Utility Week

6 | 18TH - 24TH MARCH 2016 | UTILITY WEEK Sponsored report Brought to you in association with I t is well established and widely reported that energy systems globally are facing radical transformation at the hand of intractable forces such as climate change and demographic shis. Water networks too are increasingly grappling with ominous – sometimes immediate – resource problems and a requirement to become smarter and more efficient in the way they manage water for urbanising societies. The UK is not immune to these chal- lenges, though they are set in the context of a unique – many say world leading – environ- ment of policy and regulation. In recent years, a number of changes have been made to this environment in an attempt to encourage and better foster inno- vation within individual utility companies and across the sector. Across gas and power transmission and distribution, for example, the iterative introduction of the RIIO (rev- enue = incentives + innovation + outputs) regime and innovation funding streams are commonly thought to have brought benefits in terms of the quantity, focus and pace of innovation in the energy system. In water, the introduction of outcome delivery incen- tives (ODIs) during PR14 has similarly altered the emphasis of regulation in a way that allows greater ingenuity and flexibility in achieving broadly desirable outcomes. In this context, global technology and consulting firm Wipro asked Utility Week to conduct research with innovation leaders in the utilities sector in order to understand the extent to which they feel their organisa- tions have acknowledged and are adapt- ing to disruptive forces around them – both independently and in response to regulatory incentives. How well do they feel their organisations are doing in accepting and responding to the need to change the technologies they use, the markets they operate in and the services they deliver in order to be resilient and suc- cessful businesses in years to come? How successful have they been in building cul- tures and governance structures which nur- ture innovation? The result of this research is now avail- able as a downloadable report, titled Inno- vation in UK Utilities: A State of the Nation Report, on Utility Week's website. This arti- cle summarises some of the most important observations it makes about innovation investment levels, regulation, culture and governance. Observations in brief Beginning with observations regarding investment and regulation for innovation, Utility Week's report acknowledges that find- ing money to support innovation in utilities has been seen as difficult in the past because of the generally risk-averse nature of certain market segments – especially water networks and energy transmission and distribution. The oen cumbersome nature of large utility companies, which have tradition- ally had capital-intensive long-term asset bases to support, has also been a blocker to investment. Yet the report found evidence that this is changing across the board. Investment is increasing, and while in regulated utilities this still relies to varying extents on regula- tory incentives or funding mechanisms, there is a universal appreciation that for organisa- tions to adapt and thrive in a complex envi- ronment of change, significant sums must be set aside for innovation. Levels of actual and proportional invest- ment in innovation vary significantly between regulated utilities and energy sup- ply companies. Funds allocated to innova- tion in large energy supply companies such as RWE and British Gas far outstrip the budgets available within regulated utilities, ranging up into the hundreds of millions of pounds. Meanwhile, in start-up energy sup- pliers, innovation budgets are difficult to quantify but are considered to account for significant proportions of turnover since most are attempting to bring inherently dif- ferent business models and customer propo- sitions to market. The reasons behind the wide gap in levels of investment between networks and energy supply are very clear, however. They relate to differences between market segments in terms of competitive drivers, regulation of company revenues and the risk appetite of investors. Despite varying levels of investment across different market segments and organi- sation types, all participants in this research agreed that investment itself is not a barrier to innovation in their organisation. Far more challenging were issues around building strong cultures for innovation and ensuring that the benefits of innovation are realised in business as usual. In terms of regulation, which can oen be seen as a barrier to innovation, partici- Innovation and utilities How strong is the culture of innovation in the utilities industry? Utility Week and Wipro conducted exclusive research to find out – here we present a summary of the key findings. Competition will change the scale and approach to innovation as new entrants who really understand customer service reveal the extent to which incumbents have not got customer-centric cultures We need to find a way of supporting the demonstration of new types of [energy] service It's taken a while for some to realise the upside of the new AMP " " " " " " Illustrative quotes: anonymised quotes from the report's contributors

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