What is the future of network innovation funding?

Distribution network operators (DNOs) have come under fire in recent weeks for not being “innovators”. Some critics have claimed their regulated nature means they are not capable of meeting the innovation challenge required; others have said they should not be trusted with developing energy storage.

But network operators, through funding mechanisms such as the now obsolete Low Carbon Networks Fund (LCNF) and its replacements the Network Innovation Allowance (NIA) and Network Innovation Competition (NIC), are undertaking important projects that look ahead to the challenges likely to be presented by electric vehicles (EVs), distributed generation and demand side response (DSR).

The general consensus is these mechanisms are a force for good, but now the governance is under review in a consultation by Ofgem, calls are being made for improvements – calls that include opening up the NIC to third parties, broadening the scope of the projects for a more consumer focus, increasing the level of funding, and even questioning whether such a funding mechanism is still required.

Allow third parties to lead bids for funding

One idea which is gaining traction is to open up the NIC to third parties. As it stands the annual £81 million available for electricity networks under the scheme must be applied for by network licensees, although projects can be led by third parties.

The Energy Technologies Institute (ETI) in particular has called for third parties to be allowed to directly compete with networks for the funding. The ETI’s chief executive Dr David Clarke said doing so “could provide alternative routes to market for outputs, and help publicise the findings of projects”, although he added that DNOs would still need to be engaged in the process.

Citizens Advice is also in favour of removing this “rigid” element of the scheme. “There are many ideas out there that are not held at the moment within networks but which could have quite a strong bearing on networks over time,” its policy manager, strategic infrastructure, Simon Moore said.

The Energy Networks Association says that current arrangements, which have seen third party EA Technology lead on the My Electric Avenue project with Scottish and Southern Energy Power Distribution, have led to “highly successful” projects whose outcomes have become “business as usual”.

An ENA spokesman said: “Key to the innovation stimulus and its success is the partnership with industry, SMEs, technology developers and academia”.

Whether third parties are allowed to compete or not, most would argue that DNOs must be kept involved, although safe environments for testing at grid scale do exist.

Broadening the Scope

Citizens Advice has voiced concerns that the projects already undertaken do not have enough of a customer focus. Moore said only UK Power Network’s Energywise project has gone into “any real detail” on the impact on particular groups of vulnerable consumers. “Some have collected fairly superficial data in that area, some haven’t really collected any data at all”.

“It’s that consumer impact end of the programme that we feel has been a little neglected in comparison to collecting technical performance data and more engineering driven outcomes,” Moore adds. The result is a body of data that is difficult to compare.

Now might be the right time for a change of focus. The UK Energy Research Centre’s director Keith Bell certainly thinks so. He says that disruptive technologies already investigated such as EVs and DSR will not be on the system in significant numbers any time soon.

“A lot of the projects have been kit driven. There’s a bit of a sense that they have tried the things that were there and were exciting”, Bell said. He believes attention should be turned back to “first principles” with projects that look at “how the system operates as a whole”.

Northern Powergrid’s chief executive Phil Jones wholeheartedly agrees. He said Northern Powergrid would be calling on Ofgem to relax the rules around benefits to consumers to allow more projects investigating consumer behaviour to be funded. Ofgem has a statutory requirement to ensure the funding provided to distribution companies will result in benefits to distribution customers. But this is hampering important work, Jones believes.

A project put forward for funding by Northern Powergrid was refused on the basis that a clear benefits case could not be identified. “The whole point of the project is we don’t know where the benefits will accrue,” Jones said, but distribution companies want to take such projects forward on the basis they will benefit all “energy customers”.

Instead Northern Powergrid sought and won funding from Innovate UK.

Money: Too much or not enough?

Opinion is split on whether the funding pot is large enough. It As only 60 percent of the funding allocated has actually been awarded, it could be construed that the pot is too large. Indeed this year only £44.9 million of the available £81 million for electricity network companies was awarded, with only £68.4 million even being applied for.

Jones argues that broadening the scope of projects would allow more of the money to be spent, as would allowing third parties to apply, but warns that “success does not equate to spending”.

“I said to Ofgem at the time, wow that’s a lot of money. You can do a lot of work for that amount of money.”

But others would argue that the £300 million handed out so far is simply not enough. Clarke says the lack of money is the real reason network companies are not innovators. He says investment of “hundreds of millions” is required to not only undertake the projects but properly disseminate the findings.

“I just don’t think the DNOs, in a regulated environment, have the capacity to handle that scale of investment. That is the real challenge.

“It really is the nuts and bolts detail – the real lessons learned. We have trouble doing that ourselves from our budgets, which are quite big.”

Is it even still needed?

Ofgem has always been clear that continued funding is not a certainty, one of the reasons Northern Powergrid is already seeking support elsewhere. Bell says the support must continue: “I think there is still further road to be travelled down” he says in terms of a culture change, “but also I think the innovation schemes could be rearticulated so they are not just about exploiting opportunities, but also understanding threats. I think the way the funding is made available doesn’t always appreciate that.”