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UTILITY Week - 12th February 2016

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UTILITY WEEK | 12TH - 18TH FEBRUARY 2016 | 21 Policy & Regulation Analysis D istribution network operators (DNOs) have come under fire recently for not being "innovators". Some critics claim their regulated nature means they are not capable of meeting the innovation chal- lenge required; others say they should not be trusted with developing energy storage. But network operators, through fund- ing mechanisms such as the now obsolete Low Carbon Networks Fund (LCNF) and its replacements the Network Innovation Allow- ance (NIA) and Network Innovation Com- petition (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 mecha- nisms are a force for good, but now the gov- ernance is under review in a consultation by Ofgem, calls are being made for improve- ments – including opening the NIC to third parties, broadening the scope of the projects for a more consumer focus, increasing the funding, and even questioning whether such a funding mechanism is still required. Allow third parties to lead funding bids One idea that is gaining traction is to open 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. ETI chief executive Dr David Clarke says doing so "could provide alterna- tive routes to market for outputs, and help publicise the findings of projects", although he adds that DNOs would still need to be engaged in the process. Citizens Advice is also in favour of remov- ing 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 says. The Energy Networks Association (ENA) says 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 says: "Key to the inno- vation stimulus and its success is the part- nership with industry, SMEs, technology developers and academia." Whether third parties are allowed to com- pete or not, most would argue that DNOs must be kept involved. Broaden the scope Citizens Advice says the projects already undertaken do not have enough of a cus- tomer focus. Moore says only UK Power Net- works' Energywise project has gone into "any real detail" on the impact on vulnerable con- sumers. "Some have collected fairly super- ficial 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 col- lecting technical performance data and more engineering driven outcomes." 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 disruptive technologies already investi- gated 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 excit- ing," Bell says. He believes attention should be turned back to projects that look at "how the system operates as a whole". Northern Powergrid's chief executive Phil Jones agrees. He says the DNO will be calling on Ofgem to relax the rules around benefits to consumers to allow more projects inves- tigating consumer behaviour to be funded. Ofgem's statutory requirement to ensure the funding provided to DNOs will result in ben- efits to customers is hampering important work, Jones believes. Funding network innovation An annual £81 million is available for electricity networks in the Network Innovation Competition, but with only £44.9 million awarded in 2015, how could it be improved? Lucinda Dann reports. A project put forward for funding by Northern Powergrid was refused on the basis that a clear benefits case could not be iden- tified. "The whole point of the project is we don't know where the benefits will accrue," Jones says. 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. As only 60 per cent of the fund- ing allocated has actually been awarded, it could be construed that the pot is too large. Indeed, in the 2015 NIC 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 mil- lion awarded so far is simply not enough. Clarke says lack of money is the real reason DNOs are not innovators. He says investment of "hundreds of millions" is required to not only undertake the projects but properly dis- seminate the findings. "I just don't think the DNOs, in a regulated environment, have the capacity to handle that scale of investment. "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." But is the funding even still needed? Ofgem has always been clear that contin- ued funding is not a certainty – one of the reasons Northern Powergrid is already seek- ing 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 oppor- tunities, but also understanding threats. I think the way the funding is made available doesn't always appreciate that."

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