Strategic overview

the right STRATEGY at the right time

In the year since the announcement of SSE's Net Zero Acceleration Programme much has changed in the world. We have seen war in Europe, market and political turmoil, and three British prime ministers. Through it all, SSE has remained resolute in its commitment to a long-term strategy that is focused on contributing to the UK's net zero ambitions, but we have also been able to respond directly to an energy crisis few of us could have foreseen.

We believe that programme, referred to simply as the 'NZAP', remains the optimal pathway to consolidate SSE's position as a national clean energy champion. It includes a fully-funded investment programme that will see us spend £12.5bn on critical infrastructure by 2026.

The NZAP is also the platform that could invest in excess of £25bn over the coming decade in the UK and Ireland alone, primarily in offshore wind and UK electricity networks, but also in the deployment of vital flexibility solutions. There is scope for further investment through the export of SSE's renewables capabilities overseas.

PERFORMANCE THROUGH VOLATILITY

By any measure the current operating environment is challenging. However, market conditions that influenced financial performance in the first half of the year have also highlighted the value of our integrated business model, with lower-than-expected renewables output being more than offset by earnings derived from gas storage and thermal assets that have been responding to system demand when needed most.

SSE's carefully balanced portfolio comprises regulated networks businesses that are insulated from power price movements and a range of generation and storage assets that are able to manage volatility. The Group is also well placed to withstand inflationary pressures; our Networks RAV is index-linked and so too are renewables contracts and capacity payments. A strong balance sheet and stable debt profile, meanwhile, continue to provide a solid financial buffer.

DELIVERING, INVESTING AND CREATING VALUE

As detailed in the Business Unit Operating Review later in this document, SSE has been getting on with delivery of its objectives set in the NZAP. The operational performance seen in the first half is testament to the commitment and resilience of SSE's direct employees and contractors. Keeping those people safe will always be our first priority and we have all has been deeply affected by the tragic death of a young contractor working on Shetland in June.

Progress is being made on flagship large capital projects at Dogger Bank, Seagreen and Viking wind farms; on repowering of existing hydro plant at Tummel Bridge; at our new, high-efficiency CCGT at Keadby 2; constructing the Shetland HVDC transmission link; and finalising a net zero-enabling distribution business plan for RIIO-ED2.

At the same time, expansion into Southern Europe and Japan is exporting SSE's developer expertise in renewable energy abroad. Completion of the Southern European development platform acquisition this year helps grow SSE's secured pipeline from 10GW to nearly 14GW plus over 10GW of future prospects even before upcoming auction processes. The development pipeline is progressing at home too with Coire Glas, Berwick Bank, Ossian (ScotWind), Seagreen 1A and North Falls; and developments in CCS, hydrogen, solar and battery technologies are creating further near-and medium-term growth options. And SSE Thermal's fleet has been complemented with the addition of the Triton Power acquisition with Equinor, which holds significant CCS and hydrogen potential at its Saltend plant.

With a Certain View of around £2.6bn totex to 2026, SSEN Transmission is investing at pace to connect new generation in the North of Scotland. Projections of double-digit growth could see RAV exceeding £12bn by 2031. SSEN Transmission is meeting societal need and in doing so is becoming an engine of growth. Completion of the 25% minority stake, which is expected in the coming weeks, will help propel SSE forward, unlocking further investment and expansion in Transmission and across the Group as we rebalance capital allocation.

SUPPORTING NATIONAL ENERGY SECURITY …

SSE recognises the social impact of an energy-linked cost of living crisis and while government has rightly taken responsibility for providing short-term support to bill-payers, industry must invest - and have the right conditions to invest - in creating a long-term pathway out of the current difficulties. By SSE's own estimates, if the system investment required to meet 2030 electricity targets had been made by 2022, Britain would have saved around £30bn on gas expenditure this year. The cheaper energy is coming. We just need the infrastructure; and SSE is building it at pace.

… AND ADDRESSING THE CLIMATE EMERGENCY

While SSE's develop, build, operate and invest strategy is helping to address the current energy crisis, its purpose is also to build a better world of energy for tomorrow. SSE's current plans would deliver 20% of the electricity networks and 20% of the offshore wind needed in the UK by 2030 to meet government net zero targets.

In 2019, SSE took the decision to align to the UN's Sustainable Development Goals (SDGs) with four core associated 2030 Goals. The NZAP is the shorter-term plan that will enable SSE to meet those broad goals in 2030. SSE is contributing to every step of the clean electricity value chain and has verified, science-based targets to hold it accountable along the way. Recognising that the transition to net zero represents a radical economic transformation, affecting working people, their communities and consumers, SSE has continued to advance the case for a just energy transition, attracting talent from high-carbon industries and working to deliver 'smart and fair' smart grids at a local level.

SSE has deliberately chosen to remain invested in the transition of flexible thermal electricity generation due to the key role it plays in a renewables-led, net zero, electricity system. SSE's greenhouse gas inventory gained additional scope 3 emissions through the Triton Power acquisition, and the Joint Venture partners (SSE Thermal and Equinor) are developing a net zero pathway for the plant.

LEADING INTO A NEW ENERGY LANDSCAPE

One thing we know for certain about the future energy landscape is that it will be electric. And as a well-balanced business with world-class electricity infrastructure capabilities we see plenty of opportunity alongside the challenges that will come over the short, medium and longer term.

In the short term, we are navigating the choppy waters of market and policy uncertainty. We have actively contributed to the debate, offering solutions to the significant cost pressures on household incomes and at the same time we are getting on with creating value for stakeholders.

Over the medium term, we see real opportunity for structural energy market reform that will both encourage investment and benefit consumers. And we are encouraged by increasingly positive policy direction in a number of overseas markets where we are exporting our developer expertise.

SSE's strategy is delivering for us now, but it is a long-term plan consistent with legally binding net zero goals that have cross-party support at home and policy momentum abroad.

The Net Zero Acceleration Programme looks even better than it did a year ago. It is our platform for delivery and growth, underpinned by a socially responsible purpose and a value-creating strategy, investing record amounts in clean, green energy infrastructure.

Alistair Phillips-Davies
Chief Executive
SSE plc

Group financial review

six months to 30 September 2022

This Group Financial Review sets out the financial performance of the SSE Group for the six months ended 30 September 2022. See also the separate sections on Group Financial Outlook, 2022/23 and beyond and Supplemental Financial Information.

The definitions SSE uses for adjusted measures are consistently applied and are explained in the Alternative Performance Measures section of this document, before the Summary Financial Statements.

* Excludes treasury shares.

Impact from market volatility

The Group's balanced mix of economically regulated and market-based businesses provides a natural hedge against short-term commodity price volatility. Nevertheless, the continued high and variable power and gas price environment, combined with rising inflation rates, has had an impact on SSE's businesses which can be summarised below:

SSEN Transmission and SSEN Distribution operate under a regulatory price control framework which is set by Ofgem.  Returns under this framework have no direct relationship to the power and gas market prices. However, both allowed revenues and Regulated Asset Values are index linked (Transmission to CPI(H), and Distribution to RPI (for RIIO-ED1) and CPI(H) (for RIIO-ED2)).

Within SSE Renewables, the established hedging approach generally reduces its broad exposure to commodity price variation at least 12 months in advance of delivery. This approach secures value for the business, by reducing exposure to short-term commodity price movements which would drive variable financial performance. Hedges may be achieved either through the forward sale of power or gas and carbon equivalents - when the latter approach is taken, a "spark spread" will be realised when the hedges are converted into power before delivery which will either increase or decrease the average hedge price. Whilst this hedging approach provides relatively stable realised power prices, market volatility in periods where wind volume output is significantly lower than expected could mean 'buy-backs' of excess forward sales contracts could be at higher prices which would reduce the trading result, as has been seen in HY23.

For SSE Thermal (as well as the Hydro plant within SSE Renewables), value has come from the ability of the plant to respond to market conditions and provide vital balancing services to provide security of supply and flexibility in less predictable market conditions.  This business aims to establish a hedge for the expected economic output in the six months prior to delivery, although this approach is closely monitored for any unexpected changes in exposures due to market volatility.  The current market conditions are generally positive for these businesses; however, if plant is unavailable at times of system stress then excess forward sales contracts would again require to be 'bought back' in the market which would impact the trading result.

The Gas Storage assets are operated on a merchant basis, to optimise value arising from changes in the spread between summer and winter prices, market volatility and plant availability.  As such, the current market conditions are generally positive for this business, to the extent that the assets can respond to volatility and capture the positive gas price spreads arising.  To the extent that gas remains in storage at the period end, a remeasurement gain or loss may also be recognised with reference to the forward month market price.  However, this remeasurement does not take into account the mark-to-market movement on forward contracted sales in future periods, which will impact the trading result.

EPM, through its exposure to unsettled commodity contracts, has experienced significant unrealised mark-to-market remeasurement losses in this period of heightened volatility. However, EPM is not expected to realise significant gains or losses upon settlement of these contracts, as these revaluations are unrelated to operating performance and traded volumes are backed by SSE's future generation output.  Whilst EPM is permitted to take small positions in the market to manage the Group's trading requirements and execute optimisation opportunities, this is contained within strict Value at Risk ('VAR') limits that limit trading exposure.

In addition, market volatility and increased margining requirements has resulted in a significant increase in the collateral necessary to allow the businesses to continue to trade with counterparties and on exchanges as required. Increased collateral requirements have historically been managed by issuing new Letters of Credit, Guarantees and Performance Bonds; however, with increased trading through the exchanges, cash collateral requirements have increased during the period with the amount of collateral required subject to volatility in recent months. The Group closely monitors this and maintains more than sufficient liquidity to manage these increased collateral requirements.

SSE Business Energy and SSE Airtricity (aside from Northern Ireland, where SSE Airtricity is subject to a regulatory pricing mechanism) are not subject to a regulated price cap and therefore variable tariffs are adjusted dynamically and fixed tariff rates are reset for new customers as wholesale costs increase or decrease. Although the businesses are insulated against gas price rises insofar as they are fully hedged, there are external circumstances that would result in hedge adjustments such as weather, supplier failures and broader economic conditions. In addition, the higher and volatile market price environment has amplified the seasonality of profits particularly for fixed tariff customer contracts.  A dynamic forecasting approach has been implemented to help the business respond quickly to volume changes. In relation to Airtricity, vertical integration of generation and customer businesses in the Irish market limits commodity exposures with some benefit received through Renewable Energy Feed-in Tariffs ('REFIT') receipts on legacy wind assets.  Non-commodity costs for these businesses can also be impacted by unpredictable, variable market conditions.

Finally, SSE Group is well funded with a strong investment grade credit rating; a high proportion of the £10.0bn adjusted net debt (c.92%) is fixed rate and the average maturity of SSE's debt is 6.5 years. The Group has been successful despite challenging debt markets, issuing €1bn of Hybrid Bonds, a £350m Private Placement and a €650m Eurobond in the past six months. SSE's balance sheet strength allows the Group to meet additional collateral increases on higher and volatile commodity contracts, while the high proportion of fixed rate debt provides robust financing in an inflationary environment.

Operating profit performaNce FOR SIX MONTHS TO SEPTEMBER 2022

* The table above excludes any result from discontinued operations, being the Group's investment in Scotia Gas Networks Limited which was disposed on 22 March 2022 (HY23: £nil; HY22: adjusted operating profit of £21.0m) and the Group's Gas Production operations which were disposed on 14 October 2021 (HY23: adjusted operating profit of £35.0m; HY22: adjusted operating profit of £77.7m).

In order to present the financial results and performance of the Group in a consistent and meaningful way, SSE applies a number of adjusted accounting measures throughout this financial report. These adjusted measures are used for internal management reporting purposes and are believed to present the underlying performance of the Group in the most useful manner for shareholders and other stakeholders.

Following the acquisition in the period of Triton Power Limited (JV with Equinor, SSE's share 50%), the definitions SSE uses for adjusted measures have been refined to consider the treatment of fair value gains arising from acquisition of a business or a joint venture interest.  Aside from this refinement, the definitions are consistently applied and a reconciliation of adjusted operating profit by segment to reported operating profit by segment can be found in Note 5(b) to the Interim Financial Statements.

Segmental EBITDA results are included in Note 5(c) to the Interim Financial Statements

Operating profit

Adjusted and reported operating profits/losses in SSE's business segments for the six months to 30 September 2022 are set out below; comparisons are with the same period to 30 September 2021 unless otherwise stated.

SSEN Transmission: Adjusted and reported operating profit increased by 15% to £208.4m, primarily due to higher allowed revenues in line with phasing of totex in the second year of RIIO-T2. This was partially offset by a negative timing impact on lower volumes versus Electricity System Operator expectations, plus increases in operating costs and depreciation charges as the business continues to enhance its operational capability and deliver growth in the asset base. 

SSEN Distribution: Adjusted and reported operating profit increased by 14% to £174.6m, with higher allowed revenues including previously under-recovered allowances following the impact of coronavirus on volumes in FY21, partially offset by a negative timing impact on lower-than-expected volumes, with a small decrease in operating costs and a small increase in depreciation broadly offsetting one another.

SSE Renewables: Adjusted operating profit decreased by 11% to £22.5m, with increased volumes across technologies and strong prices captured by hydro and pumped storage more than offset by the need to buy back hedges at very high prices. Having experienced exceptionally still and dry weather in the prior year, volumes increased 0.8TWh or 28% in the current year but were still 0.5TWh or 13% behind planned levels due to unfavourable weather and delays to the Seagreen construction project which is now expected to complete in summer 2023. The increase in hedge buyback costs was largely driven by very high power prices and included £(57)m of costs related to delay of the Seagreen construction project.

Reported operating loss was £(29.3)m compared to a loss of £(33.6)m in the prior period. In addition to the factors noted above, the prior period saw an exceptional tax charge of £(24.0)m recognised in joint ventures due to the substantive enactment of the UK Corporation Tax rate change impacting deferred tax balances, with no such exceptional item appearing in the current year. This was partially offset by an increase in the share of joint venture interest and tax of £(16.8)m, whilst depreciation on fair value uplifts remained constant at £(9.4)m.

SSE Thermal: Adjusted operating profit increased 178% to £100.4m, compared to £36.1m in the prior period.  The higher and more volatile gas and power market price environment, which began in early 2022, has continued during the period with the flexible generation plant continuing to respond to those market conditions.  As a result, the market income achieved increased by £187m on prior period due to a combination of higher volume (+27% year on year), higher power prices and strong performance in the balancing market to support the provision of security of supply for consumers.  This was partially offset by £76m of hedge buy-back losses due to unplanned outages - mainly arising from Great Island CCGT which did not generate for most of the period due to an outage caused by a cooling system fault and subsequent turbine overhaul - as well as a £23m reduction in Capacity Market income and a £25m increase in depreciation due to impairment reversals recognised in September 2021 and March 2022.

Reported operating profit increased to £342.7m from £215.6m in the prior period which had included a reversal of historic impairment charges totalling £181.6m reflecting the higher observable power price environment.  In addition to the factors affecting operational performance highlighted above, the reported result includes a £141m gain on acquisition of Triton Power during the period - as the acquisition was completed in a higher power price environment than the acquisition price considered - as well as a gain on disposal of the Fiddler's Ferry site of £89m and the reversal of the remaining £18m of historic impairment charges for Great Island CCGT.

Gas Storage: Adjusted operating profit increased 415% to £147.8m, compared to £28.7m in the prior period. As with SSE Thermal, the higher and more volatile gas market price environment continued during the period with the assets operating on a merchant basis to capture the positive gas price spreads that have arisen. In normal market conditions, the seasonal price spread occurs between summer and winter which results in minimal profitability for this segment in the first half of the year.  However, due to low Russian gas supplies and increased European demand as gas stores were built up for winter, the usual spread was inverted, with summer gas prices higher than winter at points during the period.  That inversion led to around £46m of profits in the period, with a further £79m of trading profits driven by the generally volatile market conditions. The assets remain well placed to also capture the usual winter spread with almost 150m therms of gas stored at 30 September - over 80% of SSE's capacity - enabling them to provide vital energy security in times of high gas demand across the winter. The strong performance of the business, as with Thermal, affirms SSE's decision during previous years when earnings were weaker to continue investing in these critical assets, recognising the value they offer to the system.

Reported operating profit increased to £544.8m from £263.9m in the prior period which included a £235.2m positive mark-to-mark movement in the fair value of physical gas inventory held at the period end.  The equivalent fair value movement in the current period was £195.9m; however, as has been noted in previous periods, this does not take into account any negative mark-to-market movement on forward contracted sales for the second half of the current financial year.  Therefore, similar to the unsettled commodity contracts held by EPM at fair value, the majority of this valuation movement is not expected to be realised by the business.  In addition to this fair value movement, the reported operating profit included a £201m impairment reversal which represented a full reversal of historic impairments on the Aldbrough Gas Storage Assets.

SSE Business Energy: Adjusted and reported operating profit of £60.5m compared to a £2.4m profit across the same period last year. The market volatility that has been seen since the start of 2022 creates a challenging environment for consumers and consumer-facing businesses such as Business Energy and Airtricity. This environment has seen aged debt (60 days past due) increase by 75% from prior period to £127.3m, with a corresponding £46m increase in bad debt expense.  In addition, in a higher price environment, the seasonal phasing of margins recognised by this business has been amplified particularly for fixed tariff customer contracts. This has resulted in a significant adjusted operating profit being recognised in the first half of the year, which is expected to reverse during the second half into a close to break-even position for the full year.

SSE Airtricity: Adjusted operating profit of £14.9m compared to an adjusted operating loss of £(2.9)m across the same period last year. The prior period result included one-off adjustments which reduced adjusted operating profit by a net £(17)m - excluding these adjustments, the period-on-period result is broadly consistent.  With tariffs being kept as low as possible for all consumers, frozen for financially vulnerable customers until the end of March 2023 and with the launch of a €25m customer support fund we do not expect to record a profit within our SSE Airtricity business this financial year, even after accounting for the income from REFIT contracts which are recognised within Airtricity.

Reported operating profit of £14.8m compares to a reported operating loss of £(2.9)m, with the £(0.1)m movement from current period adjusted operating profit due to SSE's share of interest and tax from the Marron Activ8 Energies joint venture.

Energy Portfolio Management: Adjusted operating profit has increased to £30.3m from £5.7m profit in the prior period. EPM continues to generate a relatively low level of operating earnings through service provision to those SSE businesses requiring access to the energy markets in addition to taking small optimisation opportunities within strict VAR limits. The increase on prior period is due to the heightened volatility and price of power and gas trades in the market, which has driven higher profits from the trading and optimisation activities for this business.

Reported operating loss of £(1,958.0)m compares to a reported operating profit of £1,209.7m across the same period last year. This movement reflects a significant adverse net-remeasurement movement in the current period on unsettled, previously significantly in-the-money, fair value forward commodity contracts.  Following the unrealised movement in the period, those contracts continue to have a small positive net mark-to-market valuation of £301m for EPM.  In line with prior years, this result excludes remeasurement of 'own use' contracts and is unrelated to underlying operating performance.

Distributed Energy: An adjusted operating loss of £(8.0)m was recognised, compared to a loss of £(7.3)m in the prior period. The business continues to make a loss as it invests in both its 'whole system' approach to connecting localised and flexible energy assets, as well as its nascent solar and battery storage business.

The reported operating loss was also £(8.0)m, compared to a £(24.8)m loss in the prior period, which included a £(18.1)m exceptional loss on disposal recognised on completion of the sale of the Contracting & Rail business in that period.

Neos Networks: SSE's remaining 50% share in the Telecoms business Neos Networks Limited recorded an adjusted operating loss of £(6.5)m compared to £(5.8)m in the prior period.  The reported operating loss of £(11.2)m includes SSE's share of interest and tax charges from the company.

Corporate unallocated: Adjusted operating loss of £(28.9)m compared to £(40.5)m in the prior period. Whilst there continues to be an unwind of historic transition service agreements with SSE Energy Services (disposed to Ovo in January 2020), Neos Networks (part-disposed in January 2019) and SSE Contracting (disposed to Aurelius in July 2021), the segment has benefited from a review of the corporate cost base in the period.

Reported operating profit of £25.6m compares to a £(46.7)m loss in the prior period which included a £(6.2)m adverse adjustment on contingent consideration recognised in respect of the Neos Networks part-disposal.  The reported result for the current period reflects a £54.5m revaluation adjustment to SSE's 60% share of the Gas Production decommissioning provision which was retained following disposal of that business in October 2021.

Adjusted Earnings per share

To monitor its financial performance over the medium term, SSE reports on its adjusted earnings per share measure. This measure is calculated by excluding the charge for deferred tax, interest costs on net pension liabilities, exceptional items, depreciation on fair value adjustments, revaluation adjustments to the retained 60% Gas Production decommissioning obligation and the impact of certain remeasurements.

SSE's adjusted EPS measure provides an important and meaningful measure of underlying financial performance. In adjusting for depreciation on fair value adjustments, revaluation adjustments to the retained 60% Gas Production decommissioning obligation, exceptional items and certain remeasurements, adjusted EPS reflects SSE's internal performance management, avoids the volatility associated with mark-to-market IFRS 9 remeasurements and means that items deemed to be exceptional due to their nature and scale do not distort the presentation of SSE's underlying results. For more detail on these and other adjusted items please refer to the Adjusted Performance Measures section of this statement.

In the six months to 30 September 2022, SSE's adjusted earnings per share on continuing operations was 41.8p. This compares to 10.5p for the six months to 30 September 2021 and reflects the movements in adjusted operating profit outlined in the section above.

Group financial outlook - 2022/23
and beyond

FINANCIAL OUTLOOK for 2022/23

SSE's balanced portfolio of assets of electricity networks, renewables and flexible generation and storage mean that the Group is performing well in volatile market conditions.  The first half of SSE's financial year has seen good performance from gas storage and flexible thermal as they have demonstrated their value to the energy system.  However, Renewables performance has been behind expectations in the period.  Whilst a higher price environment provides further opportunities for value creation, it also increases costs and operational risks for the business significantly which has impacted renewables and, to a lesser extent, flexible thermal financial performance when output is lower than expected.

In May 2022, SSE set out that it expected to deliver adjusted earnings per share for 2022/23 of at least 120 pence.  Most of SSE's profits are earned in the second half of its financial year and, in the context of the prevailing volatile, complex and challenging market conditions, SSE's guidance of adjusted earnings per share for 2022/23 of at least 120 pence remains unchanged.  As well as being influenced by market conditions, SSE's 2022/23 adjusted earnings per share will be determined by potential policy interventions, plant availability and weather conditions.  It is for all of these reasons that SSE does not expect to provide further detail on profit expectations for the full-year until later in the year.

The Group remains on course to report record 2022/23 capex in excess of £2.5bn (including acquisitions) and expects leverage in March 2023 to be lower than the target 4.5 times net debt to EBITDA ratio.

Net Zero Acceleration Programme

SSE set out its 'Net Zero Acceleration Programme' in November 2021 to accelerate clean growth, lead the energy transition and maximise value for all stakeholders.  This fully funded programme included plans to rebase the dividend to 60 pence in 23/24 and to invest £12.5bn, largely in projects that will provide long-term solutions that help reduce the UK's exposure to volatile international gas prices, whilst keeping leverage lower than the target 4.5 times net debt to EBITDA ratio.

The Group continues to expect that this investment programme will deliver an adjusted EPS CAGR of between 7 - 10%, against a baseline adjusted EPS of 87.5p (before restatement for disposal of Scotia Gas Networks Limited in FY22) and assuming a 25% minority interest disposal of the SSEN Transmission and Distribution businesses during FY24. This growth is underpinned by index-linked revenue streams driving around 60% of adjusted EBITDA over the five-year period.

Disposal of Minority Stake in Networks

SSE continues to regard partnering as vital for the future and an important means of unlocking future opportunities in its businesses.

As previously disclosed in May 2022, the Group has initiated a sales process for a 25% share of the SSEN Transmission business.  The process is continuing in line with expectations, and the Group expects to announce an agreement in the coming weeks, with completion following receipt of certain regulatory approvals.

Given the SSEN Distribution business has been focussed on the RIIO-ED2 business case negotiations with Ofgem, it is expected that the process for a similar stake sale will commence in early 2023.

Whilst these are high-quality, core businesses and SSE will retain strategic, financial and operational control, the scale of potential growth and the associated investment required mean that bringing in non-controlling partners will create greater long-term value by enabling SSE to harness this significant growth whilst maintaining an attractive balance of capital allocation across the Group.

Supplemental financial information

* Discontinued operation, the Gas Production business was disposed on 14 October 2021.

PROGRESS IN SSE'S CAPITAL EXPENDITURE PROGRAMME

During the six months to 30 September 2022, SSE's adjusted investment, capital and acquisitions expenditure totalled £1,743.2m, representing an increase of 67% versus the same period last year. The amount recorded includes £640m of expenditure in respect of the Southern European onshore wind development platform acquisition, plus SSE's share of the purchase of Triton Power Holdings, in transactions which both completed on 1 September 2022. The remainder of spend was focused on SSE's Renewables, Networks and Thermal divisions, including:

In SSEN Transmission, progress continues on its RIIO-T2 capex programme, with expenditure in the period including £92m the Shetland HVDC link which will connect the Shetland islands to the GB Transmission system for the first time, as well as £71m on the East Coast Development project. Elsewhere, £28m was spent on the Inveraray-Crossaig projects as part of the wider Argyll and Kintyre 275kV Strategy, and £1.5m on the first two circuits connecting Seagreen offshore wind farm to Tealing substation in Angus.

For SSEN Distribution, which is in the final year of its current RIIO-ED1 price control, investment has been delivered across a broad range of projects in both the North and South networks. This included the start of an ambitious £7m project which will see a full refurbishment of the overhead network running from Poole through to Blandford Forum and on to the edge of Yeovil; £10m of investment in Argyll's electricity infrastructure to power communities from Taynuilt to Tullich, Oban and the islands beyond; substantial progress on the £14m project to upgrade the electricity network between Aultbea and Ullapool; and key infrastructure upgrades in the Isle of Wight, Feltham and Berkshire.  

On SSE Renewables' flagship construction projects, £265m of equity drawdown has been invested at Seagreen offshore wind farm (SSE share 49%) which achieved first power on 22 August. Despite a crane failure on an installation vessel earlier in the year and subsequent poor weather, progress continues to be made with 78 jackets and 65 turbines now installed, and it is expected to reach commercial operations in summer 2023. All three phases of Dogger Bank are now under construction but this activity has so far been funded by the joint venture project finance. Further north, another £62m has been spent on Viking onshore wind farm where access tracks are complete, turbine delivery is due to commence from February 2023 and the project remains on target to achieve commercial operations in Summer 2024. Elsewhere, around £10m has been invested into the Tummel Bridge hydroelectric station repowering and £517m relating to the Southern European onshore platform is included within acquisitions.

In Thermal, around £55m was invested on the development of the 50MW Slough Multifuel station, a joint venture with CIP, which is expected to be delivered in FY25. In addition, £11m was invested in the final stages of the Keadby 2 project, which has experienced a delay; performance validation tests are now expected to completed in January 2023, with remaining capex of around £7m expected in the second half of FY23. Finally, SSE's share of consideration for the acquisition with Equinor of Triton Power totalled £123.3m after completion adjustments.

SSE's Hedging Position at 30 September 2022

SSE has an established approach to hedging through which it generally seeks to reduce its broad exposure to commodity price variation at least 12 months in advance of delivery. SSE continues to monitor market developments and conditions and alters its hedging approach in response to changes in its exposure profile, such as the acceleration of hedging by SSE Renewables previously disclosed in May 2022. SSE will continue to provide a summary of its hedging approach, including details of any changes in the period, within its Interim and Full-year Results Statements.

A summary of the hedging position for each of SSE's market-based businesses is set out below.

SSE Renewables - GB wind and hydro:

The following table provides an update for SSE's GB Wind and Hydro generation hedge positions as at 30 September 2022. The prices presented for 2022/23 reflect a weighted average of the achieved price for the first six months of the year (including any buy-backs) and updated hedged prices for the second half following conversion of gas and carbon trades for that period into electricity.  Expected volumes have been adjusted for outturn in the first half.

Note: where gas and carbon trades have been used as a proxy for electricity, a constant 1 MWh :69.444 th and 1MWh : 0.3815 te/MWh conversion ratio between commodities has been applied.

The expected volumes include anticipated pre-CFD volumes from SSE's wind farms in construction, Seagreen and Viking.  No volumes have been included for Dogger Bank wind farm. The 2022/23 wind volume hedged position reflects lower than previously expected output from Seagreen due to construction delays. Seagreen now accounts for approximately 0.6TWh in 22/23, 2.2TWh in 23/24 and 2.5TWh in 24/25 and 25/26, with Viking accounting for 1.6TWh in 24/25 and 1.7TWh in 25/26.

The table excludes additional volumes and income for BM activity, ROCs, ancillary services, capacity mechanism and shape variations and optimisations. It also excludes volumes and income relating to Irish wind output, pumped storage and CfDs.

Energy output hedges for both wind and hydro are progressively established over the 36 months prior to delivery (although the extent of hedging activity for future periods depends on the level of available market depth and liquidity). Target hedge levels continue to be achieved through the forward sale of either electricity, or gas and carbon equivalents.

This approach aims to reduce the exposure of these wind assets to volatile spot power market outcomes whilst still providing an underlying commodity price hedge. When gas-and-carbon hedges are converted into electricity hedges a "spark spread" is realised which can lead to changes in the average hedge price expected. This can both increase the average hedge price, as has been seen in 2022/23, or decrease it.

For wind energy output, SSE's established approach to hedging seeks to account for the effect of the 'wind capture price' by targeting a hedge of less than 100% of its anticipated wind energy output for the coming 12 months.  The targeted hedge percentage is reviewed and adjusted as necessary to reflect any changes in future market and wind capture insights.  The last such revision occurred in May 2021, with at least 90% of the anticipated energy output from wind for the coming twelve months being hedged from that date.

The approach to hedging hydro energy output remains unchanged at approximately 85% of its anticipated energy output for the coming twelve months.

UK Business Energy: The business supplies electricity and gas to business and public sector customers. Sales to contract customers are hedged: at point of sale for fixed contract customers; upon instruction for flexi contract customers; and on a rolling hedge basis for tariff customers.

Given the pricing and macro-economic context, Business Energy is dynamically monitoring nearer term consumption actuals for any early signs of demand variability and adjusting future volumes hedged accordingly.

GB Thermal: In the six months prior to delivery, SSE aims to hedge all of the expected economic output of its CCGT assets, having progressively established this hedge over the preceding eighteen months. Hedging activity depends on the availability of sufficient market depth and liquidity, which can be limited, particularly for periods further into the future.

SSE continues to monitor market developments, in particular overall market volatility and liquidity, and will adjust its hedging approach to take account of any resultant change in exposures.

Gas Storage: The annual auction to offer gas storage capacity contracts from Atwick, held in April 2022, resulted in no third-party contracts being secured. As such the assets are being commercially operated to optimise value arising from changes in the spread between summer and winter prices, market volatility and plant availability.

Energy Portfolio Management (EPM): EPM provides the route to market and manages the execution for all of SSE's commodity trading outlined above (spark spread, power, gas, oil and carbon). This includes monitoring market conditions and liquidity and reporting net Group exposures. The business operates under strict position limits and VAR controls. There is some scope for small position-taking to permit EPM to manage around shape and liquidity whilst taking small optimisation opportunities.  This is contained within a VAR limit of £2m (£1m for the curve period and £1m for the prompt).

Ireland: Vertical integration of the generation and customer businesses in Ireland limits the Group's commodity exposure in that market.

Summarising movements on exceptional items
and certain remeasurements

Exceptional items

In the six months to 30 September 2022, SSE recognised a net exceptional gain within continuing operations of £448.7m before tax. The following table provides a summary of the key components making up the net gain position:

Notes:

-       The definition of exceptional items can be found in Note 2 (iii) of the Interim Financial Statements.

In addition to the above exceptional items from continuing operations, a net exceptional gain within discontinued operations of £35.0m after tax was recognised.  This related to the release of a provision following further clearance granted in respect of the Group's disposal of its Gas Production business which completed on 14 October 2021.

For a full description of exceptional items, see Note 6 of the Interim Financial Statements.

Certain remeasurements

In the six months to 30 September 2022, SSE recognised an adverse net remeasurement within continuing operations of £(1,548.7)m before tax. The following table provides a summary of the key components making up the adverse movement:

Operating derivatives

SSE enters into forward purchase contracts (for power, gas and other commodities) to meet the future demands of its energy supply businesses and to optimise the value of its generation assets. Some of these contracts are determined to be derivative financial instruments under IFRS 9 and as such are required to be recorded at their fair value as at the date of the financial statements.

SSE shows the change in the fair value of these forward contracts separately as this mark-to-market movement does not reflect the realised operating performance of the businesses. The underlying value of these contracts is recognised as the relevant commodity is delivered, which for the large majority of the position at 30 September 2022 is expected to be within the next 6 - 12 months.

The change in the operating derivative mark-to-market valuation was a £(1,988.3)m decrease from a £2,306m "in-the-money" position at 31 March 2022 into a £318m "in-the-money" position at 30 September 2022. This movement consisted of:

·      Settlement during the year of £(944.3)m of previously "in-the-money" contracts in line with the contracted delivery periods; and

·      An adverse mark-to-market remeasurement of £(1,044.0)m on unsettled contracts, largely entered into during the course of 2021/22 and 2022/23 and in line with the Group's stated approach to hedging. This mark-to-market remeasurement reflects the extreme volatility in commodity markets during the period.

As in prior years, the reported result does not include remeasurement of 'own use' hedging agreements which do not meet the definition of a derivative financial instrument under IFRS 9 "Financial Instruments".

Commodity stocks held at fair value

Gas inventory purchased by the Gas Storage business for secondary trading opportunities is held at fair value with reference to the forward month market price. The £195.9m positive movement in the period arose from the significant increase in the fair value of gas held over historic cost at the period end.

However, whilst this reflects the positive movement in fair value of physical gas inventory held at the period end, it does not take into account any negative mark-to-market movement on forward contracted sales for the second half of the current financial year. Therefore, similar to derivative contracts held at fair value, we do not expect that all of this valuation movement will be realised by the business.

Financing derivatives

In addition to the movements above, a positive movement of £243.7m was recognised on financing derivatives in the six months to 30 September 2022, including mark-to-market movements on cross-currency swaps and floating rate swaps that are classed as hedges under IAS 39. These hedges ensure that any movement in the value of net debt is predominately offset by a movement in the derivative position. The adjustment was primarily driven by weaker Sterling against the Dollar and Euro, partially offset by higher rates.

These remeasurements are presented separately as they do not represent underlying business performance in the period. The result on financing derivatives will be recognised in adjusted profit before tax when the derivatives are settled.

Reported profit before tax and earnings per share

Taking all of the above into account, reported results for the six months to 30 September 2022 are significantly lower than the previous year. In addition to the £(1,548.7)m cumulative net adverse movement on forward commodity, gas inventory and financing derivative fair value remeasurements noted above, reported results also reflect historic impairment reversals of £219m and net gains on acquisitions/ disposals of £230m as detailed within Note 6 of the Interim Financial Statements.

Reported results in the prior period reflected pre-tax exceptional and certain re-measurement gains of £1,543.5m recognised which were mainly driven by IFRS 9 remeasurements on operating derivatives.

Financial management and balance sheet

* Note: Net debt represents the group adjusted net debt and hybrid capital.  EBITDA represents the full year group adjusted EBITDA, less £125.4m (at March 2022) for the proportion of adjusted EBITDA from equity-accounted Joint Ventures relating to project financed debt.

Maintaining a strong balance sheet

While there may be short-term fluctuations, a key objective of SSE's approach to managing cash outflow and securing value and proceeds from disposals is its target of a net debt/EBITDA ratio of 4.5x or lower across the five years to 31 March 2026.

As well as promoting the long-term success of the Company, this approach is also designed to ensure that SSE maintains credit rating ratios (Retained Cash Flow (RCF)/Net Debt and Funds From Operations (FFO)/Net Debt) that are comparable with private sector utilities across Europe and comfortably above those required for an investment grade credit rating.

SSE's S&P credit rating remains at BBB+ 'stable outlook' and its Moody's rating also remains at Baa1 but updated to 'stable outlook' following the strategic review update in November 2021.

Adjusted net debt and hybrid capital

SSE's adjusted net debt and hybrid capital was £10.0bn at 30 September 2022, up from £8.6bn at 31 March 2022. In addition to dividends, capex spend and revaluation of currency debt as well as various working capital movements, this movement includes the completion of two acquisitions during the period:

·      In September 2022, SSE Renewables completed the acquisition from Siemens Gamesa Renewable Energy of an onshore development platform across Spain, France, Italy and Greece for a consideration of €580m; and

·      In September 2022, SSE Thermal, alongside Equinor as 50/50 partners, completed the acquisition of the Triton Power portfolio in a £341m transaction.

Debt summary as at 30 September 2022

The SSE Group issued £1.7bn of hybrid capital and new medium- long-term debt in the six months to 30 September 2022 whilst also significantly increasing short-term debt in the form of Commercial Paper:

·      In March 2022, the SSE Group through its SSEN Transmission entity priced and committed to a £350m dual tranche private placement, being a £175m 10-year tranche at 3.13% and £175m 15-year tranche at 3.24% giving an all-in average rate of 3.19%. The proceeds were received on 30 June 2022.       

·      In April 2022, SSE plc issued a €1bn NC6 equity accounted hybrid bond at 4% to refinance the dual tranche debt accounted hybrid bonds issued in March 2017.  SSE has taken advantage of the 3-month par call option on these 2017 hybrid bonds, meaning they were repaid on 16 June 2022 in advance of the first call date. The €1bn equity accounted hybrid bond has been kept in Euros and the proceeds were used to cover the portion of the maturing hybrid that was swapped to Euros (€575m) and to finance a portion of SSE Renewables' European onshore development platform acquisition as noted above.

·      In July 2022, SSE plc issued a 7 year €650m Eurobond at a coupon of 2.875% which was left in Euros as part of our net investment hedge in overseas assets held in that currency. The bond was 8 times oversubscribed which allowed SSE to secure a highly competitive rate for the issuance.

·      Over the course of the period, rolled maturing short-term debt in the form of Commercial Paper in addition to raising a further £0.7bn, which takes the total outstanding Commercial Paper at 30 September 2022 to €1,376m (£1,173m). Commercial Paper has been issued in Euros and swapped back to Sterling at an average cost of debt of 2.395% and matures between October 2022 and January 2023.

In addition to the March 2017 hybrid bonds which were called in June 2022 as noted above, a further £463m of medium-to-long-term debt has matured in the period comprising £163m (US Private Placement) which matured in April 2022 and £300m (Eurobond) which matured in September 2022. In the next twelve months, there is a further £870m of medium-to-long-term debt maturing being £150m (European Investment Bank) maturing in October 2022, £50m (also European Investment Bank) maturing in August 2023, £35m maturing in April 2023 and £120m maturing in September 2023 (both US Private Placements) and a €700m bond maturing in September 2023. Despite this, the Group expects to have minimal long-term debt refinancing requirements to FY25, given expected asset disposal proceeds. As noted above, a further €1,376m (£1,173m) of short-term debt in the form of Commercial Paper is also due to mature in the second half of 2022/23, however the current intention is to roll this maturing short-term debt forward.

Hybrid bonds summary as at 30 September 2022

Hybrid bonds are a valuable part of SSE's capital structure, helping to diversify SSE's investor base and most importantly to support credit rating ratios, with their 50% equity treatment by the rating agencies being positive for SSE's credit metrics.

A summary of SSE's hybrid bonds as at 30 September 2022 can be found below:

¹ Sterling equivalents shown reflect the fixed exchange rate on date of receipt of proceeds and is not subsequently revalued.

² All in rate reflects coupon on bonds plus any cost of swap into sterling which currently only applies to July 2020 Hybrid.

Further details on each hybrid bond can be found in Notes 13 and 14 to the Interim Financial Statements and a table noting the amounts, timing and accounting treatment of coupon payments is shown below:

SSE's March 2015 and July 2020 hybrid bonds are perpetual instruments and are therefore accounted for as part of equity within the Interim Financial Statements but, as in previous years, have been included within SSE's 'Adjusted net debt and hybrid capital' to aid comparability. The March 2017 hybrid bonds which were called and settled in 2022/23 had a fixed redemption date and were therefore debt accounted and included within Loans and Other Borrowings; as such they were already part of SSE's adjusted net debt and hybrid capital.

The coupon payments relating to the equity accounted hybrid bonds are presented as distributions to other equity holders and are reflected within adjusted earnings per share when paid. The coupon payments on debt accounted hybrid bonds are treated as finance costs under IFRS 9.

Managing net finance Income / (costs)

SSE's adjusted net finance costs - including interest on debt accounted hybrid bonds but not equity accounted hybrid bonds - were £(156.6)m in the six months to 30 September 2022, compared to £(202.6)m in the previous period.  The lower level of finance costs from period to period mainly reflects lower overall net debt following the receipt in March 2022 of the Scotia Gas Networks' disposal proceeds, replacement of a maturing debt accounted hybrid with an equity accounted hybrid and a higher proportion of debt being held via Commercial Paper at a lower coupon rate than maturing debt.

Reported net finance income was £124.1m compared to a reported net finance cost of £(218.3)m in the previous period, reflecting the movements above as well as a £299.6m period-on-period change in the mark-to-market revaluation of financing derivatives held at fair value and a £3.2m net movement on exceptional items, joint venture interest and interest on net pension asset.

Summarising cash and cash equivalents

At 30 September 2022, SSE's adjusted net debt included cash and cash equivalents of £0.3bn, down from £1.0bn at March 2022. The level of cash and cash equivalents at the period end reflects a more normal operating cash position, as previous years' balances had included the proceeds from disposals such as Scotia Gas Networks in March 2022.

The cash collateral position has increased from £74.7m of cash provided as collateral at 31 March 2022 to £581.3m of cash provided at 30 September 2022. Cash collateral is only required for forward commodity contracts traded through commodity exchanges, and generally comprises an 'initial margin' element based on the size and period of the trade and a 'variation margin' element which will change from day to day depending on the fair value of that trade each day.  The level of cash collateral either provided or received therefore depends on the volume of trading through the exchanges, the periods being traded and the associated price volatility.  As collateral is only required on a portion of trades, the movement in collateral provided or received will not correlate to the IFRS 9 fair value movement recognised, which also only covers a portion of the total Group trading activity. The cash collateral position had increased at 30 September due to the continued higher forward power and gas price environment, alongside heightened price volatility in those markets.  We expect that the higher price environment and volatility will continue, for at least the remainder of the financial year.

On 11 November 2022, further volatility has seen the cash collateral position increase to £1,004.0m, which has been funded through a combination of Commercial Paper issuance and part draw-down of the Revolving Credit Facilities noted below. Following this increase, the Group retains over £2bn of liquidity in reserve, available to meet any further cash collateral requirements over the winter.

Revolving Credit Facility / SHORT-TERM FUNDING

SSE has £1.5bn of committed bank facilities in place to ensure the Group has sufficient liquidity to allow day-to -day operations and investment programmes to continue in the event of disruption to Capital Markets preventing SSE from issuing new debt for a period of time. These facilities are set out in the table below.

The facilities can also be utilised to cover short-term funding requirements; however, they remain undrawn for most of the time and at 30 September 2022 they were both undrawn.

Both facilities are classified as sustainable facilities with interest rate and fees paid dependant on SSE's performance in environmental, social and governance matters, as assessed independently by Moody's ESG Solutions.

Following the period end, on 11 November 2022 two new revolving credit facilities were entered into as part of the Networks minority stake disposal process. SSEN Transmission entered into a three-year £750m facility and SSE Distribution entered into a similar 3 year £250m facility, both having two one-year optional extensions.  These facilities were entered into to help cover the future long term funding requirements and the working capital of those businesses as they look to become financially independent of the Group.  The facilities will therefore support the ongoing capital expenditure investment programmes that are required to deliver their ambitious future growth plans.

In addition to these committed bank facilities, the Group has access to £50m of uncommitted bank lines and a £15m overdraft facility.

Maintaining a prudent Treasury policy

SSE's treasury policy is designed to be prudent and flexible. In line with that, cash from operations is first used to finance regulatory and maintenance capital expenditure and then dividend payments, with investment and capital expenditure for growth generally financed by a combination of cash from operations, bank borrowings and bond issuance.

As a matter of policy, a minimum of 50% of SSE's debt is subject to fixed rates of interest. Within this policy framework, SSE borrows as required on different interest bases, with financial instruments being used to achieve the desired out-turn interest rate profile. At 30 September 2022, 92% of SSE's borrowings were at fixed rates.

Borrowings are mainly in Sterling and Euros to reflect the underlying currency denomination of assets and cash flows within SSE. All other foreign currency borrowings are swapped back into either Sterling or Euros.

Transactional foreign exchange risk arises in respect of procurement contracts, fuel and carbon purchasing, commodity hedging and energy portfolio management operations, and long-term service agreements for plant.

SSE's policy is to hedge any material transactional foreign exchange risks through the use of forward currency purchases and/or financial instruments. Translational foreign exchange risk arises in respect of overseas investments; hedging in respect of such exposures is determined as appropriate to the circumstances on a case-by-case basis.

Ensuring a strong debt structure through medium- and
long-term borrowings

The ability to raise funds at competitive rates is fundamental to investment. SSE's fundraising over the past five years, including senior bonds, hybrid capital and term loans, now totals £9.5bn and SSE's objective is to maintain a reasonable range of debt maturities. Its average debt maturity, excluding hybrid securities, at 30 September 2022 was 6.5 years, down from 6.8 years at 31 March 2022. This movement reflects the £1.7bn of new hybrid capital and long term debt issued in the last six months but has been offset by a higher short-term funding position via Commercial Paper. SSE's average cost of debt is now 3.83%, compared to 3.81% at 31 March 2022.

Going Concern

The Directors regularly review the Group's funding structure and have assessed that the Interim Financial Statements should be prepared on a going concern basis.

In making their assessment the Directors have considered sensitivities on the forecast future cashflows of the Group for the period to 31 December 2023 resulting from the current volatile market conditions; the Group's credit rating; the success of the Group's disposal programme through 2020/21 and 2021/22; the successful issuance of £1.7bn of hybrid equity, Eurobond and private placement debt issued during the period; and the likelihood of disposal of assets which have been announced as in progress and related debt funding.  The Directors have also considered the Group's obligations under its debt covenants, with projections to 31 December 2023 supporting the expectation that there will be no breaches.

The Directors have assessed that the Group remains able to access Capital Markets, as demonstrated by the £3.6bn of debt issued over the last 24 months. There is also an expectation of continued availability of the Commercial Paper market along with future available liquidity in the private placement market in addition to the Group's existing liquidity with £1.5bn of undrawn committed borrowing facilities.

Operating a Scrip Dividend Scheme

In its Strategic Update, published on the 17 November 2021, SSE announced plans to accelerate clean growth, lead the energy transition and maximise value for all stakeholders. As part of its five-year investment plan, SSE is targeting dividend increases in line with RPI inflation to March 2023, followed by a rebase to 60p in 2023/24 and at least 5% annual increases to March 2026.

SSE's Scrip Dividend Scheme was last renewed for a three-year period at the 2021 AGM and continues to be offered to all shareholders. For the period 2021/22 and beyond, take-up from the Scrip Dividend Scheme will be capped at 25%. SSE plans to implement this cap by means of a share repurchase programme, or 'buyback', in October each year following payment of the final dividend. The scale of any share repurchase program would be determined by shareholder subscription to Scrip Dividend Scheme across the full year, taking into account the interim and final dividend elections.

Following notification of the final dividend elections on 29 August 2022, overall scrip dividend take-up for the financial year ended 31 March 2022 was 38.33%. SSE therefore, on 30 August 2022, announced its intention to initiate a share buyback, in the period following the final dividend payment for the year ended 31 March 2022. The number of ordinary shares to be purchased will not exceed 6,904,083 ordinary shares, and the maximum pecuniary amount allocated to the Scrip buy-back is £125m.  SSE has commenced this buy-back which it intends to complete by 31 March 2023 and, as at 10 November 2022, 5.2m shares had been repurchased.

SSE believes limiting the dilutive effect of the Scrip in this way strikes the right balance in terms of giving shareholders choice, potentially securing cash dividend payment savings and managing the number of additional shares issued.

SSE's principal joint ventures and associates

SSE's financial results include contributions from equity interests in joint ventures ("JVs") and associates, all of which are equity accounted. The details of the most significant of these are included in the table below. This table also highlights SSE's share of off-balance sheet debt associated with its equity interests in JVs which totals less than £2.5bn as at 30 September 2022.

Notes:

¹ Greater Gabbard, a 504MW offshore windfarm (SSE share 50%) is proportionally consolidated and is reported as a Joint Operation with no loans outstanding.

² For accounting purposes, £369m of the £713m of SSE Shareholder loans advanced to Seagreen Windfarm Limited as at 30 September 2022 have been classified as equity.

Taxation

SSE considers being a responsible taxpayer a core element of being a responsible member of society. SSE seeks to pay the right amount of tax on its profits, in the right place, at the right time, and was the first FTSE 100 company to have been awarded the Fair Tax Mark.

While SSE has an obligation to its customers and shareholders to manage its total tax liability efficiently, it does not seek to use the tax system in a way it does not consider it was meant to operate, or use "tax havens" to reduce its tax liabilities.

SSE understands it also has an obligation to the society in which it operates, and from which it benefits - for example, tax receipts are vital for the public services SSE relies upon. Therefore, SSE's tax policy is always to operate within both the letter and spirit of the law.

For reasons already stated above, SSE's focus is on adjusted profit before tax, and in line with that, SSE believes that the adjusted current tax charge on that profit is the tax measure that best reflects underlying performance. SSE's adjusted current tax rate for the period to 30 September 2022, based on adjusted profit before tax, is 12.6%, as compared with 7.3% for the same period last year on the same basis, and after discrete items. The increase in rate is largely driven by higher expected profit before tax across the full year.

The UK Budget in March 2021 introduced a "super-deduction" for qualifying capital expenditure incurred during the two-year period from 1 April 2021 to 31 March 2023. Capital allowances rates of 130% and 50% replace the existing rates of 18% and 6% respectively for qualifying capital expenditure in that period, significantly increasing the amount of capital allowances available on the Group's capital investment programme.

Pensions

In the six months to 30 September 2022, the surplus across SSE's two pension schemes increased by £63.6m, from £584.9m to £648.5m, primarily due to actuarial gains of £1,104.9m and contributions made to the schemes offset by reductions in scheme assets of £1,059.4m and current service costs.

The valuation of the Southern Electric Pension Scheme ('SEPS') increased by £167.7m in the six-month period primarily due to actuarial gains of £727.4m, in particular the impact of higher discount rates, as well as deficit repair contributions exceeding service costs, offset by reductions in scheme assets of £569.3m.

The Scottish Hydro Electric Pension Scheme ('SHEPS') has insured against volatility in its deferred and pensioner members through the purchase of 'buy-in' contracts meaning that the Group only retains exposure to volatility in active employees. During the period the SHEPS surplus decreased by £104.1m. 

Additional information on employee pension schemes can be found in Note 17 to the Interim Financial Statements.

HY22-23 - BUSINESS OPERATING REVIEW

SSE's strategy of sustainably developing, building, operating and investing in the electricity infrastructure and businesses needed in the transition to net zero is delivered through a focused mix of market-based and economically-regulated energy businesses.

SSE's businesses are key to enabling a net zero economy, have significant growth potential and, importantly, fit together. With common skills and capabilities in the development, construction, financing and operation of highly technical electricity assets, there are strong synergies between them and valuable links across them. SSE's business mix is very deliberate, highly effective, fully focused and well set to prosper on the journey to net zero, whilst contributing to energy security and affordability.  

The review of the Business Units that follows provides visibility of performance and future priorities.

Economically-regulated networks

SSE owns and operates an electricity transmission network in the north of Scotland and two electricity distribution networks in the north of Scotland and in central southern England.

Owners of energy networks in Great Britain are remunerated according to the RIIO (Revenue = Incentives + Innovation + Outputs) framework set by Ofgem, under which the regulator determines an annual allowed level of required capital expenditure and operating costs, in order to meet required network outputs. These are added together to form total expenditure or 'totex', which is split by defined capitalisation rates which differ between networks.

Regulatory operational expenditure ('fast money') flows into licensee revenue, whereas regulatory capex ('slow money') is added to the regulatory asset value ('RAV') for each network. Licensees earn a return on regulatory equity and receive an allowance for the cost of debt, both of which are calculated based on a notional split of their RAV. Revenues and RAV are index-linked under the regulatory mechanism, providing a valuable hedge against rising inflation. SSEN Distribution's income and asset base is linked to RPI until the end of its current price control in March 2023; while SSEN Transmission is linked to CPIH under its RIIO-T2 price control until March 2026.

Each licensee can earn above its base return on equity through delivering efficiency savings on totex. Additionally, if service levels improve against targets, there is an opportunity to earn additional income through incentives. If service levels fall below targets set out in the price control, a penalty will be incurred which reduces network revenue and therefore customer bills. This ensures that customers only compensate networks for improving service levels. Further, customers benefit from reduced bills when network providers achieve efficiency savings on totex expenditure.

In Distribution, charges per MWh ('tariffs') are set by licensees 15 months in advance of the regulatory year and are based on forecasts of: (a) revenue which licensees are entitled to collect in respect of the regulatory year ('allowed revenue'); (b) the incentives and totex outperformance for the last three months of the year in which the tariffs are set; and (c) the level of volumes which will be distributed within the regulatory year. Differences in collected versus allowed revenue (referred to as 'over- or under-recovery') are accommodated in allowed revenue two years after the year in which they occur.

In Transmission, licensees are paid by the System Operator based on a forecast of allowed revenue amount set three months in advance of the regulatory year. While under RIIO-T1 the System Operator assumed the risk of forecast volumes being different to outturn (paying Transmission Operators a fixed allowed revenue irrespective of volumes transported), under the RIIO-T2 price control settlement this risk has been transferred to the Transmission Operators and collected revenue for Transmission Operators can vary depending on actual versus forecast volumes transported. Over- or under-recovered volumes are accommodated in allowed revenue in the following regulatory year, based on a forecast set in November prior to that year, with a true-up in the subsequent year for any variance to forecast.

SSEN Transmission

SSEN Transmission overview

SSEN Transmission owns, operates and develops the high voltage electricity transmission system in the North of Scotland and its islands.

Over the duration of the five-year RIIO-T2 price control, which began in April 2021, total expenditure by SSEN Transmission is expected to be at least £2.6bn (the Certain View) and taking this expenditure alone, Transmission RAV would exceed £5bn by the end of RIIO-T2.

In addition to the Certain View expenditure, Ofgem operate Uncertainty Mechanisms which permit recovery of additional allowed revenue during the price control period to reflect additional investment requirements, when their need or expected timeframe are not known at the outset. These Uncertainty Mechanisms are used to fund further upgrades to the network during the price control period, when there is more certainty around the scope of work required. 

All of these investments play a pivotal role in providing critical national infrastructure and to maintain network reliability for the communities SSEN Transmission serves as it delivers a network for net zero.

Operational delivery

SSEN Transmission continues to make excellent progress in delivering against its regulatory settlement for the five-year RIIO-T2 price control period.

In the six months to 30 September 2022, SSEN Transmission delivered strong operational performance. There were no transmission faults affecting electricity demand network users in the North of Scotland over the period, in line with its RIIO-T2 goal for 100% transmission network reliability for homes and businesses.  SSEN Transmission is therefore on track to receive the annual reward of £0.8m (in 18/19 prices) through the Energy Not Supplied Incentive. 

This strong operational performance is underpinned by a robust programme of inspection, maintenance, refurbishment and replacement of its transmission assets, keeping the lights on for communities across the North of Scotland and ensuring reliable network access for its electricity generation customers to support security of supply. In the six months to 30 September 2022, this included enhanced tree cutting to improve network resilience in advance of the winter, particularly those areas most impacted by last year's storms. 

SSEN Transmission's capital investment programme remains on track with good progress being made on all major projects. This includes the second phase of the Inveraray-Crossaig overhead line replacement project, with the installation of steel towers and overhead conductors now under way.  As well as maintaining and enhancing network reliability to the communities it serves, the Inveraray-Crossaig project will also enable the growth in renewable electricity generation across the region as part of the wider Argyll and Kintyre 275kV Strategy.

The Shetland High Voltage Direct Current (HVDC) transmission link continues to make excellent progress. The subsea cable installation works, which commenced in July 2022, are progressing well with 100km of the total 260km of subsea cable now installed. The project remains on track for completion and energisation in 2024.

Good progress was also made to incrementally increase the capacity of the north east and east coast transmission network to 275kV then to 400kV. This included the second phase of upgrades at Rothienorman substation which commenced in July. All associated overhead line works are also well under way and due for completion in 2023, with the overall upgrade of the east coast network to 400kV on track for completion in 2026.

These strategic investments in new and upgraded infrastructure are key to enable growth in renewable electricity generation across the North of Scotland.

This included energising the first two circuits to enable the connection of the Seagreen offshore wind farm to Tealing substation in Angus. This will facilitate the export of up to 600MW of Seagreen's capacity, with the third circuit on track to be energised by the end of 2022, enabling Seagreen's full capacity of 1,075MW to be connected.

As at 30 September 2022, the total installed capacity connected to the North of Scotland transmission network was around 9GW, of which just under 8GW is from renewable sources. Factoring in the forecast growth in renewables in the second half of 2022/23 and subsequent years of the RIIO-T2 period, SSEN Transmission remains well on track to meeting, and likely exceeding, its goal to transport the renewable electricity that powers 10m homes. This will be achieved once the installed capacity of renewables reaches 10GW. 

For financial performance commentary please refer to the Group Financial Review.

growth opportunities in RIIO-T2

SSEN Transmission has made tangible progress in unlocking several investments over and above its £2.6bn Certain View. These additional projects, which are being taken forward through Ofgem's Uncertainty Mechanisms, will be key to delivering a pathway for net zero and helping secure the country's future energy independence by enabling the deployment of homegrown, low carbon electricity generation.

In July 2022, Ofgem approved the Final Needs Case for the Eastern Green Link 2 (EGL2), a joint venture between SSEN Transmission and National Grid Electricity Transmission, which will see a 2GW HVDC subsea link from Peterhead to Drax in Yorkshire.  At an estimated total JV investment of around £2.1bn, development and early construction activity and expenditure (of which SSEN Transmission share would be 50%) will continue during RIIO-T2, with delivery and energisation in 2029 (RIIO-T3).

Also in July, SSEN Transmission submitted its Final Needs Case for the replacement and upgrade of the Fort Augustus to Skye transmission line. At an estimated total investment of over £400m, the replacement line is required to maintain security of supply and to enable the connection of renewable electricity generation along its route.

In September 2022, Ofgem published for consultation its response to SSEN Transmission's Initial Needs Case (INC) for the Argyll and Kintyre 275kV Strategy, with the regulator accepting the clear need for the investment. It also acknowledged that SSEN Transmission's proposed reinforcements are likely to provide the optimal solution to meet the forecast growth in renewable electricity across the region. At an estimated total investment of around £400m, the Argyll and Kintyre 275kV Strategy is required to upgrade the local transmission network from 132kV to 275kV operation, supporting the forecast growth in renewables. 

In October 2022, Argyll and Bute Council's Planning Committee raised an objection to SSEN Transmission's proposed overhead line solution, triggering a Public Local Inquiry. SSEN Transmission is extremely disappointed by this decision, which went against the recommendations of Argyll and Bute Council's Planning Officer, with no other statutory stakeholder objections received. SSEN Transmission continues to consider its next steps as it reviews what this means for its delivery programme and will work with all stakeholders to minimise the impact of this decision on new renewable generation connections across Argyll and Kintyre.

Further expenditure to connect new renewable generation, enable rail electrification and support system security is also expected throughout the RIIO-T2 period and beyond when the need for this investment becomes certain. 

Subject to regulatory approval, combined, these investments, alongside the Certain View, could bring the total expenditure across the RIIO-T2 period to over £4bn, with SSEN Transmission RAV increasing to between £6.5bn to £7bn by the end of RIIO-T2 which includes the forecast impact of Uncertainty Mechanism investments and with current inflationary levels is likely to be nearer the upper end of the range.

further growth Opportunities

In July, the National Grid Electricity System Operator (ESO) published the Pathway to 2030 Holistic Network Design (HND) report setting out the onshore and offshore electricity transmission network infrastructure required to deliver the UK Government's 50GW by 2030 offshore wind target. This also included a refresh of January's Networks Options Assessment (NOA).

The HND and NOA refresh have recommended the following investments in SSEN Transmission's network region, which the ESO has assessed are 'required' to enable 2030 targets:

·      Two 2GW subsea HVDC links from Peterhead to England, which includes EGL2 which Ofgem approved in July;

·      A 1.8GW HVDC subsea link from Spittal in Caithness, connecting to Peterhead;

·      A 1.8GW HVDC subsea link from Arnish in the Western Isles connecting to Beauly;

·      400kV onshore reinforcements between Beauly, Loch Buidhe and Spittal; Beauly, Blackhillock, New Deer and Peterhead; Kintore, Alyth and Westfield (in SP Energy Networks); and the uprating of the Beauly-Denny line to enable 400kV operation on both circuits.

The HND also included proposals for a new HVDC Switching Station at Peterhead, Project Aquila, which would integrate HVDC systems through multi-terminal and multi-vendor interoperability. This leading innovation, a world first outside of China, aims to reduce the number of HVDC Convertor Stations required for future HVDC links, reducing costs and minimising community and environmental impacts. 

In December 2022, Ofgem is expected to publish the regulatory framework under which these investments will be progressed, the Accelerated Strategic Transmission Investment (ASTI) framework, which will confirm which of these investments will be taken forward.

Combined, the investments set out in the HND and NOA refresh, which are estimated to total around £10bn in total expenditure, provide greater confidence in SSEN Transmission's long term RAV target, which is expected to exceed £12bn by 2031.

Beyond these investments, in October, Ofgem published its decision on the onshore and offshore classification of the offshore HND assets.  As part of this decision, Ofgem has confirmed that the proposed subsea connection from Fetteresso to a new substation in Lincolnshire will be classed as an onshore electricity transmission asset and delivered by Transmission Owners, which is likely to support further growth. 

Additional growth is expected to enable the connection of ScotWind's full potential, with a follow-up exercise to the HND now under way.  Plans to decarbonise oil and gas operations in the North Sea through the deployment of offshore wind powering platforms, which are being taken forward through Crown Estate Scotland's Innovation & Targeted Oil & Gas (INTOG) leasing round, also present further opportunities for growth. An outcome on the HND Follow Up Exercise (HNDFUE) and INTOG leasing round are expected in Q1 2023.

Recognition by Ofgem and the ESO of these further potential growth and investment opportunities underlines the importance of the Transmission network, particularly in the north of Scotland, in transitioning the GB energy system to net zero.

Ssen distribution

SSEN Distribution overview

SSEN Distribution, operating under licence as Scottish Hydro Electric Power Distribution plc (SHEPD) and Southern Electric Power Distribution plc (SEPD), is responsible for safely and reliably maintaining the electricity distribution networks supplying over 3.8m homes and businesses across central southern England and the North of Scotland. SSEN Distribution's networks cover the greatest land mass of any of the UK's Distribution Network Operators with over 75,000km² of extremely diverse terrain.

In December 2021, SSEN Distribution published its £3.99bn RIIO-ED2 Final Business Plan for 2023 to 2028. 'Powering Communities to Net Zero' sets out the flexibility and network investment required to accelerate net zero while ensuring efficiency and affordability for customers. Ofgem published its Draft Determinations for the RIIO-ED2 price control in June 2022. SSEN Distribution and a number of stakeholders called on Ofgem to grasp the opportunity to secure the necessary investment in local decarbonisation and resilience whilst also considering the best interests of customers.

Operational delivery

SSEN Distribution continues to undertake a major capital investment programme across both its networks, delivering significant improvements for customers and increasing its RAV.

In the six months to 30 September 2022, the business invested £176m, bringing the total invested since the beginning of the RIIO-ED1 price control to almost £2.5bn. This is part of a forecast £2.7bn investment throughout the RIIO-ED1 period, supporting future earnings through RAV growth.

SSEN Distribution is tendering for flexibility services in areas where localised high demand can be offset to extend overall network capacity. This will allow the network to be managed whilst deferring or avoiding the need for network reinforcement. SSEN Distribution has announced plans to tender for 70 MW of new flexibility capacity this year, with a contract value estimated at £6.7m. Contracts are being sought in 16 zones across central southern England.

Incentive performance remains a revenue driver and SSEN prioritises improving reliability of network performance to support a positive customer experience. Under the RIIO regulatory regime, and the Interruptions Incentive Scheme (IIS), SSEN Distribution is incentivised on its performance against the loss of electricity supply through the recording of Customer Interruptions (CI) and Customer Minutes Lost (CML), which includes both planned and unplanned supply interruptions. These incentives will typically be collected two years after they are earned.

For the first six months of 2022/23, SSEN Distribution's CI rate in SHEPD rose from 26 to 30 in comparison to the first six months of 2021/22, with CML increasing from 23 to 27. Investment in automation continues to support SHEPD's unplanned CI performance, with an operational success rate of 53% compared to 43% last year. Two significant faults, alongside the impact of extreme weather impacted IIS performance over the period.

In SEPD, CI reduced from 25 to 23, with no change in CML at 24. SEPD is currently outperforming the CI target set by Ofgem, reflecting a reduction of 5.8% of customers impacted by unplanned interruptions compared to 2021/22. Continual improvements in the reliability of SEPD's Extra High Voltage (EHV) and Low Voltage (LV) networks are positively contributing to SEPD's incentive performance.

SSEN has successfully secured improvement in customer satisfaction levels based on initial RIIO-ED1 Broad Measure incentive scores. The current performance is an improvement on last year and provides an upward trend which is supported by a comprehensive improvement plan for each Broad Measure category in SEPD. A highest ever league table position in the Stakeholder Engagement and Customer Vulnerability (SECV) incentive was achieved in 2021/22 resulting in an estimated revenue of £1.5m representing SSEN Distribution's second highest return since the incentive was established.

For financial performance commentary please refer to the Group Financial Review.

Growth opportunities

As a provider of critical national infrastructure, SSEN Distribution plays a vital role in accelerating the transition to net zero. The climate emergency, cost of living crisis and unstable geopolitical situation mean that RIIO-ED2 will be a unique price control.

SSEN Distribution's RIIO-ED2 Business Plan, which was co-created with stakeholders, is a core component of SSE Group's Net Zero Acceleration Programme. The Final Business Plan proposed a total base expenditure of £3.99bn, representing a 32% increase over an equivalent timeframe in RIIO-ED1. It reflected additional requirements for customers over the five years to 2028.  With the transition to net zero gathering pace, we are now seeing a significant rise in the uptake of low-carbon technologies, particularly EV chargepoints, heat pumps, and battery storage. At Final Determination stage later this year, Ofgem can drive the efficient investment in energy systems required to enhance security of supply in a more volatile geopolitical environment. This will support quicker decarbonisation, increase network resilience giving consumers the confidence to switch to low-carbon technologies, and ultimately keep costs low in the longer-term. This will mean network customers can benefit from a just energy transition to net zero.

In August 2022, the BEIS and Ofgem publication, 'Electricity Networks Strategic Framework: Enabling a secure, net zero energy system', detailed a vision for how the electricity network can act as an enabler of a secure, resilient, net zero energy system, and noted the substantial opportunities for growth and jobs generated by network investment. BEIS and Ofgem estimate that investment in electricity networks to meet net zero could directly support in excess of 50,000-130,000 FTE jobs by 2050, contributing an estimated £4-11bn of Gross Value Added to the UK economy as well as delivering positive impacts on wider sectors. The framework also recognises the pivotal role that DNOs will continue to play in supporting the UK's smart technology industry and businesses across the country.

SSE Renewables key performance indicators

Note 1: Capacity and output based on 100% of wholly owned sites and share of joint ventures

Note 2: Contracted capacity includes sites with a CfD, eligible for ROCs, or contracted under REFIT

Note 3: Onshore wind output excludes 134GWh of constrained off generation in HY2022/23 and 44GWh in HY2021/22; Offshore wind output excludes 72GWh constrained off generation in HY2022/23 and 4GWh in HY2021/22

Note 4: Biomass capacity of 15MW and output of 30GWh in HY2022/23 and 37GWh HY2021/22 is excluded, with the associated operating profit or loss reported within Distributed Energy

SSE Renewables overview

SSE Renewables' strategy is to drive the net zero transition through the world-class development, financing, construction and operation of renewables. The business comprises the Group's existing operational assets and those under development in onshore wind, offshore wind, flexible hydro electricity, run-of-river hydro electricity, pumped storage, as well as solar and batteries in international markets. Its operational offshore wind installed capacity is 487MW with its onshore wind and hydro electric installed capacity at 1,974MW and 1,459MW respectively. SSER is currently leading the construction of more offshore wind than any other company in the world.

Operational delivery

SSE Renewables' hydro assets continue to play an important role in providing cost-effective, low-carbon flexibility to the system, providing additional diversified revenue streams. Rainfall in the first half of the year was exceptionally low, which has had a major impact on hydro's output. However, station availability remained very high, and through proactive water management, hydro has been able to generate when the system most requires it. Summer outages were managed well, and plant availability is high going into winter months. 

Onshore wind also saw very high availability with volumes at 98% of planned volume.

Late summer saw lower wind resource than anticipated and offshore output was further impacted by delays to the Seagreen offshore wind farm project. Offshore output in the first half of the year was 63% of planned levels, though excluding Seagreen the figure rose to 84%. The outlook is positive with the significant grouted connection works at Greater Gabbard and the inter array cable repairs at Beatrice complete. The service operation vessel is mobilised at Seagreen with positive early asset performance.

For financial performance commentary please refer to the Group Financial Review.

Construction programme

All three phases of the world's largest offshore wind farm at Dogger Bank (each 1,200MW, SSE share 40%) remain on track. Onshore works are continuing on all three phases, with the three convertor stations at various stages of construction and the onshore HVDC cables already installed on Dogger Bank A and Dogger Bank B. Offshore work is well under way for Dogger Bank A with successful installation of the first monopiles and transition pieces and the 175km offshore export cable. Although there have been some delays to the foundation installation programme, and weather and vessel availability remain as risks, Dogger Bank A is still expecting to achieve first power during 2023.

On Seagreen 1 (1,075MW, SSE share 49%), which will be the world's deepest, fixed-bottom offshore wind farm once operational, there were 78 jackets and 65 turbines installed as at 11 November 2022. The offshore substation platform has been successfully installed and, following first power in August, 27 turbines are now exporting energy. All onshore cabling works and export cable installation is progressing as planned. Due to challenging weather conditions over the first half of the financial year and delays encountered with the S7000 installation vessel subcontracted to the project, Seagreen is expected to be completed in summer 2023, assuming normal weather and planned vessel availability.

Onshore, construction is progressing well on Viking (443MW) with all 70km of access tracks finished and all 103 bases completed on 12 November 2022. Work on the DC substation is continuing with all transformers delivered safely. The safety and wellbeing of the Viking team has been a particular focus since the tragic death on site of a BAM Nuttall Contractor, Liam Macdonald, in June and there is a determination to deliver the remainder of the project safely. Turbines will be installed in early 2023 and completion is planned for July 2024. In July, Viking was awarded a CfD in Allocation Round 4 covering 50% of the output of Viking for 15 years at £46.39/MWh, in 2012 prices.

In Ireland, Lenalea wind farm (30MW, SSE share 50%) construction is progressing and it is due to be commissioned in late 2023. Following a final investment decision in August, Yellow River (104MW) started construction at the beginning of November 2022 and will proceed on a merchant basis.

In hydro, all major station outages have been successfully completed and the refurbishment of Tummel Bridge station remains on track for completion in Autumn 2023.

Growth opportunities - domestic

SSE Renewables' core markets of the UK and Ireland continue to offer considerable opportunities for growth over the near, medium and long term.

In August, consent was received for the Bhlaraidh Extension (in excess of 100MW) in Scotland and in September for Drumnahough (60MW, SSE share 50%)) in Ireland. A decision on consent for Achany Extension (in excess of 80MW) in Scotland is expected by the end of FY22/23.

In October, SSE Renewables reached an agreement to acquire Aberarder wind farm, a 12-turbine, 50MW consented development project located adjacent to the operational Dunmaglass wind farm (94MW, SSE share 50%).

SSE Renewables recently launched a fleet-wide assessment of where batteries, hydrogen and solar could be co-located with existing onshore assets. Co-location could present a material opportunity for further domestic growth by optimising existing grid connections and secured land on existing sites. On hydro, SSE Renewables is also actively seeking additional investment opportunities, including adding pumping capabilities to existing stations.

Offshore, the consented Seagreen 1A (500MW, SSE Renewables share 49%) did not secure a CfD in Allocation Round 4 but is currently exploring alternative routes to market to take the project forward.

Looking to the medium term, SSE Renewables is working towards a consent application submission by the end of 2022 for the Berwick Bank wind farm. The aim is to secure consent for the up to 4.1GW project in 2023 and for it to be operational around the end of the decade.

North Falls wind farm (up to 504MW, SSE Renewables share 50%), which is an extension to the Greater Gabbard wind farm off the east coast of England, continues to progress with local consultation under way for a potential grid connection in North Essex. North Falls could also be operational by 2030.

Ossian wind farm is SSE Renewables' floating offshore wind project secured in Crown Estate Scotland's ScotWind offshore wind seabed leasing process as part of a consortium with Marubeni Corporation and CIP (Copenhagen Infrastructure Partners). The project recently increased its potential maximum capacity from 2.6GW to up to 3.6GW (SSE Renewables share 40%) following completion of a full geophysical and benthic survey of the project area. It continues to progress through the early stages of development and could play an important part in meeting the UK Government's increased floating wind target of 5GW by 2035.

SSE Renewables also aims to contribute additional capacity needed to meet Ireland's new offshore wind target of 7GW by 2030. Arklow Bank Wind Park 2 (800MW) is progressing through the new marine consenting regime with a Marine Area Consent offer (to secure seabed rights) received in October 2022. Arklow intends to participate in the first Offshore Renewable Energy Support Scheme (ORESS) auction, expected in Q2 2023, with a view to being operational by 2028.

A foreshore licence has been secured for site investigations for the 1,000MW Braymore Wind Park project off the north-east coast of Ireland and an application has been submitted for the 1,200MW Celtic Sea Array off the south-east coast. Celtic Sea Array and Braymore Wind Park will both apply for a Marine Area Consent in the government's next phase, expected in 2023.

In August, the UK Government acknowledged the need for large-scale and long-duration electricity storage and confirmed it will develop policy to enable the investment by 2024. Subject to the outcome of these policy decisions, SSE's Coire Glas pumped hydro storage project (up to 1,500MW) could progress to an FID decision by 2024/25 with the objective of being completed around the end of the decade.

SSE's first green hydrogen projects - the Gordonbush H2 project co-located with Gordonbush wind farm and the Galway Hydrogen Hub (GH2) in Ireland - are progressing through their respective planning processes. 

Growth opportunities - international

In September 2022, SSE Renewables completed the acquisition from Siemens Gamesa Renewable Energy of an onshore development platform across Spain, France, Italy and Greece for a consideration of €580m. The platform comprises 2.2GW of secured and up to 3GW of prospective onshore wind and solar hybridisation projects. The most advanced projects are progressing well to commence construction in FY23/24. 'Bolt on' acquisition opportunities to further leverage the strength of the platform are being actively explored.

In the Netherlands, SSE Renewables is participating in the Hollandse Kust (west) offshore wind tender for the 700MW HKW Site VI with the results expected in December 2022.

SSE Renewables continues to pursue offshore wind development activities in Japan within its joint ownership company, SSE Pacifico (80% stake). The Japanese Government has confirmed the Round 2 auction process will begin towards the end of 2022. SSE Pacifico is looking at potential opportunities to participate alongside partners, whilst continuing to focus its development activities on projects targeting future auctions.

SSE Renewables has submitted an application to the Polish Government for an Offshore Location License (OLL) for the allocation of development rights for a 954MW offshore wind farm in the Baltic Sea, which would be developed in partnership with Acciona Energia. The outcome of the process is expected in Q1 2023. The companies awarded through this process will have the chance to qualify and participate in Contract for Difference (CfD) auctions starting in 2025.

SSE Renewables also continues to work with Acciona Energia on offshore wind opportunities in Spain and is awaiting the Spanish Government's final offshore wind regulations.

Elsewhere, SSE Renewables is assessing growth options across selected markets in Northern Europe and the United States. It continues to assess participation in upcoming offshore leasing rounds, for example, in California, which will take place in December 2022.

Sse renewables project pipeline

Note 1: Table reflects ownership and development status as at 16^th November 2022

Note 2: Late-stage is consented in GB and grid or land security elsewhere, early-stage has land rights in GB and some security over planning or land elsewhere. Future prospects are named sites where non-exclusive development activity is under way.

Note 3: Includes solar hybridisation

SSE Thermal

SSE Thermal key performance indicators

Note 1: Capacity is wholly owned and share of joint ventures; September 2022 capacity reflects share of Triton Power portfolio with acquisition completed 1st September 2022.

Note 2: Output is based on SSE 100% share of wholly owned sites and 100% share of Marchwood PPAs due to the contractual arrangement. In September 2021 SSE's offtake agreement for 100% of output from its Seabank CCGT JV expired, with output following that date only recognised to the extent of its 50% equity share.

Note 3: Output in GB excludes 651GWh of pre-commissioning output from Keadby 2 CCGT in the six months to September 2022, with completion of performance validation testing expected January 2023

SSE Thermal overview

SSE Thermal owns and operates conventional flexible thermal generation in the UK and Ireland. These assets play a key role in the SSE Group and wider energy system on the journey to net zero. While providing much-needed system flexibility to ensure stability and security of supply in the short term, SSE Thermal is actively developing options to progressively decarbonise its fleet, most notably in carbon capture and storage and hydrogen technologies.

Operational delivery

SSE Thermal's Combined Cycle Gas Turbine (CCGT) fleet plays an important role in the UK and Ireland, providing flexibility at scale to tight and volatile energy markets and supporting the Government, regulator and ESO in their obligation to ensure security of supply. The fleet also delivers value for the SSE Group portfolio by providing a defence against wind price capture volatility and actively responding to system need through the Balancing Market, illustrating the importance of flexible assets in securing a resilient transition to net zero.

In the GB market, significant periods of high spark spreads over the first half of the year have allowed value to be secured by the fleet in utilising its inherent flexibility to sell output to the market, particularly in the Balancing Market, and contracting forward ahead of delivery.  Although this period of very high and volatile gas prices has resulted in higher profits at half year, the commercial risks associated with plant failure are also high. Despite the overall availability of the fleet meeting expectations, outages at Medway, Marchwood and Great Island have partially offset some of the market value captured.

SSE Thermal's role is to respond to market conditions and system balancing requirements; with increasing renewable penetration, strong operational performance is less dependent on the volume of the fleet's output, and more on its availability at times of system stress. Managing availability responsibly is therefore a key focus for SSE Thermal.  

Following an agreement in June, SSE Thermal, alongside Equinor as 50/50 partner, completed the acquisition of the Triton Power portfolio on 1 September in a £341m transaction. The portfolio includes the 1.2GW Saltend power station in the Humber along with two smaller plants, Indian Queens power station, a 140MW OCGT in Cornwall, and Deeside power station in North Wales, a decommissioned CCGT which provides carbon-free inertia to the system. These assets provide a platform to develop future decarbonisation options, in particular at Saltend, as outlined below.

In July, SSE Thermal completed the sale of the closed and decommissioned Fiddler's Ferry power station to natural resources company Peel NRE, who have future development ambitions for the site. 

For financial performance commentary please refer to the Group Financial Review.

SSE Thermal Capacity Contract Awards

The following agreements have been awarded through competitive auctions:

Capacity contracts are based on de-rating factors issued by the delivery body for each contract year, therefore will not directly match SSE's published station capacity.

Capacities stated reflect Transmission Entry Capacity

Marchwood (SSE equity share 50%) tolling arrangement means SSE receives 100% of economic benefit from capacity contract

Keadby 1 has capacity obligation in 2022/23 and 2025/26 but none in 2023/24 or 2024/25 contract years.

Keadby 2 16 year obligation comprised of a T-1 and a 15 year contract

Growth opportunities

Delivering lower-carbon flexibility is a key pillar of SSE's NZAP. Developing decarbonised alternatives to the existing CCGT fleet will be vital to deliver SSE's goal to cut carbon intensity by 80% by 2030 and achieve its science-based carbon reduction targets, aligned with a 1.5C global warming scenario. SSE Thermal is developing projects that include carbon capture and storage (CCS) and hydrogen; technologies which will be critical to society in the transition to net zero, enabling enhanced renewables deployment by balancing the system.

In the first half, SSE Thermal made good progress in its plans for carbon capture power stations, which are being co-developed with Equinor. Building on the selection of the East Coast Cluster as a Track 1 cluster, it was announced in August 2022 that Keadby 3 Carbon Capture Power Station has been shortlisted to progress to the due diligence stage of the UK Government's Cluster Sequencing Process. This process will give the project the opportunity to receive government support through a Dispatchable Power Agreement; a revenue support scheme designed for power projects with carbon capture. A contract for the completion of FEED study (Front End Engineering Design) for the power station, which will be up to 910MW, was announced in June. The station could be operational by 2027 subject to reaching a final investment decision in 2023. It would capture up to 1.5m tonnes of CO2 a year, which represents at least 5 per cent of the UK Government's 2030 target, while providing low-carbon, flexible power to back-up renewable generation.

Details on the timing for selection of Track 2 clusters have not been confirmed although the UK Government has committed to engaging with industry this calendar year on that process. The Scottish Cluster, a 'reserve Track 1' cluster continues to be well placed, with the UK Government committed to supporting four clusters by 2030, including two by the middle of this decade. SSE Thermal and Equinor's Peterhead Carbon Capture power station project is likewise continuing to develop with planning application submitted in March and July's announcement of the award of a FEED study contract.

Low-carbon hydrogen will be an important facet of a net zero economy, with the British Energy Security Strategy published in April 2022 setting out an ambition for a production capacity of 10GW by 2030 to secure indigenous supplies of low-carbon energy. The UK Government's 2021 Hydrogen Strategy highlighted the role it will play in providing flexible energy for power, heat and transport and the need for large hydrogen storage facilities. In August 2022, UK Government launched a consultation to support the delivery of hydrogen transport and storage infrastructure critical to enabling the targeted volumes of production.

SSE Thermal is progressing with a proof-of-concept project, the purpose of which is to better understand and de-risk the interactions between hydrogen electrolysis, hydrogen cavern storage and 100% hydrogen dispatchable power, with the intention of drawing on government support via the Net Zero Hydrogen Fund and Hydrogen Business Model. This project will enable and inform the scaling up of both SSE's, but also the wider Humber's, hydrogen ambitions. In parallel, SSE Thermal is continuing to develop low-carbon hydrogen projects, alongside Equinor, including hydrogen blending at Keadby2, Keadby hydrogen power station and Aldbrough hydrogen storage, and sees significant further growth opportunities as routes to market develop.

SSE Thermal and Equinor's acquisition of the Triton Power portfolio in September 2022 adds to this hydrogen pipeline, with plans to blend up to 30% low carbon hydrogen by 2027. Saltend power station is a potential primary offtaker of hydrogen from Equinor's H2H Hydrogen Production facility, which has also progressed to the due diligence phase of the UK Government's Cluster Sequencing Process

SSE Thermal continues to explore the decarbonisation of the Medway site through hydrogen or CCS, and has further opportunities such as a new potential low carbon power generation development option in North West England, well-located relative to the HyNet Cluster. 

SSE Thermal is also actively exploring opportunities for low carbon flexible generation in Ireland where policies for hydrogen and CCS are currently at an early stage, but there is definite potential for these technologies, with solutions such as biofuels potentially providing a transitional step to hydrogen power generation in the near term.

Commissioning of Keadby 2, SSE Thermal's 893MW CCGT, started in October 2021 with performance validation testing expected to complete in January 2023, which represents a delay of three months. The unit has been generating intermittently since the commencement of its commissioning phase and has captured some value to date. This delay does not impede the achievement of timelines for completing testing required under Capacity Market Rules. Keadby 2 brings Siemens Energy's cutting-edge turbine technology to the UK; this first-of-a-kind turbine is one of the most efficient in the world and will displace older, more carbon intensive plant on the system. It is capable of being upgraded to decarbonise the system further, through hydrogen blending or carbon capture and storage.

Gas Storage

Gas Storage key performance indicators

Gas Storage overview

SSE Thermal holds around 40% of the UK's conventional underground gas storage capacity. These assets support stability and security of gas supply and can potentially be converted to hydrogen storage for a net zero future.

Through the first half, SSE Gas Storage performed strongly, navigating highly volatile gas markets and optimising assets to help ensure security of gas supply for the UK whilst providing important liquidity to the market. As well as their clear societal value, the assets are also a significant risk management tool to the portfolio by offering short-notice flexibility to mitigate exposures from wind speeds and demand variability. The increasing focus on gas security arising out of geopolitical developments underlines the importance of gas storage.

Following a number of years of very low profitability, SSE's gas storage assets have made a substantial contribution in the period with high withdrawals in response to market signals and trading profits realised against a low stock price. The return to service of Aldbrough Cavern 9 has also enabled the capture of additional value, as has investment to increase available capacity. These assets are well positioned going into the winter, with high levels of gas stored and technical readiness to respond to market demand. As a result of an increase in future market revenues forecast from these types of assets, the historical impairments have been fully reversed on Aldbrough at half year.

SSE Thermal remains committed to working with UK Government departments and Ofgem to ensure the critical role of UK storage is properly valued.

Plans to develop a potentially world-leading hydrogen storage project at Aldbrough with Equinor, announced in July 2021, are progressing. Following the commitment in the British Energy Security Strategy to deliver hydrogen transport and storage business models by 2025, the UK Government published a consultation on this at the end of August 2022. This consultation notes the importance of storage as a 'system balancer' and envisages underground hydrogen storage becoming important to the functioning of the hydrogen economy by the end of the decade. SSE Thermal is participating in industry working groups to progress the development of the business model. As described in the previous section, SSE Thermal has submitted a proof-of-concept project to the Net Zero Hydrogen Fund, including a hydrogen cavern storage element. 

For financial performance commentary please refer to the Group Financial Review.

Energy Customer Solutions

overview

SSE Business Energy in GB (non-domestic) and SSE Airtricity on the island of Ireland (domestic and non-domestic) provide a shopfront and route to market for SSE's generation, renewable green products and low-carbon energy solutions.

The Russian invasion of Ukraine and resulting disruption on global commodity markets led to notable cost inflation, which the customer business has been actively managing on behalf of its customers. Given the operating environment, the business placed a keen focus on risk management, particularly in relation to its hedging position and pricing approach, to maintain service to its customers in a responsible and sustainable way. As detailed in the subsequent business breakdowns it has also taken several steps to increase its support for those customers who need it most, as well as working constructively with governments on assistance packages.

Across Great Britain and Ireland, focus remains on supporting customers to reduce energy consumption, modernise systems and expand the green energy product offering to ensure the business grows its position as a trusted partner to customers on their net zero journey.

The business has also made strides on diversity targets, particularly in the recruitment of personnel to green customer service roles, while also targeting support to help staff on lower salary bandings.

SSE Business Energy

SSE Business Energy key performance indicators

SSE Business Energy overview

In GB, SSE Business Energy (BE) markets its products under the SSE Energy Solutions brand alongside SSE Distributed Energy, selling power to around 469,000 non-domestic customers across GB. 

Operational delivery

With all new customers signing fixed contracts in 2021 offered 100% renewable electricity from SSE Renewables' wind and hydro assets, the number of customers on Business Energy's 100% green-as-standard tariff has increased by 41% over the period.

Following the successful 2021 launch of its new simplified Corporate Power Purchase Agreement proposition, Business Energy has successfully closed a number of contracts for business customers, allowing them to secure 100% renewable power backed by SSE assets for up to five years.  Smart meters will continue to be a vital tool for consumers to manage and reduce demand, with BE continuing with its rollout of the Smart programme, having successfully installed 11,700 smart meters in the period.

In response to higher customer engagement, the business has also increased resourcing levels to enhance support for customers during this period. This has included introducing online self-service for business customers.

Business Energy has also been actively delivering Faster Switching and other regulatory schemes. In addition, in recent weeks SSE Business Energy has been implementing the Energy Bill Relief Scheme for eligible customers. The business has taken a pragmatic approach, working collaboratively with Government to complete system change at pace.

For financial performance commentary please refer to the Group Financial Review.

Growth opportunities

Business Energy is continuing to expand its product offering of green energy and low carbon solutions in order to enhance its position as the trusted expert for business customers on their net zero journey. During the period, it has forged a number of successful partnerships to bring innovative and practical products to customers that the business will continue to build on throughout 2023 and beyond.

This includes Business Energy's recent partnership with sustainability platform, Zellar, which provides access to a knowledge centre for businesses seeking to operationalise sustainability practices, tools to measure progress, and a directory of accredited sustainable goods and service suppliers.

Sse Airtricity

SSE Airtricity key performance indicators

SSE Airtricity overview

The SSE Airtricity brand continues to strengthen, and the business serves over 700,000 home and business customers across the island of Ireland.

Operational delivery

The nature of electricity markets has meant all suppliers, regardless of energy mix, have been exposed to rising wholesale prices. While the business has been actively managing market challenges, sustained volatility in global energy markets has impacted customer tariff decisions during the first half of the year.

SSE Airtricity established the largest customer support fund of any supplier on the island, making provision for up to £21m in customer affordability funding. This support includes holding energy costs for financially vulnerable customers* at June 2022 levels until 31 March 2023, a free home energy upgrade for 600 vulnerable households and donations of almost £2m to charitable partners. These measures have ensured support is targeted directly at communities across the island and demonstrate SSE's commitment to responsible business. Indeed, as mentioned earlier, the actions taken in Airtricity will mean the Group does not expect to record a profit within the SSE Airtricity business this financial year, even accounting for any additional returns from Airtricity renewable contracts resulting from REFIT1.

With that in mind, further context of the profits covered earlier in the Financial Review is required. An adjusted operating loss of £(2.9)m was recognised in the prior year, which included one-off adjustments which reduced adjusted operating profit by a net £(17)m. Excluding these adjustments, the reported and adjusted operating profit would have been around £14m, which is broadly consistent with the current period result.  However, unlike the prior year, the current overall profitability position is expected to reverse by year end as the business further supports customers via SSE Airtricity's enhanced affordability fund.

As in GB, on the island of Ireland Airtricity has been working closely with government partners to establish and administer government support schemes with optimum efficiency, so customers receive the support within the timeframes outlined in the schemes. This has included delivering the Microgen Scheme and enhanced consumer protection measures for Winter 2022 in Ireland.

The business has also supported customers to reduce their energy consumption through service offerings such as full home retrofits in Ireland enabling cost savings and reducing carbon emissions. It has brought several innovations to market such as funded solar offerings. It will continue to build on these innovations in the second half of the year as it continues to support customers on their net zero journey while enabling cost reduction.

For additional financial performance commentary please refer to the Group Financial Review.

 *excludes customers of the AGSNI business, as a Regulated entity

Growth opportunities

SSE Airtricity's pioneering first Sustainable Energy Authority of Ireland ('SEAI') accredited one-stop-shop model for home energy efficiency upgrade in the Republic of Ireland and Northern Ireland continues to grow with an ambition to retrofit 45,000 homes across Ireland by 2030. The business has secured energy credit savings of 1.5 GWh** and the growth of the Energy Services business segment remains a key priority for 2023 with further expansion planned for Northern Ireland.

The business continues to develop its offering in Smart and microgeneration with further propositions planned in the second half. SSE Airtricity further strengthened its B2B customer services with the recent launch of the Electric Vehicle Charge Points product platform added to existing lighting, solar and demand side response offerings.

 **via our partners AES and Activ8

SSE DISTRIBUTED ENERGY

SSE Distributed Energy key performance indicators

SSE Distributed Energy overview

The primary activities contained within this segment are distributed energy, solar and battery storage. Distributed energy activities relate to embedded generation, EV infrastructure, heating and cooling networks and smart buildings. Solar and battery storage activities relate to a growing pipeline of grid-scale solar generation and battery storage assets.

Distributed energy, solar and battery storage assets have an increasingly important role to play in the GB energy system as electrification accelerates and generation is increasingly led by intermittent wind output. They also provide valuable diversity and optionality to the SSE portfolio.

Operational delivery

As the grid-scale solar and battery pipeline has grown, a standalone team was formed to provide increased focus on the successful development and delivery of the portfolio. Recent progress includes works now fully under way at a 50MW battery storage asset on a consented site at Salisbury, Wiltshire, with full energisation expected in summer 2023.

The Distributed Energy team has made progress helping people and places reach their net zero targets by adopting a 'whole system' approach to connect localised and flexible energy assets. These include energy optimisation, heat and cooling networks, electrical networks, smart buildings, and EV charging.

For financial performance commentary please refer to the Group Financial Review.

Growth opportunities

The Solar and Battery team has nearly doubled its secured pipeline so far this year from 380MW to 700MW with more than 1GW of further sites under active consideration. Secured pipeline growth has come through acquisition of a 320MW battery project at Monk Fryston, which is subject to planning.

Development at the 30MW solar farm at Littleton Pastures in Worcestershire continues and once complete in 2024, the 77-acre solar site will be capable of powering some 9,400 homes.

In addition, progress is being made to bring two 150MW battery projects to the former SSE power station sites at Fiddlers Ferry and Ferrybridge. Once built, these batteries will also benefit from remote monitoring and energy trading services through the SSE Enhance platform.

The Distributed Energy team is targeting construction of a network of 300 EV charging hubs across the UK by 2027 and opened its first site in Glasgow this summer. It has also announced a partnership with Oxford Properties and M7 Real Estate to build EV charging hubs at 20 retail parks in the Oxford area: capable of charging an estimated two million vehicles annually. 

ENERGY PORTFOLIO MANAGEMENT (EPM)

EPM key performance indicators

EPM overview

Energy Portfolio Management (EPM) is the energy markets heart of the SSE Group, securing value on behalf of SSE's asset portfolios in wholesale energy markets and managing volatility through risk-managed trading of energy-related commodities for SSE's market-based Business Units. 

SSE trades the principal commodities to which its asset portfolios are exposed, as well as the spreads between two or more commodity prices (e.g. spark spreads): power (baseload and other products); gas; and carbon (emissions allowances). Each commodity has different risk and liquidity characteristics, which impacts the quantum of hedging possible.

See also SSE's Hedging Position earlier in this document.

Operational Delivery

In the six months to September 2022, EPM navigated continued energy market volatility, ensuring the SSE portfolio was hedged in accordance with the Group's approach to hedging and then optimised through prompt periods. The value EPM secures for SSE's asset portfolio continues to be reported against individual Business Units.  Exposure to shape trades as a legacy of the sale of SSE's domestic Retail business to Ovo Energy has now expired.

For financial performance commentary please refer to the Group Financial Review.

Growth Opportunities

Transformation of the EPM Business Unit continues with recruitment into risk, trading and data analytics. Trading activity is becoming established in France, Belgium and the Netherlands as the business looks to expand into Europe to support the Renewables business. Projects to optimise wind balancing performance and support further international expansion are also progressing.