Editor’s letter: Driving innovation in energy and water

While the need to innovation in utilities is widely accepted, the approaches used to encourage it varies between the regulators.

Innovation. It’s a much overused buzzword these days, but nevertheless it is the key concept for utilities as they reshape themselves to face the challenges of the future. It’s also much-beloved of economic regulators, who see innovation as a means of companies delivering more for less.

Interesting, then, that Ofwat and Ofgem take such different approaches to fostering innovation among once-staid, former public sector monopoly utilities, and realising its benefits for customers.

Ofgem’s approach is now well established, and extremely successful. The ring-fenced innovation funding that started life as the Low Carbon Network Fund and transitioned to the Network Innovation Allowance and Competition has driven genuine culture change among networks. The findings of the many innovation projects completed to date are significant, and will be key enablers as networks seek to transition to a more flexible, integrated energy system.

The obvious, and perhaps the easy, path for Ofwat to take would have been to learn from this success and introduce similar ring-fenced funding for water companies. However, the water regulator’s leaders, chairman Jonson Cox and chief executive Cathryn Ross, have made little secret of their scepticism with regard to innovation funding. Other ideas were floated, such as linking the cost of equity to evidence of innovation to create financial rewards, but in the end, they have not materialised.

That’s not to say Ofwat isn’t pushing innovation – it’s a key theme of the price review, and a determiner of whether water companies will achieve coveted “exceptional” status for their business plans, with the financial and other rewards that entails. The methodology rule book has this to say about innovation: “Innovation will be seen in the culture, the processes and the people in the company. It will not be limited to the use of new technology or a new service.”

So Ofwat is seeking innovation of process as well as physical innovation. It’s fair to say that network innovation to date has been focused mainly on engineering solutions that are, by the very nature of the project-based funding, discrete. It’s also fair to say that embedding that project-based innovation into business-as-usual is an ongoing challenge for networks – one that Ofwat, by demanding innovation as a core feature of the business plan, will hope to avoid.

That said, the water sector is playing catch-up on innovation. Ofgem’s funding approach has driven a culture change and created a host of new solutions and approaches that are attracting attention from across the world. It remains to be seen whether Ofwat’s more nuanced approach can compete.