Market view: High innovation is essential

A review of LCNF projects shows DNOs have moved from low to medium levels of innovation, but that a smarter energy market will need them to be highly innovative, says Jonathan Brearley.

Some of you will remember the landmark moment on 10 May this year when for the first time in well over 100 years, no coal was used to generate electricity in Great Britain for several hours.

Coal generation during that month was displaced by renewables – in particular, solar – and other cleaner generation. It shows how far GB has progressed with encouraging renewable energy, but it also highlights one of the big issues we have to tackle to move to a lower carbon economy.

Around 7GW of distributed generation is being connected year on year, as large centralised fossil fuel plants close. At the same time, smart meters, energy efficiency and other new technologies give customers much greater control over their energy use, as well as opportunities to generate electricity at home.

These changes in the energy landscape put the role of electricity grids into sharp focus. Companies will need to be innovative when thinking about how their networks adapt to the future. They also need to reconfigure grids to get the most out of their existing capacity. Only through innovation will we make the low-carbon transition at lowest cost to consumers.

Ofgem has encouraged networks to innovate by investing in trials, the costs of which they can recover through our network price controls. So are the companies up to the task?

We have carried out a review of our innovation funding and we asked consultancies Pöyry and Ricardo Energy to assess progress by looking at the projects the distribution network operators (DNOs) delivered from 2009 to 2015 through the Low Carbon Networks Fund (LCNF).

One of the LCNF projects was carried out by UK Power Networks (UKPN), in which it connected wind and solar generators by offering them cheaper connections if they all agreed to curtail their output at peak times. Connections like this are cheaper because UKPN does not have to carry out expensive grid reinforcement. Another project, by Western Power Distribution, also offered generators cheaper connections. Customers that connected more recently are more likely to be asked to curtail output at certain times. This project also trialled overlaying communications infrastructure over the electricity lines.

The consultants found that since 2009, DNOs carried out 65 trials, up to 37 per cent of which can be incorporated directly into their work practices. A further 41 per cent could be suitable for rollout in future when the market requires them. This is a reasonable success rate, as by their nature some innovation projects will fail.

DNOs spent £300 million on projects, and according to the consultants, benefits to customers are between £800 million and £1.2 billion if the projects are only rolled out as far as all DNOs. If the projects are rolled out more widely across Great Britain, the overall benefit is estimated at between £4.8 billion and £8.1 billion. We cannot be certain about these figures because it depends on what happens in the future, but this is an encouraging assessment of the value for money of this fund.

Overall, the DNOs have made progress, moving from low to medium levels of innovation. If we are to have a smarter energy market, we need grid companies to be highly innovative. There will need to be a culture change within network companies for them to get there, according to the consultants.

Their view was that many DNOs still do not believe that innovation is critical to the success of their business. The rate at which DNOs converted innovation into business as usual during the LCNF could have been quicker as well.

All networks can learn from the findings, and they must take these on board when applying for Network Innovation Competition funding (the successor to the LCNF). The companies should also develop a coherent, industry-wide strategy for using innovation.

Involving more third parties in innovation is also critical. Non-network companies have good ideas that are not currently being taken forward because they need a host DNO to work with. They have the skills and technology to make the projects work and they can also help to ensure best practice is followed and shared. For now we are telling network companies to ask third parties in a more formal way to come forward with proposals, so that there is a clearer call for them to get involved. To go further we would need government legislation.

Our price control formula for network regulation requires companies to develop outputs that their stakeholders want them to deliver. These include, for example, quicker connections and better customer service. When we next come to review the price controls, we expect the companies to show us how they will use innovation to deliver those outputs at lower costs for customers. In this way, innovation has to become a core part of each company’s business.

To sum up, the Great Britain market faces a major challenge to adapt to a low-carbon economy and the role networks play in helping this is very important. Our review into innovation funding is not about criticising the companies for what they have not done. The review explains the progress that has been made and recommends what needs to happen to build for the future.

Prior to the LCNF, the amount of innovation companies were using was minimal, so things have improved. But there is still a long way to go and it’s clear that we need a collective effort – one which pools the expertise of third parties, networks and industry experts to get us to the next level.

What is the Low Carbon Networks Fund?

Ofgem announced the Low Carbon Networks Fund in August 2009 to help drive innovation and new technology to deliver the networks of the future. It is one of the most significant and important investments in network innovation in Europe.

It provided £500 million over five years, encouraging and enabling the transition to a low-carbon energy sector. A total of £64 million of funding was available each year in the competitive element of the fund and a further £80 million was made available over the five years to help fund smaller scale projects.

An additional but discretionary £100 million was provided over the five years to reward projects that brought particular value in helping the networks adapt to climate change while providing security of supply and value for money to consumers.

LCNF projects are broken down into Tier 1, covering smaller scale projects that deliver initial learning to benefit the operation of the grid, and Tier 2, which is for larger scale projects in specific areas.