think a failure to reflect what we think is very clear methodology would be an issue for us going forward. Admittedly, as Gregor said, you will take all those things in around. I think in this inflationary environment and particularly with some of the supply chain issues that we're seeing globally, cables and other materials. I think unit costs and efficiency are both big areas for us to look at and think about. Where Ofgem, I think, need to be realistic about what can be achieved in this environment and particularly even by their draft determination, which fell some way short of what consumers and stakeholders had wanted. We'll see a substantial rise in operating costs, and we've achieved that roughly 1/3 rise pretty much no cost. The consumer will now increase in build. So I think that's important. We also have some important points in terms of specifics to our area. We've got 110 subsea cables in the North of Scotland, which are essential for running the island and providing power to remote and vulnerable communities. No other DNO in this country has that. In the last price control, we were severely cut as part of the ED1 process on that, and cost turned out to be far higher than were allowed and were to a considerable extent. That's given rise to an overspend by us, i.e., we've ended up spending shareholders' money that we're unable to recover to make sure that we look after those consumers and those communities. So again, another area where I think Ofgem will have to step in. And then finally, as we pointed out in the presentation, although there will be a need -- a clear need for uncertainty mechanisms, and we appreciate that, and Ofgem have obviously stepped up to the plate in transmissions in terms of giving certainty on those with their HNDs, I think we need to get enough baseline CapEx in there so that we can build the supply chains and we can build the delivery capability that is needed to do that efficiently. You can't have very little certainty on one hand and then huge efficiency on the other hand, if you're just in time in what's going on. That is very, very difficult to wring efficiencies out of a supply chain that's stretched, and we'll just go elsewhere and do other things. So there are a few things to be talked about. We remain optimistic that Ofgem will see the benefits in our original plan, and we'll get far closer to that in terms of their final determination, but we'll just have to wait and see what comes out on the 30th of November. Gregor?

Yes. I'll just add that we need to have a plan that takes us forward in net zero. We kind of have price controls on a 5-year basis, but we should be looking out 20, 25 years. And you've seen that in the transmission businesses, and that's starting to come through. So we need to see something that we can really deliver what customers are looking for, connections, all these other things that at the moment are taking far too long. So I'd agree with Alistair on that. On inflation, I think Ofgem will come out with -- once ED2 final determination comes out the way, a consultation on inflation next year, I think that's probably the intention. On debt, I think we'll get some sort of solution that works specifically for the higher cost of debt and the way the indexation works because really debt rates have gone up considerably. On the Distribution business sale, we will start that early next year. And I would hope that sometime in the summer, we'll be able to kind of sign and announce a transaction, whether we can complete quickly, it would just depend on who the buyer is. But that would be the time line.

The next question is from Bartlomiej Kubicki from SG.

This is Bartek from SG. A couple of things, please. Firstly, on the delays of Seagreen and Keadby 2. I wonder if given that you will need to still buy -- assuming normal weather, of course, especially for Seagreen, whether you will still need to buy back power on the market in the second half. And similarly, on Keadby 2, this is a couple of [indiscernible], whether you already hedged for Keadby 2 and you will also need to go to the market and buy back hedges. So we will see a negative impact in the second half as well. On Seagreen as well, given the fact that delays are not on your side, can you actually claim the additional costs from the counterparty which is building the power plant for you. So that would be the first sort of thing. Second thing on financing costs, they have quite considerably declined in the first half versus first half last year. And maybe we can elaborate -- you can elaborate a little bit on this one and what to expect in the second half of this year. And lastly, on Gas Storage, you are talking about 80% of the Gas Storage being full at the end of first half. If we just assume, whatever, 200 piece spreads, we can be talking about GBP 100 million plus of profit in the second half. I hope this is actually the correct thinking and [indiscernible] significant in Gas Storage business in the second half versus the first half.

Okay. Greg, do you want to do the finance cost? Any comments you've got in hedges? And then Martin can sort of do a bit more detail on hedges, Seagreen and Gas Storage.

Yes. That's fine. the finance costs have come down. We remember we got the proceeds in from SGN at the end of March, so we had lower debt for a period of time. So we benefited there. We also have the hybrid debt is now equity accounted for in the new hybrids, so that's going to benefit. And then the final thing is we've done a fair bit of commercial paper. So we've been more in short-term lower rates for the first 6 months, which has benefited. I still expect to see the overall interest charge for the year lower than last year, reflecting the very good funding that we did in the summer, particularly the EUR 1 billion hybrid, which in today's kind of rates is considerably lower at 4%. So that will come through. On the Seagreen impact on hedges, yes, we will still continue to see an impact in the second half. The extent of that impact will depend on where power prices are. And as you've seen, power prices have come down a bit as we've got into the winter. So the extent of that will still be determined. But we have a -- clearly, we've got some offset within our hydro output that takes some of that risk away.

Okay. Bartek, just on Keadby 2. So obviously, we don't comment on thermal hedging, but worth reiterating we expect Keadby 2 to be back in service by the 19th of December, so I guess it's only 4.5 weeks away, and handed over in middle of January. So I don't see in the meantime, in the short term, spark spreads have reduced significantly on the back of very high renewables and quite low demand. So I don't see that as a major issue. In terms of Gas Storage. So Gas Storage, I mean, there's basically 3 kind of main remuneration mechanisms for Gas Storage. You're right, the intrinsic spread between summer and winter, then the volatility exists in the market and allows us to reoptimize and then any kind of further system actions in responding to those. The intrinsic spread, which I think you talked about GBP 2, I think probably that's not necessarily a number that we would recognize as a hedgeable number kind of on a long-term basis. But clearly, ultimately, gas storage prospects for the year will be directed by how volatile the spot market is and how volatile those spread relationships between the short term and the balance of year is. And of course, we just don't know that right now.

And just Seagreen claims as well as mentioned.

Right, yes. Sorry. Thanks, Alistair. So I mean, these projects obviously have quite weighty contracts. There are various clauses in those. And in my experience, there will be all sorts of things to talk about at the end of the points of hand over on these big projects, and there will be, of course, some LDs in there, but also there will be some -- there's going to be some allowances for contingency, et cetera, should projects have issues. So we'll have to see how that plays out as the project delivers .

At the end of the day, I think the teams are very focused on Seagreen, on building it and getting it finished and the quicker that happens and the sooner that happens, the happier we'll all be. So I think there's that. And then overall, just because -- I think you were trying to get to numbers in a variety of areas. All we're clear is that we are very comfortable with the guidance that we gave earlier in the year, so the greater than 120p guidance that we give, we are still very, very comfortable with that number despite any of the ups and downs and other things that are in the numbers or even things that are concerning you.

We are now taking the next question, came from Jenny Ping from Citi.

Just going back to strategy. I just wanted to understand how you look at yourself in the context of some of the other peers in the sector. Obviously, we've had bigger Iberian utility reporting their outlook Capital Markets Day on pulling back on renewables and refocus on network, whereas you're still looking to sell networks to reinvest in renewables. And some of the concerns where they're coming through is really on the return spread. And you've clearly reiterated those again. I just wondered where -- how you see your business in the context of some of the challenges that's coming through in terms of the cost of debt and the return spreads achieved on some of these renewable projects, where you see -- how you differ to some of your peers who are clearly voicing some of the concerns in this area. And then secondly, just very factually, as part of your submission process to government on the profitability of your various power generation businesses, can you confirm that you have not submitted anything with regards to your CCGT assets.

Right. Just when I think about the second one, just on strategy, look, I mean, other people can do all sorts of things. Our Iberian cousins, competitors, colleagues, whatever, they've got -- they've had a slightly different business to us in different geographies. I think we noted earlier that RWE won something in the Netherlands. We remain very comfortable with the spreads that we're making or with the outputs that we're getting through the contracts that we've got. I think we don't have that much that we contracted in recent times where people might have been on older prices, and they've firmed up their income numbers without having been able to absolutely firm up their prices. I think going forward, there is no doubt that we will see inflation coming through. things like the AR4 round that yielded GBP 37.20. That probably looks quite challenging to us in this environment. But fortunately, we don't have any of those contracts. What we just have is lots and lots of seabed and assets that are going to bid in shortly, where I think we'll have a lot more granularity and a lot more visibility of where prices have gone and where inflation has gone. I think some of those contracts are changing, and it's not as easy to pin down all the prices as it was 18 months, 2 years ago. But still, I think we'll have greater visibility than some people. So we still remain optimistic because we think we've got excellent projects very well located and they're absolutely in the sweet spot of what governments in the U.K. and more internationally need to deliver. And they can deliver energy at far, far cheaper prices than anything you're seeing over the next year or 2 in terms of what's been quoted on the markets that we look at. So our strategy of that 40-40-20 that we referred to earlier, we're still pushing ahead hard to make sure that the network build, which is critical to delivering the renewables, one from these far-flung wind farms and assets gets to customers. And also Martin and all his businesses are pushing forward very, very hard, one, to get to that 5x target in terms of renewable output by the end of the decade and also to provide the flexibility. And indeed, we've had that validated by government pushing forward with CCS and hydrogen and choosing our projects as well in those things. So we feel very comfortable, and we're still pushing ahead with all of those things, although there's clearly inflation around in the world and that inflation will feed through to project prices and ultimately income levels. In terms of discussions with government, talked about all sorts of things with them over a long period of time. I think one of the clear things that we've said publicly generally around that is that people have to be very careful about imposing either taxes or caps on flexible generation. Flexible generation, the merit order, how we dispatch that is critical to making sure that the system functions effectively this winter and a system which is heavily interconnected with Europe, where they will see incredible strains from having lost roughly 1/3 of the hydrocarbons, which are coming from Russian sources. We're exposed to all those price pressures. We need to make sure that we're dispatching plant and saving plant for the absolute peak in that way. Also, a number of those flexible plant will have benefited from the fact that French nuclear haven't performed well. We've invested in a lot of kit, gas storage and flexible thermal. Over a number of years. We've taken over GBP 2 billion of the write-offs on those. We've kept our plant to open for times like this when the system is in stress and strain. And therefore, it's important that we're able to earn a sensible return over a good period of time, having not done so previously. But I think all those facts should be known by government, and we'll have certainly made them clear to the discussions that we've had on a whole variety of matters over the last 6 to 12 months.

We are now taking the next question from Sam Arie from UBS.

Congratulations on another good set of results. I know that you broadly leaving guidance where it was. But on the other hand, I think it seems like you made a number of quite positive comments today and overall, so a great presentation. So I'm left to not too many questions, but maybe I could just come back to the fiscal statement. And I heard your comments earlier and I accept that you don't know what's going to come, and I guess, nor do we. But on the other hand, maybe you've been fairly, let's say, open and honest in the past when you've been unhappy with certain policies. I'm remembering a press release that you put out in part of one of the Ofgem processes not long ago where you said that in the first line, you were deeply disappointed with what they just published and so on. So we appreciate that clarity. And I guess my question is, look, if we end up getting something tomorrow that's in line with what the FT reported yesterday, so a percentage tax on prices above a level, which might be defined as what you would have expected to earn before the current crisis kicked off. Then broadly speaking, what would be your reaction to that? Would you maybe think that's a fair outcome when you kind of grin and bear it? Or would you be fiercely opposed and pursuing all means to overturn it? Or would it be one of those where you kind of -- we get the headline, but the devil is in the detail, and it takes a while to figure out whether you're happy or not? I know it's difficult to comment, but anything you can share would be very helpful.

Sure. So I can take my answers from what you said, Sam, and it's a good question, but we'll probably be waiting 24, 48 hours for that. And indeed, we may be waiting longer to get through it. So look, we'll be open and nice and very clear with people. We always are. So we continue to do that. I think god will be in the detail. At the end of the day, we will need to go through it carefully. And the final thing is ultimately if we or other people are benefiting, we all need to pay our fair share, and we're absolutely clear we're happy to do that. Key thing is that we don't impact investment. We've recently done work where 100 basis points or 1% on the cost of capital is going to mean that net zero cost of the GBP 50 billion for this country. That's the sort of thing that we've got to avoid. Having gone through all of the all of the work that we've done over a decade plus in this country to create great markets and to place ourselves at the forefront of where investors want to come for green and renewable investment we've got to maintain that. So I very much hope following tomorrow and any subsequent conversations that we still end up in that place. And if we're paying our fair share, then so be it.

Okay. Fingers crossed, I guess.

Hopefully, we won't need to cross our fingers. Hopefully, everyone will be sensible.

We are now taking the last question. And it came from the line of Ajay Patel from GS.

I have one, right? If we look back to when the investor presentation was first set, we can say that market conditions have improved, power prices are higher, thermal spreads are higher, gas storage benefits, inflation is higher. So to the degree you benefit from that, we can debate depending partly on what happens tomorrow. Clearly, from your presentation, there's huge opportunities for CapEx investment that were much higher than probably what you were thinking when you started this journey. So what I was trying to sort of overlay on this is how does the movement in bond affect all of that? I mean, we have retraced quite a long journey back in terms of the sharp movement we've seen over the last 6 months in terms of yields. And a lot of these projects will depend on new investments. And I wonder whether the capital structure that you need to put in place for new investments have moved, i.e., what may be a 67.5% debt, the rest equity investment in offshore is now changed in some manner or not. So that's -- so I can understand how much of this business -- how much of that extra cash flow will fund maybe a change of capital structure? And how much can be used for new investment opportunities? Can you maybe talk around that to get us a better understanding of really like when you look at the current market environment, how that has affected the capital structure you're now putting forward for new investments when they come along.

Sounds like a very detailed financial question. So we're going to start with a very detailed Finance Director, I think.

Well, I'll start and then you can bring in over to you. I mean, clearly, cost of debt has gone up. It's come back down a bit. So we need to just see how that stabilizes. 10-year gilts of -- last I alluded to was about 3.2%, they've been up at 4.5%. So we need to just look at the profile of how we fund. So you may do a bit more short-term funding. And bear in mind, a month or 2 months ago, Bank of England expecting to raise to peak at 6% in terms of base rates, and maybe it will be at 4.5%. So I don't think we should have a knee jerk reaction to that. Clearly, our cost of capital is going up, so we need to reflect that. I think the good thing is that SSE's balance sheet is very strong, and we've positioned ourselves to make sure that we have limited refinancing risks. 92% of our debt is fixed. And we have very little index-linked debt. So relative to our peers, that index-linked debt is low is at 3%. So we have -- as we see benefits going through to cash flows, we're able to put them into projects and benefit. But we constantly will look at opportunities. We were one of the first utilities to do large-scale project financing for our offshore wind farms, and people kind of questioned at the time. Well, that is now the norm. We were the first utility to do a hybrid facility for our CCGT station in Marshwood. So we will continue to be innovative and look at opportunities. And I'm not overly concerned about that. I think what we need to make sure, though, is that the returns are adequate to justify the investment and we'll be able to fund it. There are plenty of opportunity to fund either through debt or through bringing partners in.

Yes. And on Networks, we're going to hopefully -- hopefully, we'll see Ofgem move up on the allowable cost of equity and WACC. Otherwise, we might be seeing the CMA yet again. So that will partly fund that. And then as Gregor said, we've I think we'll be as innovative as we can. We can't ignore the fact that rates have gone up. Equally, we've got a lot of assets in the ground where we do have merchant exposure and where we -- you've seen even in these half year results, particularly on the Thermal and Gas Storage side where we benefited, that will hopefully give us some additional profits, which we can invest in increasing the size of our pipeline going forward, subject to consent and supply chain, as Gregor mentioned earlier. So hopefully, there is a win-win. As we mentioned earlier, we'd very much like to be announcing that next year, whether that's pre-close or May or whatever. I think there's huge opportunities there. And we need to be building more and more of these things to get away from the expensive imported gas and the crisis that, that's creating. Right. I think I heard that, that was the last question. So thank you very much all of you for your time. The team in -- well, the team both in IR and media. I'm sure, we'll be around. And I hope of course the day will be available and make ourselves available wherever we can. I don't know that we've got some roadshows coming up as well, where we'll be seeing investors and/or other interested people. So I would say, please get in touch with either IR and the media team if you need anything. Thanks very much for your attention. Now we -- those of you that we do get a chance to speak to later today or over the next couple of weeks. I look forward to having that engagement. Thank you very much for your time.

That conclude the conference for today. Thank you for participating. You may all disconnect.