Ofgem ‘pleased but not delighted’ with network innovation funding

Ofgem is “pleased… but not delighted” with the outcomes of network innovation funding, according to a senior figure at the regulator.

Although it has had a positive impact, the organisation would prefer to rely on regulatory arrangements to deliver innovation.

“At Ofgem we are pleased with how network innovation funding has gone but we’re not delighted,” said senior partner for consumers and competition Rachel Fletcher. “Network innovation funding has made a difference but fundamentally we’d like to have a set of regulatory arrangements which didn’t rely on that to bring forward innovation.”

Speaking at the Utility Week Congress in Birmingham, Fletcher said there is an “intractable issue”, in that “the most important and disruptive innovation may come from outside the sector; may come in a way that actually fundamentally challenges the business model”.

“Even if you’ve got a fund, how do you make that fund available to people might be coming in and challenging the RAB [regulated asset base] for example,” she added.

Fletcher was responding to comments by Ofwat senior director for customers and casework Richard Khaldi, who said innovation funds have a “patchy record”: “A lot of money might get spent… but coming up with ideas that aren’t demanded can be quite an issue.

“So what we want to try and do is to make companies think about doing things in a different way that will hopefully then lead to them demanding more innovation, rather than coming up with ideas and then pushing them on to an industry that isn’t really ready to take them on in the first place.”

Energy Systems Catapult chief executive Philip New said there is a “really, really knotty problem” in trying to properly reward successful innovation.

“Many venture capitalists would have a ‘buy ten hope for one to succeed’ kind of model, and therefore for one to succeed and pay for the costs of the other nine they need a payout,” he said. “They need some kind of payday. That’s how the really innovative sectors have been able to get funded and get investment.”

“How do we manage to bridge that gap in necessarily highly regulated utilities spaces?”, he added. “I think it’s a central problem.”

Ofgem has been conducting an in-depth review of network innovation funding over the summer, the findings of which are due to be published in the next week or so. The regulator will consult on the proposals it puts forward in early November, before issuing its final report in spring next year.

Fletcher’s comments chime with those of Ofgem chief executive Dermot Nolan, who last week said in a speech that the Low Carbon Network Fund had provided “value for money to consumers” although “no-one is pretending the programme was perfect”.