2 Worrying Reasons To Sell National Grid plc

In recent days I have looked at why I believe National Grid (LSE: NG) (NYSE: NGG.US) is a shrewd stock selection (the original article can be viewed here).

But, of course, the world of investing is never a black and white business — it take a variety of views to make a market, and the actual stock price is the only indisputable factor. With this in mind I have laid out the key factors which could, in fact, undermine National Grid’s investment appeal.

Renewables question rages on

National Grid continues to face great uncertainty over the role of green energy in the future of UK power generation. How to meet European interconnector and renewable targets has been a long-standing conundrum in the UK, as ongoing policy roadblocks have stymied the progress in securing low-cost electricity from its European neighbours.

National Grid raised the issue again last month when it outlined plans to hike the UK’s interconnector capacity to between 8-9 GW national gridby 2020, up from 4 GW at present, allowing the country to source much cleaner and cheaper power. The firm argues that this would represent a huge step in helping Britain to hit the European Union target of having interconnectors produce at least a tenth of the country’s generation capacity.

But although the firm highlighted the “broad support from the UK Government, European institutions and energy regulators” over such plans, the amount of red tape needed to be hurdled — particularly concerning green subsidies — is likely to continue hampering National Grid’s investment plans, at least in the near-term.

US operations may sap the cash

The US has been a significant drag on National Grid’s balance sheet in recent times, with the cost of upgrading back-office information systems over the past year overshooting initial estimates and hampering operating profit — this fell 3% alone during April-September, to £1.6bn.

On top of this, National Grid has warned that it may also be forced to plough increasingly-large sums into the country’s electricity network due to volatile climate patterns. The firm noted that “many US utilities, including [our own] operations are evaluating the need for further investment in system resilience following a significant number of extreme weather events over the past few years.”

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Royston does not own shares in National Grid.