An Ofgem executive has pledged to make energy regulation more “agile and adaptive” and to fully exploit RIIO-2 innovation incentives and challenge funding through a new partnership with the government’s UK Research and Innovation (UKRI) agency.
Steve McMahon, who is in charge of policy on electricity distribution at the energy regulator, was addressing the plenary session of the Utility Week Live Summit (UWLS), and responding to co-panellist Laura Sandys, chair of the newly-created Energy Digitalisation Taskforce.
In her opening remarks, Sandys had publicly thrown down a challenge to Ofgem and the Department for Business, Energy & Industrial Strategy (BEIS) to be bolder in re-thinking the regulatory system and market design, and to embrace the same attitude to innovation that is taking hold across the sector.
Sandys said: “Innovation also does need to happen in the regulatory field, and in the market design field. So, I think that’s actually an opportunity … for regulation to go through its own innovation, and I know there’s quite a lot of work being done by Ofgem on that.”
Responding, McMahon replied: “Laura’s spot on – like everything else, approach and conditions need to evolve, and that’s something we recognise at Ofgem. Part of that is recognising that innovation doesn’t just mean engineering and technology, it is much more than that.
“As we face up to the next phase of the decarbonisation challenge we completely agree that we need to make sure regulation evolves to reflect those wider challenges, so we’re going to see a much more agile and adaptive regulatory approach, the funding and processing on our side from the new innovation funds, which are going to nest under the RIIO-2 price controls.
“On the funding side, we’ve got to have the ability to dial up allowances for investment or innovation, as policy for net zero continues to evolve.
“Another big reform on our side is that innovation is much more closely co-ordinated with innovations that’s happening elsewhere, particularly across government and the other regulators.”
McMahon also referred to Ofgem’s new Strategic Innovation Fund (SIF), under which the regulator will set competitive funding “challenges” for the network operators and electricity system operator around the energy transition.
The SIF aims to coordinate more closely with other public innovation funding streams, such as Innovate UK, Ofwat’s Innovation Fund, the Industrial Strategy Challenge Fund and the Industrial Energy Transformation Fund.
Announcing the SIF in March, Ofgem said at the time that it was “exploring” a partnership with UK Research and Innovation (UKRI), the national funding agency investing in science and research.
McMahon indicated that the tie-up was now in place, telling the UWLS online audience: “Lots of funds are being introduced, a lot of these have a strong energy focus, irrespective of background, and again that needs to be strategically organised so that it’s not siloed.
“To help us do that, we’ve got a new exciting partnership with UKRI to help us deliver the innovation programmes, so really harnessing their expertise to help transform that innovation landscape and the value it brings, including the deployment aspect.”
The need to regulate in innovation was a theme later amplified by Philip New, chief executive at the Energy Systems Catapult, who saw successful innovation as a “runway” blocked by multiple challenges.
He told the UWLS audience: “This is such a regulated space that it creates an extra layer of complexity and challenge for us as we think about navigating this in utilities … we have market structures that are really based around the needs of a system of 10 years ago, not the system of 10 years’ time.”
Sandys also discussed the need to innovate in technology and digitalisation, and how workable ideas can be grown to scale and integrated into wider ecosystems.
“In innovation, there’s something called ‘the valley of death’ where innovation gets lost when it comes to scaleability. So we should be looking to ensure that all of those pockets of innovation are actually scaled… and roll out these great nuggets of value that have been created through innovation programmes.”