SSE plc (OTCPK:SSEZF) Q2 2023 Earnings Call Transcript November 16, 2022 3:30 AM ET
Company Participants
Alistair Phillips-Davies – Chief Executive
Gregor Alexander – Finance Director
Martin Pibworth – Chief Commercial Officer
Conference Call Participants
Robert Poole – Morgan Stanley
Mark Freshney – Credit Suisse
Deepa Venkateswaran – Bernstein
Martin Young – Investec
John Musk – RBC
James Brand – Deutsche Bank
Ahmed Farman – Jefferies
Bartlomiej Kubicki – SGB
Jenny Ping – Citi
Sam Arie – UBS
Operator
Good day and thank you for standing by. Welcome to the SSE Half Year 2022 Results Webcast and Conference Call. At this time all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over the SSE’s Chief Executive, Alistair Phillips-Davies. Please go ahead.
Alistair Phillips-Davies
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 three things will be clear, our strategy is more relevant than ever, it 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 of 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 has stood up extremely well.
Our plans cement SSE’s standing as a clean energy champion, positioning us to invest around GBP25 billion in critical infrastructure this decade while delivering sustainable long-term value. Our diverse and well-balanced business mix is helping us navigate turbulent 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 update 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 will 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 four less injuries than the same period last year. The small decrease in our total recordable injury rate. But of course devastatingly in June we saw the death of BAM Nuttall Contractor Liam Macdonald and this 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 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 call 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 UK 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 policy is strengthened too, the REPower EU package has inspired an upping of clean and renewable energy ambitions in Ireland, the Netherlands, Germany and other markets. While challenges clearly exist in the short-term, our NZAP 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 de-carbonisation, containing huge flexibility, critical to energy security.
We are diversifying via technologies and market while adapting to change. In the last six 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 at the UK’s 2030 renewable targets being met in 2022, Britain would have saved approximately GBP30 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 will invest more if we can.
We’ve taken immediate action too, 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 a thousand 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.
Gregor Alexander
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 renewables 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 renewable profitability was hit by hedge buybacks and a higher price environment and lower volumes against plan, thermal and gas storage have responded to system demand well, providing their value after a period of limited returns. While networks businesses have also performed well of the built-out and reinforced 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 break-even for the full year.
Overall at the Group level adjusted operating profit increased by 90% to GBP716 million. Adjusted profit before tax increased by 221% to GBP559 million. And adjusted EPS was 41.8 pence in line with pre-close guidance. In these volatile times it is no surprise that unrealized fair value re-measurements are driving the reported loss before tax at 30th 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 on 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 our residual gas production decommissioning obligation. The majority of the movement in unrealized fair value re-measurements 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 we 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 re-measurement at the end of each accounting period. This re-measurement 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. Counter-party 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 on liquidity later where 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 network’s 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 transition transaction is progressing well and we continue to target signing in the next few weeks with completion following shortly thereafter. For distribution, the business has been focused on securing the best ED2 outcome possible. And we therefore expect to commence its process at the start of 2023.
In terms of SSEN Transmission performance, adjusted operating profit increased by 15% to GBP208 million. Mainly driven by increasing our 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 is slightly reduced from the prior period to GBP271 million as large capital projects have been re-phased. SSEN Distribution has also continued to show growth with adjusted operating profit increasing by 14% to GBP175 million. This reflects higher allowed revenues for the current regulatory year, including an additional GBP40 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 GBP176 million as the business entered the final year of ED1.
In renewables, adjusted operating profit decreased marginally to GBP22.5 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 terawatt hours or 13% behind planned levels. This was partly due to unfavorable wind conditions that also reflects delays and achieved first power at Seagreen resulting from a crane failure on an installation vessel earlier in the year and subsequent poor weather. Undelivered volumes appeared with extremely high market prices led to an increase in hedge buyback costs of which GBP57 million related to Seagreen.
For SSE Thermal adjusted operating profit for the full year increased to just over GBP100 million, reflecting not only higher prices and an increased output, but also plant availability and flexibility in volatile markets. However the business 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 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 GBP148 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 SSE’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 GBP60 million in the period, which reflects the phasing of customer contract margins in the first six 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 break-even 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 GBP30 million in the period as it has worked hard to manage the Group’s commodity position. 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 GBP10 billion at 30th September 2022 with 92% of debt held at fixed rates. Our S&P credit rating remains at BBB-plus 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.
Whilst it’s 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 a combined surplus having increased in the period to GBP649 million. We prudently utilized capital markets where we saw opportunities, issuing EUR1 billion of hybrid capital at a coupon of 4% in April, a GBP350 million 10 and 15 year dual tranche private placement in June at an average rate of 3.19% and EUR650 million seven year green bond at a coupon of 2.875% in July, well below current market prices. And we have recently entered into GBP1 billion of new revolving credit facilities for our transmission and distribution businesses to support their future growth plans.
Our cash collateral requirements are comfortably within existing facilities. At 30th September SSE had around GBP2 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 GBP1 billion at 11 November ’22, the majority of liquidity facilities still remain un-utilized going into the winter. We remain on course to report full year CapEx in excess of GBP2.5 billion, including acquisitions and continue to expect leverage to be well below our target 4.5 times 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 risks 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 120 pence remains unchanged. As well as out on market conditions, SSE’s results will be determined by potential policy interventions, plant availability and weather condition. 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 29 pence. In line with the 2023 dividend plan we will re-base our dividend to 60 pence 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 re-basing 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 are fully financed, the balance sheet is strong, and we continued to project adjusted EPS CAGR growth of 7% to 10% by March ’26 from an 87.5 pence baseline.
I’ll now hand you over to Martin to cover developments in our market-based businesses.
Martin Pibworth
Thank you, Gregor, and good morning everyone. We are building more offshore wind than any company in the world right now. These mega projects always brings specific challenges, but we continued 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 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 the 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 polled 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 GBP60 a megawatt hour in today’s prices. We have prudently de-risked these projects by locking in the prices of major contracts, hedging a 100% of direct exchange rate risk and fixing a 100% of interest rate exposure on project finance developments.
In addition to these flagship projects, construction continues in Ireland at Lenalea and a 104 megawatt Yellow River project 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 a third 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 project 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 gigawatts to up to 3.6 gigawatts. Onshore, we’ve made excellent progress in Scotland with the up to 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 the Coire Glas development. At 1.5 gigawatts Coire Glas would be the first large-scale pump storage scheme to be developed in the UK for more than 30 years and we bring a swath 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 the 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 six 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 US we’re working with local partners to gear up for future auctions. We remain laser focused on our domestic markets in the UK 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 are 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 of supply and our investments in recent years have created the UK’s leading fleet of high performing flexible generation plants. In tight and volatile market conditions, our plants is responsive, agile, and hugely complementary to the rest of the portfolio. Keadby is one is 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 will already have been supporting energy security this winter with final decommissioning — sorry final commissioning expected for mid-December onwards.
The portfolio of assets purchased through the Triton acquisition with Equinor will also have an important role this winter. But their de-carbonization potential is the real price, particularly at Saltend we’re plan to 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 of supply sustainably.
While other operators have exited the thermal generation sector, SSE is taking responsibility for the de-carbonization 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 UK 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 three 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 GBP350 million against these assets. Successive governments have provided limited support, but we recognize both its system-wide importance and its potential to SSE as a long-term risk management tool. We hold around 40% of the UK’s onshore underground gas storage capacity at our two sites in East Yorkshire. And we have invested significantly to keep our salt caverns 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 investment and remuneration of such assets over the longer term.
Our Atwick facility has nine caverns and can store around 100 million therms of gas. Whilst Aldbrough, a joint venture between SSE Thermal and Equinor also has nine caverns 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 from the Humber cluster. This year these assets have delivered when society needed them, protecting consumers from price peaks than 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 Airtricity prices for financially vulnerable customers from June 2022, and through the end of March 2023 and launched the EUR25 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’s renewable contracts resulting from REFIT1.
In GB, we have been helping our business customers too. And have worked closely with base to support the new Energy Price Guarantee scheme. Whilst this carries implementation challenges given the urgent timescales 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 re-positioned 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 Fiddlers Ferry are both home to battery development 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 concludes 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.
Alistair Phillips-Davies
Thank you Martin. SSEN Transmission has a central role in net zero. We are 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 a 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 400kV gas insulated switchgear. We’re also progressing additional investments through Ofgem’s Uncertainty Mechanisms.
In July we received Final Needs Case approval for Eastern Green Link 2, a joint venture between ourselves and National Grid, which will see a two gigawatt HVDC subsea link from Peterhead to Drax. In addition we submitted a Final Needs Case for the upgrade of the Fort Augustus to Skye transmission line, which will support security of supply and connect renewable generation. Ofgem has also recognized a clear need for reinforcement in Argyll and Kintyre to support the regions’ 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 nine gigawatts of connected generation. But for achieving net-zero all credible scenarios point to a 14 gigawatt to 15 gigawatt system by mid decade. We continue to expect to deliver RAV of GBP6.5 billion to GBP7 billion by financial year ’26 and now will 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 generator commitment, planning an Ofgem approval. But we continue to forecast a double-digit RAV CAGR and expect gross RAV to exceed GBP12 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 operators second iteration of the holistic network design early next year, this should highlight further growth potential.
Alongside its 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 de-carbonization 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 over twice the volume of the previous year. This accelerated trajectory looks set to continue with our recently published early inside 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 supportive, regulatory environment, so the local distribution networks come in 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 sent 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 deliveries for all stakeholders. Our draft plan sought to keep pace with stakeholder demands, proposing around GBP4 billion in gross baseline total expenditure, an increase of around a third on an equivalent ED1 period. A plan balanced investment in the smart, flexible networks that will facilitate net zero with a 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 recognize 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 errors.
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 the 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 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 GBP25 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 target is a step closer than a year ago and acceleration of our investment program is in line with societal needs domestically and internationally. There were short-term challenges, but we are positive about the medium-term outlook and beyond, while 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 and 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 UK become energy independent. But while SSE’s focus aligns with the UK’s comparative advantage as a European energy center, SSE’s horizons stretch beyond the UK 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 a just transition.
Put simply, we have the right strategy at the right time to 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 — to cover recent media speculation around tomorrow’s UK autumn statement and 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 to speculating any further on what might be announced.
We believe in paying our fair share of tax. However, in the event that additional tax in electricity generators is announced tomorrow, it is essential that it is sensibly designed, so as not to undermine investor confidence, jeopardize security of supply or damage the UK’s ability to meet its net zero target. It is absolutely paramount that we do not throw away the progress that has been made in the last decade in making the UK 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.
Question-and-Answer Session
Operator
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We are now taking the first question the first question. The first question from Robert Poole from Morgan Stanley.
Robert Poole
Hi, good morning. Thank you. Two questions if I may. So firstly, if you could talk about capital allocation and whether the changing environment since the strategic update last year, where you indicated the CapEx 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 are seeing across the rest of the sector.
Second one is related to that and pulling up on your point around Transmission RAV for 2031 exceeding GBP12 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. Thank you very much.
Alistair Phillips-Davies
Yes. 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 expansion into Southern Europe and also the opportunities in CCS and hydrogen where we’ve been selected as a key part of 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. And 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 down there, there 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 will — 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 three areas where we could see potential upside over the coming months to the in excess of GBP12 billion number that we’ve already put out there.
I don’t know whether Martin or Gregor have got anything to add.
Gregor Alexander
Just on transmission, I think the big 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 GBP12 billion.
Alistair Phillips-Davies
Okay. Thank you.
Robert Poole
Thank you.
Operator
Thank you for your question. We are taking the next question from Mark Freshney for Credit Suisse.
Mark Freshney
Thank you for taking my questions. I have two. Firstly on inflation, CapEx inflation, I think you alluded to 2026 RAV being more like GBP7 billion than GBP6.5 billion to GBP7 billion 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 GBP12.5 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 GBP12.5 billion plan. I mean, we’re only one year into a four year plan, but it’s something that generally constantly gets revisited. So can we expect another five 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? Thank you.
Alistair Phillips-Davies
Do you want to do inflation Gregor?
Gregor Alexander
Yeah, I mean, basically, yeah, that’s why we pushed that number up because of 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 are 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.
Alistair Phillips-Davies
Okay, great. Look, I think you’re right, Mark that we’ve obviously got a huge number of opportunities across the business. Greg 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 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 lead to a full new five year plan. I think we’ll just provide more clarity on that GBP25 billion and the 10-year plan that we had previously. But Martin?
Martin Pibworth
Yeah, hi, morning, Mark. I mean I guess, I mean we had a number of opportunities clearly six months, a year ago, including batteries where we’re thinking about hydrogen, we’re obviously very keen on carbon capture and have been for a while. And of course as the extension of how kind of onshore and offshore renewable options that we’ve been looking at, the world has obviously substantially changed over last six months 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 REPowerEU 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 also, I guess we are 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 kind of six months on from when we last spoke about this, it feels to me like carbon capture and hydrogen ambitions remain as strong in the UK as they were 6 months ago, if not slightly stronger.
Mark Freshney
Okay. So as a follow-up, I guess we can assume that there may be an upgrade to the or a roll forward of this plan perhaps next May?
Alistair Phillips-Davies
Yeah, well, we’d like to think so. We stand ready. I think we’ve got the right businesses, the right people, just the right time for the UK, 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. Greg had rightly highlighted consenting and supply chain, but 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 GBP12.5 billion, the GBP25 billion were minimums, they were where we’re starting from, not where we’re finishing.
Mark Freshney
Perfect. Thank you.
Operator
Thank you for your question. We are now taking the next question. The next question is from Deepa Venkat from Bernstein. Please go ahead.
Deepa Venkateswaran
Hi, there. This is Deepa Venkateswaran from Bernstein. My two questions are as follows. Firstly, just on the refinancing and divestment you highlighted that you don’t see the need for additional refinancing till ’25. I just wanted to recap if the amount of divestments you’re expecting over the planned period has changed. So last year you said GBP4.5 billion of which SGN was GBP1.2 billion, so that will leave GBP3.3 billion from transmission, distribution and then I think telecoms and something else. So can you confirm whether you are 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 a 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.
Alistair Phillips-Davies
Yeah, 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% are still — that GBP4.5 billion we still expect to get and put forward. We may get a bit more in free cash flow just where power prices are and a bit less in there. So yeah, that’s all part of the package.
Gregor Alexander
On caps and windfall tax, I think the European price cap was reasonably well thought out as long as you assume that the EUR180 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.
Deepa Venkateswaran
Thank you.
Alistair Phillips-Davies
Thank you.
Operator
Thank you for your question. We are now taking the next question, it’s from the line of Martin Young from Investec.
Martin Young
Yeah. Good morning to everybody. Had just a couple of questions from me please. Clearly a very clear message on your keenness to crack on with the much-needed investment that 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 is 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 REMA, we have a delayed energy bill. If I look at who might be driving the bus, base or treasury, who do you think is driving the bus at the moment? Thanks.
Alistair Phillips-Davies
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 febrile 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.
Martin Young
Okay, thank you. Very clear.
Operator
Thank you for your question. We are now taking the next question from John Musk from RBC.
John Musk
Yes. Hi, good morning everyone. 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 GBP57 million. But what other buybacks or the — 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?
Alistair Phillips-Davies
Yes, sure. Martin please and then Gregor.
Martin Pibworth
Good morning, 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.
Alistair Phillips-Davies
So that well, I was less close with 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 as a good learning process the first one. But I think the second one the team always felt like they had a better chance there. Gregor, do you want to —
Gregor Alexander
Yes. Yes. Look, on the reais 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 three 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 [indiscernible], you’re probably talking about low to mid tens of millions in terms of impact.
John Musk
Okay. Thank you.
Alistair Phillips-Davies
Thank you.
Operator
Thank you. We are now taking the next question. It’s from James Brand from Deutsche Bank.
James Brand
Hi, good morning. Thanks for taking my questions. I have three 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 the power system there been 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 are there.
Second question is on the hedging, in the statement, you had language that said you had 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 has been a few concerns in the market. The fact that bond yield has risen so much, it might be a negative and might have affected interest. But on the other hand, you’ve obviously got huge investment ahead 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? Thank you very much.
Alistair Phillips-Davies
Yes, it’s a fantastic asset, but I’ll let Gregor comment and Martin do you want to do the first two?
Martin Pibworth
Yes, let’s do 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 in aggregate have looked to try and intervene and 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 are now talking about 7 gigawatts by the end of the decade. They’re talking about increasing over there their solar ambition, and also their 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 market.
In terms of the — 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 a direct power and sometimes through kind of own use. And obviously that that leads 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.
Alistair Phillips-Davies
And generally spark spreads are probably been strengthened during the course of the year as well. I think that’d be the one other comment I would make. So, Gregor?
Gregor Alexander
Yeah, 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 two 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 transaction through over the coming weeks.
James Brand
Great. Thanks very much.
Alistair Phillips-Davies
Thank you.
Operator
Thank you for your question. [Operator Instructions]. We are now taking the next question, coming from Dominic Nash from Barclays.
Dominic Nash
Good morning everyone. I’ve got again it’s another two questions for you please. The first one is on the final determination on electricity distribution we have to due 30th of November. Obviously the draft was 4.75% real return on equity. What do you think in line of what’s happened since then should be the return on equity there. And if the regulatory contract doesn’t meet your expectations, will the CMA referral delay the sale of the stake in electricity distribution.
And the second question is on inflation. Obviously we’re running full 10% ahead of the sort of regulatory expectations on inflation. And on my numbers, that’s basically a GBP1 billion extra RAV or getting close to GBP1 billion extra RAV coming on your RAV base, which is a GBP1 billion extra cost for consumers that was beyond expectations. Is this a windfall? And do you think that after the government is so focused on retail than generation, they might start focusing on the network windfall sort of potentially coming your way with the high inflation. Thank you.
Alistair Phillips-Davies
Well, Dominic, I’m sure, Greg will answer these. But I don’t see it is a windfall, inflations something to say 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 that’s been changed from RPI to CPI recently as well. So that’s — that I think is providing some 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 UK, 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 roll out 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?
Gregor Alexander
Yeah, I agree with Alistair on inflation. And you have to look at inflation 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 ago yields have moved up over the last few months since the Draft Determination peaked over five 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 Ofgem produced in the 30th of November, we will look at it in their own with their business plan and then we’ll see whether we take that forward. On your point on whether we go to CMA delaying the distribution. So it depends, if we did go to CMA, what we were going to CMA on. And we’ll reflect that at that time. But I’m not expecting that, that should delay the distribution process unless it’s a detailed CMA point on the business plan.
Dominic Nash
Thank you.
Operator
Thank you for your question. We are now taking the next question. It came from the line of Ahmed Farman from Jefferies.
Ahmed Farman
Yeah, good morning. Thank you. Thank you for taking my questions. A few from my side. Just a few firstly on 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 have been engaged in?
Then my second question is, Ofgem also raised the question about how inflation is treated within regulation and how it sort of is are 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, minority sale next year, given the experience on transmission side, when do you think you will may be able to announce a deal to the market? Thank you.
Alistair Phillips-Davies
Okay. Well, Greg you may want to comment on all three, but certainly the second too. I sort of cost of equity will be a clear one. I think there is a formula there, we’ve all been to the CMA on that recently in relation to transmission. So I think a failure to reflect, well what we think is very clear methodology would be an issue for us going forward. Admittedly, as Greg has said, he will take all those things in a round.
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 is 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, that roughly a third rise at pretty much no cost to consumer or no increase in bills. 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 were essential for running the Islands, 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 ED1 process on that. And costs have 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, though there will be a need, a clear need for Uncertainty Mechanisms, and we appreciate that and Ofgem have obviously stepped up 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 timing, what’s going on, then it’s very, very difficult to bring efficiencies out of the supply chain 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?
Gregor Alexander
Yeah, I’ll just add that we need to have a plan that takes us forward to net zero. We kind of have price controls on a five-year basis. But we should be looking at 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 sort of things 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 that we have consultation and 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 clearly debt rates have gone up considerably.
On the distribution business, sale, we will start that over next year. And I would hope that sometime in the summer we’ll be able to kind of say, and announce a transaction. Whether we can complete quickly, will just depend on who the buyer is, but that would be the timeline.
Ahmed Farman
Okay. Thank you.
Operator
Thank you for your question. We are now taking the next question. Please standby. The next question from Bartlomiej Kubicki from SGB.
Bartlomiej Kubicki
Good morning. This is Bart from SG. Couple of things please. Firstly on the delays of Seagreen and Keadby 2. I wonder if given that you will need to still buy the — 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 are 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 your — on your side, can you actually claim the additional costs from the counter-party 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. 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 spread, we can — we’re talking about GBP100 million plus of profit in the second half. I hope this is actually the correct thinking and [Technical Difficulty] significant bring gas storage business in the second half versus the first half. Thank you.
Alistair Phillips-Davies
Okay. Gregor, do you want to do the finance costs, any comments you’ve got on hedges, and then Martin can sort of do a bit more detail on hedges Seagreen and gas storage.
Gregor Alexander
Yes, that’s fine. The finance costs have come down, remember we got the proceeds in from SGN at the end of March. So we had lower debt for a period of times. So we benefited there. We also have the hybrid, there is no equity accounted for in the new hybrid, so that’s going to have a 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 six months, which has benefited. I would still expect to see the overall interest charge for the year at lower than last year, reflecting the very good funding that we did in the summer particularly the EUR1 billion hybrid, which today — 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 got into the winter. So the extent of that would still be determined. But we have a — clearly we’ve got some offset within our hydro output that it takes some of that risk away. Martin?
Martin Pibworth
Okay. Good morning, Bart. Just on Keadby 2, so obviously we don’t comment on thermal hedging, but whilst 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 hand it 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 three kind of main remuneration mechanisms to gas storage, you’re right, the intrinsic spread between summer and winter, then the volatility that exists in the market and allows us to re-optimize and then any kind of further system actions and responding to those.
The intrinsic spread, which I think you talked about two pounds. I think probably that’s not necessarily a number that we would recognize as a hedgeable number kind of on 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 the year is in of course, we just don’t know that right now.
Alistair Phillips-Davies
And just Seagreen claims as well were mentioned.
Martin Pibworth
Yes, sorry. Thanks, Alistair. So, I mean these big projects, obviously you have quite weighty contracts, there are various clauses in those. And in my experience, there’ll be all sorts of things to talk about at the end of the points of hand over in these big projects. And there’ll be of course some LDs in there, but also there’ll be some — there will be some allowances for contingency et cetera should projects have issues. So we’ll have to see how will that plays out as the project delivers.
Alistair Phillips-Davies
At the end of the day, I think the teams are very focused on Seagreen on building — 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 120 pence 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.
Bartlomiej Kubicki
Okay. Thanks you very much.
Alistair Phillips-Davies
Thank you.
Operator
Thank you for your question. We are now taking the next question, came from the line of Jenny Ping from Citi.
Jenny Ping
Hi, thanks very much. 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 peer, Iberian utility reporting their outlook Capital Markets Day on pulling back on renewables and refocus on network. Whereas you are still looking to sell networks to reinvest in renewables. And some of the concerns were there coming through is really on the return spreads 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 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? Thank you.
Alistair Phillips-Davies
Right. Just — well 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 had a slightly different business to us, they’re in different geographies. I think we noted earlier the RWA had 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’ve contracted in recent times where people might have been on older prices and have firmed up their income numbers without having being 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 around that yielded GBP37.20, 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, two 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 absolutely in the sweet spot of what governments in the UK and will internationally need to deliver and they can deliver energy far, far cheaper prices than anything you’re seeing over the next year or two 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 networks 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 want to get to that five times 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, though there is 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 we’ve talked about all sorts of things with them over a long period of time. I think when 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 the system which is heavily interconnected with Europe, where they will see incredible strange and having lost roughly a third of their 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 nuclears 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 GBP2 billion of the write-offs on those. We’ve kept our plant open for times like this when the system is it — 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 will have certainly made clear to them, discussions that we’ve had on a whole variety of matters over the last six months to 12 months.
Operator
Thank you for your question.
Alistair Phillips-Davies
Thank you.
Operator
We are now taking the next question from Sam Arie from UBS.
Sam Arie
Thank you. Good morning everybody. And 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’ve made a number of quite positive comments today. And overall it’s a great presentation. So I’m left with not too many questions. But maybe I could just come back to the physical statement. And I heard your comments earlier 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 am 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.
Alistair Phillips-Davies
Sure. So I can take the 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 honest and very clear with people. We always are. So we’ll 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 will need to, we will 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 another GBP50 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.
Sam Arie
Okay, fair. Well thank you. And fingers crossed I guess.
Alistair Phillips-Davies
Hopefully we won’t need to cross our fingers. Hopefully everybody will be sensible.
Sam Arie
Very good. Thank you.
Operator
Thank you for your question. We are now taking the last question. And it came from the line of Ajay Patel from GS.
Ajay Patel
Good morning and thank you for the presentation. I have one, right. As in if we look back to when investor presentation was first set, we can say that market conditions have improved where the 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 dependent 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 six months in terms of yields. And a large 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 has moved i.e. what may be up 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 we’ll 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 now putting forward for new investments when they come along.
Alistair Phillips-Davies
Sounds like a very detailed financial questions. So we’re going to start with our very detailed, Finance Director, I think.
Gregor Alexander
I’ll start and then you can bring in. Very clearly costs there has going up. It has come back down a bit. So we need to just see how that stabilizes, 10 year — 10 year ago [indiscernible] 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, one month or on three months ago, banking raised 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% 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.
Alistair Phillips-Davies
Yeah. And on networks we’re going to hopefully we’ll see Ofgem move up on their reliable cost of equity and WACC. Otherwise you might be seeing the CMA yet again. So that’ll partly fund that. And then as Gregor says 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 you’ve seen even in this 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 is 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.
Ajay Patel
Thank you very much.
Alistair Phillips-Davies
Thank you. Well, I think I heard 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 will be around and over the course of the day will be available, making ourselves available wherever we can. And I know that we’ve got some roadshows coming up as well where we’ll be seeing investors and/or other interested people. So I will say, please get in touch with either the IR or the media team if you need anything. Thanks very much for your attention now with those of you that we do get a chance to speak to later today or over the next couple of weeks look forward to having that engagement. Thank you very much for your time.
Operator
That concludes the conference for today. Thank you for participating. You may all disconnect.
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