The next steps for innovation

Ofgem has concluded that support for network operators to innovate should continue, but with a tighter budget and increased competition.

The next steps for innovation

Network operators are without doubt more innovative than they were before the introduction of the Low Carbon Networks Fund (LCNF), but there is still road to travel before a complete culture change takes place. The LCNF’s replacement, the Network Innovation Competition (NIC), is safe until at least the end of the current price control period, Ofgem confirmed in December after the publication of an independent review into the LCNF’s success.

But the NIC will be trimmed and new obligations put on DNOs and gas networks as part of the funding. Ofgem has revealed plans to cut the funding budget and drive greater strategic thinking through the production of an innovation roadmap. It will also set the wheels in motion to allow greater access to the funding pot by third parties.

Funding through the NIC initially only committed for the first two years of the current electricity price control, with the review of the success of the LCNF being used to determine the future of the NIC after this point. When plans for a review were announced, the industry was not shy in coming forward with points for improvement. These included broadening the scope of the scheme and allowing third parties in. It wasn’t all constructive criticism though – some called for the scheme to be cut back or scrapped.

The headline findings of the review were revealed by Ofgem chief executive Dermot Nolan at the LCNI conference earlier this year. These include estimated net benefits of LCNF projects totalling around £1 billion if the companies trialling technologies were to adopt them permanently. This could rise to £8.1 billion if innovations are successfully adopted GB-wide.

The review conducted by consultancy Poyry and Ricardo Energy and Environment also found that network operators have moved from a low to medium level of innovation, but need to be highly innovative to meet the challenges of delivering a low-carbon future.

The review puts forward a series of proposals to improve the NIC. Firstly it calls for funding to be continued to take advantage of the momentum already generated by past funding. It also calls for the production of an innovation roadmap by DNOs in conjunction with the SO, transmission companies and other parties associated with the gas, heat and transport sectors to ensure funded innovation is optimised to deliver maximum benefits for consumers.

It also calls for a greater focus on the sharing and dissemination element of projects, and puts forward the concept of each DNO taking on the role of innovation area “champion” to minimise the risk of project duplication. But the proposal which is likely to have most impact is its agreement that third parties should have more direct access to the funding pot.

In light of these findings, Ofgem has opted to continue with a streamlined version of the NIC, cutting the budget for electricity companies to £70m from £90m annually in an effort to drive efficiency and ensure value for money. It said it could find little evidence for increasing the budget because network operators are already not claiming the full budget. Those who have called for a larger pot have also called for the scope of the scheme to be broadened, but Ofgem has not revealed any plans for doing so.

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Ofgem is therefore removing the Successful Delivery Reward, meaning network companies will now make a non-refundable 10% contribution towards the project costs. Ofgem says this will increase the stake companies have in a project and encourage them to bring forward better projects. The bid preparation costs mechanism will also be removed.

Ofgem has also set out plans to require DNOs to work together to develop an innovation strategy and will be working with government to explore whether to legislate to allow third parties to bid directly for NIC funds.

Beyond this it plans to place a requirement on network companies to issue a call annually for ideas from third parties and to respond to these publicly from 2017 to increase transparency and promote engagement with third parties. WPD and National Grid have already undertaken such a process, with WPD submitting two of the resulting projects. Ofgem also plans to increase the number of projects network operators can submit from two to four to accommodate third party projects.

The consultation will run until February 2017 with a decision document due in the spring.


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