Under Ofgem’s revenue=incentives+innovation+outputs (RIIO) network regulation, network companies have made a lot of progress in their ability to use innovation. It wasn’t always the case. Following privatisation in the 1990s the focus was on cutting costs, and rightly so with the cost of the networks on bills falling by 17 per cent over the last 20 years. However, as any business would tell you, cost cutting leads to less focus on research and development which benefits consumers.
Things have been changing. Since 2010 for electricity distributors and 2013 for other companies Ofgem has widened the availability of innovation funding available through the price controls that we set for the network companies and they have responded well. Independent consultants estimated that the net benefits to consumers of distribution network operators’ (DNO) innovation projects in the 2010-2015 price is around £1 billion, rising to £8 billion if the learnings are adopted across all of Britain’s network companies.
Changing role
The companies need to go further though. The energy system is going through unprecedented changes with rapid growth in renewable energy, falling costs for electricity storage and new approaches to providing demand side response. At the same time, the role of network companies is changing, especially in electricity distribution. Gone are the days when the DNO’s job was simply taking electricity from the high-voltage grid and transporting it passively to customers. As the system becomes smarter and more flexible, the DNOs are taking on the wider system operator role where they actively manage flows on their networks.
All these developments point towards innovation being critical to how network companies do their job in future. Put simply, innovation is no longer a ‘nice to have’ it must be part of the day job and we need to see a stronger culture of innovation developing across all network companies.
Group working
This spring we will consult on the framework we will use to set tougher price controls for network companies from 2021. Our price controls will set strong incentives for innovation, but in return I want see further collaboration between network companies on solving systemic problems so that smart solutions can be rolled out across all networks.
Group working is also important so that we avoid duplication on projects. For example, when we announced the winners of last year’s Network Innovation Competition we told three DNOs to work together on the projects they submitted to remove duplication and coordinate learnings which will support markets for providing electricity flexibility services. I also want to see more evidence that network companies are working with third parties such as technology providers on innovation projects.
New uses for data, energy services such as demand-side-response, electricity storage and the roll out of electric vehicles throw up great challenges and opportunities that across the sector we must make the most of for consumers.
The networks have made good progress over the last decade, but we need a step change so that they become highly innovative business which are not as reliant on specific funding programmes as they are currently. The need for the companies to use innovation will only increase in the next decade. Developing, testing and deploying new approaches quickly is the best way for them to stay on top of the major changes we are seeing in the energy system and deliver the best possible service – and value – to consumers.
Jonathan Brearley will be speaking at Utility Week and Network’s Future Networks Conference in Birmingham in April.