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UTILITY Week 8th April 2016

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10 | 8TH - 14TH APRIL 2016 | UTILITY WEEK Policy & Regulation Analysis T he call from network operators to Ofgem on the future of innovation funding is loud and clear: it must con- tinue. But they also acknowledge that the funding mechanisms need change to con- tinue to be effective. Ofgem's consultation on the future of the Network Innovation Competition (NIC) and Network Innovation Allowance (NIA) has revealed support for widening the scope of the NIC to ensure projects benefit all energy customers, but also encourage continued participation by third parties. Some have even called for third parties to be able to bid without the involvement of network operators. But submissions to the consultation reveal a number of barriers small and medium enterprises (SMEs) feel the schemes present to their involvement. These primarily stem from the battle between being innovative, where failure and working outside of the rules is necessary, and the need for projects to be adopted as business as usual (BAU) to be deemed successful. Ofgem has been told ending the fund- ing mechanism now would be "premature" as there is still opportunity to deliver "fur- ther value and savings". But Centrica has backed the movement away from networks, saying Ofgem should consider whether fund- ing would be better spent "subsidising new technology and propositions to be delivered by innovative third parties and procured by DNOs [distribution network operators] on a commercial basis". Risk of failure A project is judged beneficial against the time it would take for the innovation to become BAU. EA Technology, lead on the My Electric Avenue NIC project, says this encour- ages higher technology readiness level (TRL) projects that need significant capital outlay rather than lower TRL projects that focus on development. It says there should be "greater recognition of long-term benefits in the NIA and NIC criteria" and adds that the reward process, which is judged against success- ful delivery, discourages NIC participation by partners as lower TRL projects are more likely to fail. "Bid assessors should look favourably upon such provision, because such outcomes always result in valuable learning that should be recognised and rewarded," it says. The Energy Innovation Centre says a focus on projects at the early stages is essen- tial to ensure the pipeline of projects does not diminish, which it says would have a "detrimental effect on the networks, but also ultimately on energy customers". It says along with the higher financial risk, the focus on innovation having to be adopted as BAU means early TRL projects are not a pri- ority for networks. Trade body Beama argues the requirement to provide a BAU case at point of tender is proving "challenging" and resulting in legitimate innovation projects not receiving funding. It also points out if the business case of an innovation can already be made, it is not by definition innovation. In order to receive funding, projects put forward must be able to work under current regulatory rules. But Beama says projects that work outside of these would help the understanding of how the regulatory frame- work may need to change, and allow some of the assumptions made by the Future Power System Architecture Project to be tested. Conversely, Centrica called for Ofgem to ensure current frameworks are strictly imposed, ensuring "the relevant market players are undertaking the usual market activities". It says not ensuring innovation occurs with the current parties is a major barrier to widespread adoption. Both third parties and networks point to the rules around intellectual property (IP) rights as being a huge barrier to third-party participation. Currently, the requirement for project learnings to be shared among network companies means primary IP is retained by the project lead. While this max- imises benefits to the customer, it also pre- vents third parties from extracting any future revenue from the foreground IP. EA Technol- ogy says this "perversely incentivises project partners to reduce foreground IP", the part of the project that directly benefits custom- ers. It adds in early NIC projects, network companies recognised this issue and offered flexible arrangements, but Ofgem's guidance on this matter has now "hardened". The Energy Networks Association agrees IP rules are a major issue for networks. It says the implications for networks taking responsibility for IP "are not trivial" and pro- poses that at the start of the project the party responsible for "holding, registering and maximising IP should be identified", rather than defaulting to the network operator. Centrica says its experience of bidding for innovation funding revealed "far too much emphasis was placed on academic rigour, governance, rigid deliverables and time- scales". It says this led to "bloated" project management focused on presentable results rather than real-world learning. It has called for funding to be delivered in a "leaner and more agile" way, looking to the tech start-up world for an example of the kind of flexible framework required. EA Technology has also focused on the level of bureaucracy, calling for more flex- ibility around when project delivery part- ners are specified, and for exemptions to be allowed to the formal change request process – which it describes as "not fit for purpose" – to minimise costs. However, EA Technol- ogy recognises this approach would be chal- lenging for Ofgem, which must ensure value for money for customers. Ofgem intends to publish its decision by the end of the year. In an open letter to the industry this week the regulator said the review would look at whether "substantive changes" were needed. Innovation without barriers Respondents to Ofgem's consultation on the future of network innovation say funding mechanisms need to change to encourage third parties and SMEs to participate. Lucinda Dann reports. up to £81 million The amount per year available through the Electricity NIC up to £18 million The amount per year available through the Gas NIC INNOVATION FUNDING BY NUMBERS

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