National Grid Embeds Carbon Pricing Into Investment Decisions To Achieve Net Zero Goals

(Credit: National Grid)

Historically, many enterprises have not factored environmental and social externalities, such as effects on global warming, into their business models. Using an internal carbon price is one way companies can address this deficiency.

National Grid, a global energy and utility company headquartered in the UK, has begun using carbon pricing to support the UK's climate commitments for sustainable energy and its own net zero by 2050 target. 

Utilities spend billions of dollars annually on infrastructure, according to the American Society of Civil Engineers (ASCE), so including carbon pricing in infrastructure investment decisions makes sense. For instance, in its 2021 infrastructure report card, ASCE notes that annual spending on high voltage transmission lines grew from $15.6 billion in 2012 to $21.9 billion in 2017, while annual spending on distribution systems — the “last mile” of the electricity network — grew 54% over the past two decades. 

To evaluate its electricity transmission business infrastructure investments, National Grid embeds carbon data into its existing cost estimation tool, which is used by investment engineers to cost proposed investments. Finance and sustainability teams collaborated to determine appropriate pricing, starting with a carbon price of £45/US$60 per tonne of carbon to reflect different markets, regulatory mechanisms, and geographies. To ensure robust carbon data is used, the team developed a carbon database that aligns carbon data with the specific assets used in the electricity transmission network. Investment engineers then multiply estimated carbon emissions by the internal carbon price to monetize the carbon impact. This feeds into an options analysis, which includes calculating net present value assessments and discounted cash flows.

The new tools and process enable National Grid to make more carbon-efficient investment decisions and shed light on where the company should focus efforts to help achieve its net zero target.

Key takeaways for other companies considering carbon pricing:

• Integrate carbon pricing into existing tools and processes - Comfort level with existing capabilities helps with adoption.
• Work with your contractors - Provide carbon data to bidders as this encourages suppliers to innovate and reduce their carbon emissions as well. Contractors can be required to include the final carbon impact of proposed infrastructure projects.
• Make it easy to use - Cost is often easier to understand and use than carbon tonnage. Provide training on carbon pricing to internal teams as needed.
• Internal collaboration - Encouraging different functions to work closely together, such as finance and sustainability teams, ensures that complementary knowledge and skills are included in determining the right carbon data and pricing models to use.