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National Grid warns of supply shortages! Why I’m not tempted by its share price

Kirsteen Mackay
·3-min read
Arrow descending on a graph portraying stock market crash
Arrow descending on a graph portraying stock market crash

National Grid (LSE:NG) provides most of the UK’s electricity infrastructure. We all need electricity, more now than ever before. As we become increasingly reliant on our internet connection, on-demand streaming and ultra-connected homes, it’s far more than a case of keeping the lights on. So, National Grid’s monthly announcements that British electricity supply is being stretched are a little alarming.

Balancing supply and demand

The company has been issuing electricity margin notices while it seeks to increase capacity to safeguard against a shortfall between supply and demand. However, it insists it will maintain enough generation to meet demand.

The first announcement was in September, when it warned reserves had fallen below 500MW and it may require an increase to prevent a blackout. This was a message triggered automatically and the company later retracted it. But, in October, several National Grid power generators were experiencing unplanned outages and the wind speeds were too low to pick up the slack.

Yesterday, it followed this up with a tweet forecasting tight margins on the electricity system again. This time The warning was due to several factors including low renewable output, and the availability of generators at periods of peak demand.

Balancing the system is difficult. Generating electricity using renewables is unfamiliar territory to navigate, and I think teething problems are to be expected.

Are blackouts on the horizon?

In the past, blackouts were common in Britain and, in some remote locations, they still occur occasionally, usually down to geese flying into a power line, or a construction incident causing a cable to accidentally be cut.

However, if supply and demand became a serious issue for National Grid, then power outages could become a more persistent problem. This seems unlikely today, but efficiently balancing the system is vital to keeping it this way.

In California, they’ve endured countless blackouts due to soaring temperatures. These have required air conditioning and the grid has been unable to cope with the demand. I don’t see this being an imminent problem here. But I do think careful management and upgrading of the systems appear to be necessary.

Are National Grid shares a good buy?

Looking back over the past five years, the National Grid share price has endured extreme volatility. With a price-to-earnings ratio of 25, the shares aren’t cheap. They do, however, offer a decent dividend yield over 5%. This invariably entices long-term holders. All-in-all, I think the company is heading in the right direction. Any attempt to shift to renewables is commendable, but getting there effectively will be expensive. Blackouts could have a negative effect on the National Grid share price. But I doubt it will be any more volatile than it already is.

Some of the power shift to renewable sources is going to require an element of trial and error. Hydrogen could be a potential replacement for natural gas in the process of heating homes. But for this to happen, National Grid’s infrastructure would have to be heavily upgraded. As long as the dividend is on offer, it’s probably not a bad addition to a FTSE 100 long-term portfolio. But I’m not particularly tempted by the National Grid share price and won’t be adding it to my Stocks and Shares ISA.

The post National Grid warns of supply shortages! Why I’m not tempted by its share price appeared first on The Motley Fool UK.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020