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Dermot Nolan speech at ENA's Low Carbon Network Innovation conference

Agendas, minutes and presentations

Publication date

11 October 2016

Industry sector

Distribution Network
Transmission Network

Dermot Nolan, chief executive of Ofgem, is speaking at the Energy Networks Association’s annual Low Carbon Network Innovation conference.

“Welcome to this year’s Low Carbon Network Innovation conference.

It’s good to see here today so many of the companies who have been running innovation projects which consumers fund via our regulatory regime.

As you all know, it’s something we have been promoting for some time through programmes like the Low Carbon Network Fund and the mechanisms in our RIIO framework for network regulation.

Our framework provides incentives for innovation which allow both consumers and network companies to benefit.

As the energy system transforms, the role that innovation can play more broadly has become a key question for policymakers and regulators.

New technologies are accelerating structural changes in the market and have created new business models and products.

I spoke about this in my speech at Energy UK’s conference last October.

The key question for us at Ofgem is how we ensure the potential from these developments is harnessed so that consumers benefit.

So in my speech today I want to outline some of the work we are doing with industry and government to make this happen.

As well as our RIIO framework and innovation funding, we will shortly be announcing a joint call for evidence with the government on flexibility – a routemap to a smarter, more flexible energy system.

I will also be talking about new ways we will be helping innovators navigate what some people describe as “the regulatory jungle”, although that analogy always strikes me as a little exotic for Ofgem.

And finally, I want to talk a little at the end about how we are planning for the future.

Now, I am conscious that many of you in the room are eager to find out the result of our network innovation review.

I’ll cut straight to the chase – we won’t be ready to announce it for a few more weeks.

We plan to consult on our proposals in early November before issuing our decision document in spring next year.

However I can share some of the high level findings from the independent evaluation into the LCNF we commissioned Poyry to carry out.

And I will share with you some of our thinking about our approach to innovation funding in the future.

First some background. We set up the LCNF in 2009 with the objective to help Distribution Network Operators understand how they provide security of supply at a reasonable cost and facilitate the transition to the low carbon economy.

The fund provided up to £500 million although just under £300 million was spent.

Projects under the LCNF have covered a number of areas such as the development of more flexible connection offers that allow distributed generation to be connected more quickly and at lower cost as well as the trialling of smart fuses which can cut the duration of interruptions to customers’ supply.

The idea is that consumers, who ultimately foot the bill, see a return on their money.

Network companies share savings resulting from innovations with consumers in the current price control.

This should lead to lower cost allocations in future price controls together with a better service to an increasingly diverse range of customers.

Last year we announced a review of our innovation funding asking some fundamental questions.

Is it value for money? Should we even continue to fund innovation projects for electricity distribution?

If we decide to continue funding, at what level? And who should the money go to? And can third parties bring forward ideas easily enough?

Poyry’s evaluation of the LCNF has helped to inform our thinking.

We will publish Poyry’s report alongside our consultation in the next few weeks but I can share some of the high level findings.

The answer to the key question – has the LCNF been value for money for consumers – the answer, according to the evaluation, is “yes”.

We broadly agree.

Poyry has estimated discounted net benefits to consumers of between £800m and £1.2bn if projects are not rolled out beyond the distribution network operators trialling them.

If the projects are rolled out across Great Britain, the discounted net benefits are estimated at between £4.5bn and £7.8bn.

I would caution that there are some caveats around these numbers.

Poyry has noted there is significant uncertainty because these figures are largely based on future roll out of these projects.

And no-one is pretending the programme was perfect. Nevertheless the estimated benefits are considerable.

Poyry also looked at whether the LCNF had resulted in a cultural shift among DNOs to become more innovative.

It found that the programme had succeeded in encouraging the DNOs to innovate and had moved the level of innovation from a “low” base to a “moderate” level.

So I think we can show that the LCNF is value for money to consumers.

We’ve also been looking at ensuring that third parties have sufficient scope to bring forward innovative ideas related to networks.

This isn’t necessarily straightforward, but we are reviewing how best to improve the existing arrangements to make them even more successful in the future.

As I said at the start, I’m sorry that I’m not able to provide more answers to these questions. But we will be in a position to do so very soon.

As well as our innovation review, we will also be issuing a call for evidence on flexibility soon.

I know many of you have been expecting this for a long time.

Obviously there have been a few other things for the Government to focus on.

But I am hopeful that the document will be out shortly.

The call for evidence will cover –

Removing undue barriers to storage and aggregators
Increasing demand side response, particularly from industrial and commercial customers
Price signals, including network charges
Innovation
And last but definitely not least, the roles and responsibilities of the network companies and the DSO-TSO relationship

My colleague from Ofgem, Jon Parker, will be discussing this last point at more length later today.

The call for evidence will set out our thinking on these developments and ask for input into how policymakers should respond. This work will also feed in to wider thinking on the future energy system.

I mentioned at the beginning of my speech that some innovators, particularly start-ups, find it difficult to navigate the “regulatory jungle”.

Given the speed of transformation that the energy system is undergoing, it shouldn’t be surprising that the regulatory framework is playing catch up.

Innovators are already blurring the lines between the typical role of generator, distributor, supplier and consumer.

Many of these innovators’ models are not easily recognised by the traditional regulatory arrangements and cut across industry and market boundaries.

The increasing diversity and volume of innovators, and the complexity of their needs and enquiries, requires a new approach.

At the same time, the need to ensure we engage with and understand innovators and what their plans mean for consumers – good and bad – has arguably never been greater.

That’s why by the end of the year we will launch the Innovation Link within Ofgem; we expect to announce the details of our launch event soon.

This link will be a place for energy innovators to bring ideas and receive fast, frank and useful advice on the regulatory implications of their activities.

It will provide innovators a central point of contact for their inquiries and a support service capable of understanding their businesses and navigating the regulatory framework.

The link’s advisors will not necessarily be able to solve all innovators’ challenges.

However, they will consider what further might be needed to enable new ideas to be trialled and to support innovators as they try to get their idea off the ground.

The link will also be a valuable learning tool for Ofgem by feeding the views of innovators and their activities into our policy development.

More generally, we are changing our whole approach to how we regulate the retail sector, in part to allow the full benefits of innovation to be unlocked in the interests of consumers.

Too much regulation means that companies also innovate less, which means consumers have fewer products, like tariffs, to choose from.

The rules have grown steadily over the last decade, making it especially hard for new entrants, who have fewer resources, to operate and grow.

So we are going to start again.

As regulator, we will rely more on principles, rather than an unwieldy rule book, to achieve better outcomes for consumers.

It will put more onus on suppliers to work out how to do this, giving them more freedom to innovate and provide better deals and services to consumers.

This is no soft option for suppliers – far from it.

We will continue to protect consumers.

Our change in approach means suppliers have to obey the spirit as well as the letter of the law.

If they fail on either count, we will take tough enforcement action.

The energy landscape is changing quickly. No-one, including Ofgem, knows what it will look like in 2030 or 2050.

Our job at Ofgem is not to try to predict the future but to make sure that however the energy system develops, consumers are at its heart.

To do that, we need to be part of the debate. That’s why today we have launched our Future Insights programme by publishing the first in a series of discussion papers.

The series will consider some of the possible issues and opportunities for consumers and regulators from changes in the energy system.

Topics include the prospects for local energy networks and new ways of heating the home.

Earlier this year, we asked stakeholders for their views on how the energy system could develop. We have fed these views into the discussion papers which we hope will generate further debate.

As part of our Future Insights programme, Ofgem will hold stakeholder events to discuss these issues in the coming months.

This isn’t about trying to settle on a preferred pathway based on a particular technology or set of assumptions about the future.

Anyone who tried to plot such a course would invariably get it wrong.

We need to be more open minded and flexible about the range of scenarios we should prepare for – and about what we don’t know what is also coming down the line.

We hope the findings from our Future Insights programme will help us develop this strategic vision and inform our approach to regulation so we can protect consumers now and in the future.

We invite you and other stakeholders to join in the debate in all these areas.”