National Grid's green revamp will add £4 to energy bills

National Grid revealed today that new investment in a greener energy infrastructure will cost the average UK household an extra £4 a year on energy bills.

The group, which runs Britain's electricity and gas networks, announced it would ask investors for £3.2bn in a rights issue next month as it steps up spending to £22bn over the next five years, from £14bn in the past five. Three-quarters of the total will be spent in the UK.

The two-shares-for-five rights issue is heavily discounted at 335p and took the City by surprise. Finance director Steve Lucas explained that the company needed more equity to maintain its stable credit ratings in light of the ramped-up capital spending.

Lucas said: "This is a very major investment to get a major upgrade to the system to make it fit for the energy revolution." The company has worked out that the cost, which will be passed on to its clients, the energy companies, and ultimately to households, will be just £4 per average customer a year. "That's pretty good value," said Lucas. Transmission only makes up 5% of household bills.

The move came as the new government set out the full details of its coalition agreement. It wants to increase the 15% target for energy from renewable sources, subject to advice from the climate change committee. The measures announced include an offshore electricity grid to support a "new generation of offshore wind power" and promoting energy from waste through anaerobic digestion.

The government also hopes to roll out a new smart meters scheme to boost the number of homes with the energy-saving devices, which will be supported by the creation of a smart grid. A full feed-in tariff system to encourage renewable energy is planned, as well as a network of charging stations for electric cars. The creation of a green investment bank was also confirmed, along with "green financial products" to encourage infrastructure investment.

The shift to a low-carbon energy system "requires much greater investment in the electricity and gas transmission networks to deal with a very different flow of energy on the networks," said analysts at Morgan Stanley. "We believe the broad principles set out in the Con-Lib coalition agreement are supportive of this evolution, and therefore are supportive of the need to invest materially in transmission networks."

National Grid will spend an extra £5.6bn, including the proceeds from the rights issue, on replacing its ageing network and infrastructure in the UK to help the government meet its carbon emission reduction targets.

About £2.8bn has been earmarked for nine major projects to link up nuclear power and offshore wind farms in Suffolk, Somerset and Wales. A further £1bn will be spent on "rewiring" London and Birmingham – building deep-bore cable tunnels to replace the old system – and another £1bn on "other opportunities" such as installing new cables from Scotland to England and further gas interconnectors. The remaining £800m will go towards reinforcing the gas network to secure the country's liquefied gas supply from abroad. The investment programme is expected to create 5,000 new jobs.

Lucas hailed the new spending plans as a "very big step up". He added: "We're replatforming National Grid to a bigger company, with much bigger investments." The group is ramping up capital spending to £5bn a year from £3 to £3.5bn in the past.

National Grid also announced annual profits of £2.2bn for last year, up from £1.4bn the previous year.

There has been a debate over whether to move to a low-carbon system through developing the national infrastructure or investing in micro-generation. In recent years the Labour government came under heavy criticism for delaying decisions on energy generation and distribution, and for failing to encourage micro-generation.

Lucas said he saw the coalition agreement as "very supportive" in terms of greening up the economy.

Analysts at Nomura said: "We think the rights issue will be well supported and will remove one of the overhangs on the shares. We expect all the additional capital expenditure to be growth- and value-enhancing. Hence any initial adverse reaction to the announcement may be short-lived."