Ofwat continues to consult on arrangements for a £200 million innovation fund announced for AMP7. The funding will be raised from a levy on customers’ bills and will be made available to water companies, and their partners, through competition. Ofwat wants the fund to be transformational for the sector as it looks to increase resilience, respond to climate change and improve affordability.
For Ian Cameron the head of customer service and innovation at UK Power Networks, the innovation competition set up by Ofwat holds enormous potential for the sector. The key, he says, is making the bidding process easily accessible, promoting collaboration and having a sector-wide strategy.
Ofgem’s Network Innovation Competition (NIC), which has amounted to around £70 million a year for electricity networks and £20 million for gas has been under-subscribed, he says, partly because it is costly and burdensome.
“It’s a 100-page bid document and it takes us about seven months to prepare for the submission. Following several years of being under-subscribed, Ofgem reduced the headroom to provide saving to customers.
“To my mind, I’m not sure that’s the right approach, considering the benefits this fund delivers for customers,” he says.
The Energy Networks Association plays a central role running a ‘call for ideas’, matching networks with potential problem solvers. “It means that a single innovator doesn’t have to come and meet six different network groups, they’re all in one room. Networks like it, because it lifts some of the effort,” says Cameron. “On average, it costs over £100,000 to submit a bid. And if you’re unsuccessful, the costs are borne by the business, and any third-party company that’s part of the bid.”
The innovation competition has been one of two mechanisms for both electricity and gas networks to access innovation funding in the last price control period from 2015 to 2023. The other pot, Network Innovation Allowance (NIA), comes from energy networks being given a use-it or lose-it allowance, roughly half a percent of their revenues. “Water companies are not getting that, but that is possibly the most impactful form of innovation stimulus we have had and continue to have,” says Cameron.
For UK Power Networks the NIA amounts to about £8 million pounds a year. “Innovators can access the money quickly, we can make the decisions swiftly, it has clear governance on applicability, we don’t bid for it, and that results in you unlocking benefits a lot quicker.”
Cameron agrees Ofwat has the right idea for a sector-wide strategy to prevent duplication and wasting resources. “We should have had a common innovation strategy across all electricity companies a long time ago. In the past competitive barriers seemed to prevent consensus on where we needed to focus, but this is no longer the case. We now see less duplication and creating ‘new’ projects by making marginal changes to each other’s ideas, and a lot more collaboration.
“There was no incentive to fast follow, by which I mean that in innovation, you get certain businesses doing the ‘rock breaking,’ really trying to break the mould. And then you get businesses who pick it up when it’s nearly deployable, which I call the ‘rock shovelling,’ which is about picking things up and implementing them fast.
“We as electricity networks were not very good at fast following, it has taken us a long time to find it acceptable. Gas networks seem to fast follow well, specifically on technical asset innovations.”
Another aspect of Ofwat’s approach which gets Cameron’s seal of approval is the encouragement of collaborative bidding – a hallmark of the energy regulator. “Ofgem has been very clear that if you bid into the fund on an annual basis on your own, you need to have a good reason not to have collaborated with another network as a partner. There’s no written rule, but there’s very clear signals to that effect in their feedback.”
“Ofwat might want to consider making it a condition to include another water company in your bid, that way success can be scaled up quicker in two water networks rather than one.”
There have been criticisms from some quarters, that the innovation fund to the energy networks has not delivered on its promises. Cameron refutes this: “I think it’s been hugely successful. The challenge is that it had not consistently been made visible to our regulator, in that some networks may not report it in a way that makes the successes obvious.”
Cameron gives an example of the benefits the stimulus package has bought to UK Power Networks – classed as the second-smartest grid in the world by the Singapore Power Smart Grid Index, and top in Europe. “It’s called Flexible Plug and Play. It was a £6.7 million project funded through the network innovation competition to trial new technologies and commercial arrangements to connect distributed generation to our distribution network. In the last four years the project has saved customers over £78million. And there’s loads of projects that have been successful across all energy networks. But the consistency of benefits reporting and transparency are lessons for all to learn, both regulators and networks,” he concludes.
This interview appears in Utility Week’s Insight report in association with CGI examining the challenges and opportunities for the innovation fund. The full report can be downloaded here.