“There is an intrinsic enthusiasm for net zero. Perhaps because of what has happened with Covid, people and organisations are more open about what to do next. This is an opportunity to be seized, to capitalise on an enthusiasm for doing things differently.”
The new chair of the EIC clearly relishes the opportunity to be once again at the centre of change in the utilities sector. After a total of nine years at Ofgem – originally working with the regulator from 2003 – 2007, and then again as chairman from 2013 – 2018 – Gray says it is “good to be on the other side” and to use his knowledge of the sector to guide a path through what he admits can seem a complex environment for innovators.
Utility Week caught up with Gray and his predecessor on separate calls to discuss the successes of the past, the opportunities of the future and the key areas for innovation. Throughout these conversations, the underlying theme was the crucial role of innovation in creating what Cocker memorably describes as “green collar jobs”. In fact, the only area on which the incoming and outgoing chairs diverge is over the potential impact of Ofgem’s draft determinations for RIIO2. Given their respective backgrounds this is hardly surprising. But, more of that later.
Cocker spent two years as chair of Ellesmere Port-based EIC, overseeing its expansion beyond its traditional base of energy and into water and rail. The ethos, however, remains the same – the EIC acts as a bridge between the innovator community and the monopolies.
Since its inception in 2008, the Denise Massey-led not-for-profit organisation has worked with a community of over 7,000 innovators and in that time there have been more than 150 calls launched – with 85 per cent successful in having a solution explored by a network partner.
Its funding still comes from the networks and both men say the next step is to move away from annual payments – creating what EIC refers to as a coalition for the future, in which utilities partners sign up a five-year period spanning their respective price controls.
Cocker explains: “If you have that coalition of the willing, then for other players in the ecosystem there’s greater clarity of purpose and direction and therefore transparency of what people are trying to achieve. That reduces the risk of duplication and will hopefully improve the pace of support for innovation.”
Both accept that the utilities sector may not be the immediate port of call for creative entrepreneurs keen to shake up the status quo.
“These companies by their nature absolutely have to ensure security of supply”, Cocker says. “They have to have great health and safety and therefore that can lead to a risk averse culture.
“It is a real culture change for some of these organisations to be more innovative. But that change, while also maintaining the focus on security of supply and health and safety, is essential if we’re going to meet the challenge of net zero.”
Gray accepts there is some validity to stereotypes of the sector being risk averse but adds: “If you look at the huge changes in the energy system over the past ten years, it’s clear that this is an industry that is adapting and reshaping to the world around it. That fits squarely with the objectives of innovation.
“The industry needs to be responsive and recognise they are dealing with companies that are very unlike them but who share the same goals.”
But, how does a regulated sector providing a lifeline service ever reconcile itself with one of the central tenets of innovation – the right to fail?
For Cocker, this is a case of distinguishing between frontline areas where failure is simply not an option and areas where creative solutions can be trialled without impacting on the delivery of lifeline services.
As an ex-regulator, Gray sees this as an important part of stimulating competitive processes in a monopoly environment.
“In a competitive market, what happens most often with innovation is that it fails. That also leads to a speed of progress – the mantra is fail quickly, try again.
“You have to be tolerant of failure, otherwise you’re not testing the boundaries. But, what you must do is be careful that overall your programme is producing some positive net return for the consumer.”
Electricity and water can mix
As chair of Affinity Water, Cocker is closely involved with the fledgling journey to embed innovation within the regulatory framework, as the industry works with Ofwat to flesh out its vision for a £200 million innovation competition.
He insists that there is a genuine “forward thinking” from water company execs and an acceptance that collaboration will drive the fastest pace and widest benefits from innovation.
Clearly there is much to learn from the experiences of Ofgem and the energy sector. Gray was in the vanguard of this movement in the early noughties when he admits he was perplexed at how controversial the notion of innovation funding within price reviews was.
He explains: “The price controls had been really effective in driving costs down and one of the costs that had gone altogether was not just the spending on innovation, but the management capacity to handle that. We needed to kickstart a different way of thinking with the network companies.
“We started with some very small-scale incentives which were designed to get the process going again. We introduced a separate pot of money from the main price control and then that developed through the next price control and more importantly to RIIO1, to the extent that consumers – through energy bills – became one of the main funders of innovation in the economy not just in the sector.
“The water sector is nearer where we were in 2005. You need to look at that history and start at a modest level because what you are trying to do is build up capacity in the companies to handle innovation funds and work out good ways for it to be spent.”
Did Ofgem get it right?
Talk of regulation – and getting it right – leads us to the subject of Ofgem’s recent draft determinations on the RIIO2 price controls for transmission, gas distribution and the electricity system operator.
The regulator’s first take on company business plans was met with howls of outrage, with a common accusation that Ofgem was disincentivising investment in innovation to help us reach net zero.
Gray says this has to be seen in a wider context: “The evidence is that ever since privatisation, regulators have failed to push down on costs and industry returns to the extent they intended. That’s actually a really good thing because it means the system is working properly – you set what you think are tough targets, the industry not only deals with them but more than deals with them and makes lots of money anyway.
“At the same time though, the government has this really major target of decarbonisation by 2050 and the network price controls need to, at the very least, acknowledge and facilitate that and ideally they should be a really active part in the process.
“You are faced with two objectives – to keep costs down and to keep the incentives going for investment in a green strategy.”
But ultimately, he describes himself as “intrinsically an optimist on the availability of investment”, adding “if the projects are there, and they make sense, then the money appears”.
Cocker, meanwhile, has “concerns about the overall picture that came out from the draft determinations”.
He says: “Ofgem’s process kicked off a long time ago but in the middle of that process we had the net-zero commitment. Has Ofgem taken sufficient account of that legislation?
“We now see the Chancellor of the Exchequer pushing a green recovery and we know the net-zero ambitions of the networks can provide green collar jobs up and down the country.
“Of course we have to consider price and affordability, particularly post-Covid, but we should also focus on jobs.
“Does Ofgem’s draft determination really address the current situation post-Covid of the absolute need to hit net zero, the need for improved environmental outcomes, the need to create jobs up and down the country, as well as balancing affordability?
“I think there’s more work to be done.”
Ones to watch
Looking beyond the question of how innovation is funded, where is it best targeted?
Cocker points to innovations during his time as chair that show the practical impact of innovation, including self-healing cables, Pollywood poles and the increasing use of drones.
But, significant challenges remain within the wider net zero conundrum – how best to decarbonise heat and transport chief among them.
Gray insists that on a pure innovation basis, these overarching questions should not stand in the way of creating the building blocks for multiple outcomes.
“If you look at the electricity sector, there’s been huge progress in facilitating renewable generation. That’s a process that has worked better than anyone expected and now we are up against a series of technical problems to do with how you operate a network with a very high degree of penetration of renewables which are inherently intermittent. There’s a very basic building block required which is some sort of system stabilisation measures to make the national grid work in that environment. The most obvious is largescale battery storage, which has been an objective for decades but is now becoming a realistic possibility.”
He adds: “I’d like to see at this stage, with 30 years to go, focus on what the main technological innovations need to be. So, rather than determining the answer to, for example, home heating, we’re still at the stage where we need to do a lot more research and development into the options. There’s a lot of scope for science and technology to move on in the key areas – whether that’s converting the gas grid to hydrogen or looking at heat pumps, or whatever – over the next 30 years.”
He adds: “If you just look at what has changed over the last ten years it makes it seem ridiculous that we could confidently predict what will happen over the next 30. We have to pave the way for many different outcomes.”