Innovation Stimulus Package Monday, 15 November 2010 14.00-16.45 - PowerPoint PPT Presentation

Innovation Stimulus Package Monday, 15 November 2010 14.00-16.45 Ofgem, 9 Millbank

Welcome and Agenda • 14.00 Introduction (Stuart Cook) • 14.15 Innovation Stimulus Package (Anna Rossington) • 14.30 DNO Experience with the Low Carbon Networks Fund (Jim Cardwell – ENA) • 14.45 Plenary Q&A Session - Table Discussions • 15.45 Tea Break, Panel to review responses • 16.00 Summary and Q&A session • 16.40 Close 2

Introduction RIIO and innovation Stuart Cook, Senior Partner Ofgem

We Face an Unprecedented Challenge Decarbonised electricity sector Electricity networks Gas networks  Smart Grids  Offshore networks Affordability Ageing assets  Local generation CCS  Electric vehicles   Energy efficiency European hub   Electric heating  District heating LNG   Smart grids  Fuel poor Renewable gas   Electricity storage  Climate change Uncertain demand   New nuclear adaptation  Renewables  Energy service companies Security of supply £200 bn of investment. £32bn of network investment. 4

What are we seeking to achieve? Desired outcomes from the future regulatory framework Play a full role in the delivery of a sustainable Deliver long-term value for money network energy sector services for existing and future consumers Issues that the network companies should be considering Long-term focus on value for money Innovation Optionality and flexibility Working with others to identify best delivery Understanding and responding to needs of existing solutions and future consumers 5

RIIO: A new approach to regulation Constraint set up front to ensure: Timely and Network Transparency Balance between costs Revenue efficient companies are and faced by current and delivery financeable predictability future consumers = Deliver outputs efficiently over time with: Incentives 8 yr control Rewards/penalties for delivery Upfront efficiency rate + Technical and commercial innovation encouraged through: Innovation Core price control Option to give third parties a Innovation incentives greater role in delivery stimulus package + Outputs set out in clear ‘contract’, reflecting expectations of Outputs current and future consumers 6

RIIO = + + Revenue Incentives Innovation Outputs Technical and commercial innovation encouraged through: Core price control Option to give third parties a Innovation incentives greater role in delivery stimulus package • Networks will need to be smarter, integrating intermittent sources and encourage customers to manage their demand. • The shape of the low carbon future is not clear, therefore companies will need to innovate. 7

Introduction The need for an innovation stimulus package Anna Rossington – Head of Distribution Policy Ofgem

Network companies are facing a number of drivers for change that will affect how the networks are used to deliver a low carbon future. Electricity networks – specific challenges Reduced demand Back-up Renewable Electric space / energy generation for Ageing assets Electric vehicles energy targets heating efficiency renewables Transmission Distribution Connecting Closure of New nuclear, gas Adapting to Distributed Active demand remote existing coal and and CCS impacts of generation management renewables nuclear plants generation climate change Gas networks – specific challenges Secure Alternative Uncertain future Reduced demand / Ageing sources of Safety Storage network use demand average Renewable gas energy efficiency assets supply for CCS or peak Transmission Distribution Adapting to Changing mix of Potential gas hub Gas quality Mains District Heating impacts of supplies for Europe issues replacement climate change New sources in Liquid Natural Increasing import Demand from Combined Heat Social obligations new places Gas dependency and Power extension 9

Need for innovation in networks  Companies may not take account of all the benefits from innovation that accrue to a wide range of parties as they consider the relative merits of innovations;  The upfront costs of innovation may be significant, potentially outweighing expected benefits for the network company itself;  The long-term private cost to network companies from choosing not to innovate may not be significant, particularly if the costs associated with continuing to deploy existing technologies are generally funded under a price control;  Companies may discount the future benefits of innovation if the carbon price is low or they doubt the political commitment to meet the targets 10

Historically, regulated companies have had little incentive to innovate. A number of aspects of the new framework will encourage innovation. No ‘with the benefit of Equalised efficiency Outputs-led hindsight’ adjustments incentives New delivery New ideas from solutions in enhanced business engagement plans Innovation (technical, operational and commercial) New ideas from potential for increased competition in Longer price delivery control Time-limited innovation Discretionary rewards for stimulus commercial innovation 11

Additional support for innovation Innovation stimulus package  Innovation expected to be included in the business plans  Incentives in the price control may not be sufficient to deliver the type and scale of innovation needed  Therefore framework includes competitive time-limited innovation stimulus funding (separate for gas and electricity)  Aim: to encourage innovation in the provision of network-services related to delivery of a sustainable energy sector that may not develop in the absence of the innovation stimulus package 12

Additional support for innovation Innovation stimulus  Building on Low Carbon Networks Fund (LCNF) from DPCR5  Open to network companies and (licensed) third parties  Partial project funding (implementing company commitment)  Open to projects at any point in innovation cycle  Bids assessed by independent panel; final decision GEMA  Funded by transfers of money between licensees (no central fund)  Projects selected must share the information and knowledge gained  Specific rewards for new commercial and charging arrangements aligned with sustainability 13

Development process Stakeholder engagement events Working groups will cover further issues over and above those set out in December documents e.g. (but not limited to) Working group Working group Working group Working group • Licensing Plenary sessions – dates tbc sessions sessions sessions • Third-party access session • Terms of the competition • Detailed funding arrangements Plenary Should working groups be subject-specific? session 2010 2011 2012 2013 Creation of a new licence Open letter October Consult on governance 2010 Consultation ‘Go live’ on policy 1 April 2013 elements New licence Publish application and detailed Feed into price governance statutory control Policy consultation consultations – decision innovation in document business plans Ofgem timetable 14

Low w carbon bon network works s fund – a a DNO’s perspective Jim Cardwell 15 November 2010 15

The £500m low carbon networks (LCN) fund is a welcome extension to the prior existing innovation funding incentive • £100m DNO funds DPCR4 Innovation funding incentive (IFI) • Technical R&D • £80m DNO funds LCN fund tier 1 • Smaller trial projects • £320 central fund LCN fund tier 2 + • Flagship projects DPCR5 • £100m central fund • Reward learning: Discretionary reward – 10% DNO compulsory contribution – Exceptional learning 16

Customers are responding to government policy imperatives such that the need for smart grids remains compelling Feed in tariff 17

Distributors have responded enthusiastically to the LCN fund WPD, £9.5m Seven projects registered in first tier total CE, £28.0m £8.1m SSE 2, £18.0m CN1, £21.2m UKPN1, 1, £2.9m SSE 1, CN2, £51.0m £2.7m UKPN, UKPN2, £0.2m £39.0m SP, £0.5m SP2, £4.5m SP1, £3.0m ENW1, ENW2, CE, CE £6.3m £8.2m £2.9m SSE1, 1, £64m SSE2, 2, £0.3m £1m 1m Second tier three times over SSE3, 3, £0.3m subscribed 18

Distributors responding predictably and positively to the innovation incentives framework Behavi aviou ours rs and outcomes omes • Highly competitive second tier bidding LCN fund objectives es environment • Range of regional and national project partners • Shared learning • Consortium partners enrich projects • Specified outcomes • Several projects with similar scope • Leveraged funding • All innovation funding routes being • Replicable solutions utilised • Deliverable • Positive outlook for DNO and wider industry collaboration 19

Plenary Q&A session Table discussions