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Ofgem’s £500m bet: can network operators innovate?

Author: Alastair Martin 16th Sep 2015

Ofgem’s £500m bet: can network operators innovate?

Last month, electricity regulator Ofgem awarded £6.6m of Low Carbon Network Fund (LCNF) money to three Distribution Network Operators (DNOs) – UK Power Networks, Northern Powergrid and Western Power Distribution.  These days, we’re more used to hearing about investigations, fines and other signs of tough regulation.  So what was it that caused Ofgem to be so uncharacteristically generous with customers’ money?

The LCNF kicked off in 2010, funding major projects aimed at delivering the networks on which a secure, diverse and low-carbon economy will rely.  Since then, the electricity industry has transformed.  Whatever the government does next, we’ve got at least another five years of that process to run.  We’re well on the way to hitting 35GW of renewable capacity by 2020. 

Yet much of that capacity goes straight into transmission, ignoring the DNOs entirely.  Of the rest, only a small fraction was directly affected by LCNF projects.  The LCNF wasn’t responsible for the five-year surge in renewables. 

Meanwhile, we’re still waiting for electric vehicles, heat pumps and batteries to make a noticeable impact – areas that the LCNF put a lot of effort into.  On top of that, many small generator developers are finding it harder, not easier, to get a viable connection for their projects.  Large areas of the map are no-go, and many connection offers are spiked with Delphic caveats relating to future upgrades.

So why the pat on the back?

In one sense, this is about management.  The projects delivered their objectives on time and looked after their budgets well.  That’s definitely something for the project teams to celebrate, but in itself it isn’t going to revolutionise the networks. 

Here’s why Flexitricity got excited about LCNF projects like Low Carbon London and the Customer-Led Network Revolution, which were the top two reward-earners.

Before 2010, distribution network innovation was stuck.  No technology could be used unless it had previously been written up in policies.  These policies were typically inaccessible: jealously guarded and immune to external challenge.  CHP and renewable developers were stonewalled, and demand-response alternatives to network reinforcement were ignored.  Relationships were often adversarial, and the industry was going nowhere.

From 2010 to 2015, the LCNF allowed the industry to spend up to £500m on innovation, with one caveat: successful innovations had to be deployed.  And the innovations were pretty successful.  UK Power Networks worked out the right blend of demand response to enable it to defer capital works at highly-loaded substations.  Northern Powergrid now knows how to use distributed generation and flexible load to manage voltage.  Electricity Northwest has shown that active customers can unlock substantial capacity in wires already in the ground.

But these results don’t just point the way to a low-cost, low-carbon active network; they oblige the DNOs to deliver it.  The LCNF deal fed straight into Ofgem’s next price-control mechanism, the snappily-titled RIIO-ED1.

RIIO stands for “Revenue = Incentives + Innovation + Outputs”, and ED1 is the first eight-year round of it for electricity distribution.  Crucially, RIIO marks the end of the era in which a DNO’s profit depended mainly on how much copper it owns.  Under RIIO, profit depends on serving customers economically, and using appropriate innovations to do it.

Furthermore, in writing their business plans for RIIO, the network companies have explicitly included savings from LCNF technologies.  Demand response, for one, now has a fully commercial role in managing stressed network nodes.  The DNOs are already seeking offers of capacity in key locations.

RIIO and the LCNF haven’t yet revolutionised generator connection.  Within DNOs, it would be fair to say that there is still a cultural gulf between “on-the-ground” connections engineers, and the teams who delivered the innovation projects.  But the toolkits now exist.  If a connection offer is no more inspiring than it might have been five years ago, developers can refer the DNOs to their own great ideas for doing better.  Doggedness will often be required, but developers are used to that.

But then there’s transmission.  Increasingly, connections are limited not by local networks, but by what’s going on at the grid supply point (GSP) and above, in National Grid’s electricity “motorways”. 

Enter the Network Innovation Competition (NIC), and its smaller sibling, the Network Innovation Allowance (NIA).  These two funds succeeded the LCNF and brought National Grid into the party.  The first NIC projects are already underway.  One of the biggest is Smart Frequency Control, which will provide new opportunities for demand response to help secure electricity supplies.  More of that in a future blog.

With the Low Carbon Networks Fund, Ofgem took a £500m punt.  The DNOs rose to the challenge, and the bet paid off.  The rest of the industry needs to keep pushing, so that LCNF innovations become deeply embedded as business-as-usual practices.  We need DNO planning engineers to forget the time when active network management wasn’t a thing, or when the only assets worth considering in network security were made of copper.  In the meantime, the DNOs deserve credit for the massive step forward they have taken, and the door they have opened to cost-saving, carbon-saving new technology.

Written by Alastair Martin, Founder and Chief Strategy Officer at Flexitricity

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Alastair Martin

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