Making the case for innovation

 

At the LCNI conference in Manchester this year, Dermot Nolan, Ofgem’s chief executive, was the keynote speaker. His message was clear, the case for providing innovation funding under the control of network operators is hanging in the balance. Ofgem senior partner Rachel Fletcher further reinforced this message during her speech at the Utility Week Congress in Birmingham. It is a worrying message for several reasons. The customer incentive programme, which has paid for £350 million-worth of projects to date, means the UK is now seen as a leader in Europe in providing innovation funding. Funding that the network operators have said is necessary, and has been sanctioned by an Ofgem expert panel.

Ofgem has commissioned an analysis aimed primarily at answering the long-standing question: is the incentive value for money to the customers who are funding it? It will also be consulting more widely with the public on this question. But the analysis goes further, looking for answers to other questions such as why more of the successful LCNI projects have not been adopted as business as usual, and whether third parties should be allowed access to the funding in competition with network operators?

It has been mooted that the reason for the gap between funds awarded and the full £0.5 billion budget over five years is the result of a shortage of high quality projects. This raises more questions about the future of funding. How is it that a sector as desperately in need of innovation and modernisation as energy is struggling to spend the full funding available and make the case for more funds?

The answer is not straightforward. The reasons for the lack of take-up are varied. Some projects are testing solutions to future problems on the networks. Not all R&D projects are successful, but regardless, they provide useful learning to inform future solutions even if they do not deliver the desired results. Are the right projects being chosen? The list goes on.

A previous report into the benefits of NIA and NIC funding from UK Energy Research Centre in February 2015 stated: “In what might be an over-generalisation, our feeling is that the network licensees had, over the last 25 years, broadly forgotten how to undertake, manage or report R&D with the result that experiments – necessary to test ideas or gain knowledge – are not always well designed and reports sometimes fail to follow good scientific practice in providing the means by which others might test the results and conclusions.” We can only hope these concerns have been rectified.

Incumbent stakeholders should not be allowed to define innovation because this often prevents real disruptive innovation occurring or being adopted, even if it is seen by customers as more service friendly (note that this does not rely on being lowest cost but best value).

But the real elephant in the room is the market structure into which the innovation is being delivered. Is it fit for purpose in a world that is changing so quickly?

Innovation is not just a technical activity, it includes the entire context within which it resides. Will the questions address this issue or will they focus purely on the economic outcomes under the current market structure? What would the outcome be if you changed not only the technology but also the relevant commercial or market structures so that they become self-adapting?

Bitcoin or Blockchain concepts are built with this approach and were considered completely unlikely to affect serious financial markets when they were first deployed. Mainstream banking is now embracing the same Blockchain technology and processes as it is seen as a clear and present threat to their businesses.

Is the case for power system innovation funding being made by asking the wrong questions? Time will tell. The important issue is that all with an interest in ensuring that we have a vibrant and flexible innovation funding mechanism for the regulated sector of power and gas respond to the consultation. To be an accurate analysis it must be provided with a solid representation from the UK supply chain that sets out the need for, and design of, a funding incentive scheme. I hope you will respond with your views to this important review.

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