REGULATION AS A DRIVER FOR CHANGE

hero__default

REGULATION AS A DRIVER FOR CHANGE

Regulation as a driver for change

Utility Week Live at the NEC on 21-22 May will be exploring transition in the sector in all its guises. In the third of a series of monthly reports Nadine Buddoo turns her attention to regulation and asks is it fostering transition or hampering it?

Shifting political narratives, new technologies and the evolving role of consumers continue to shape the way utilities view the state of transition across their sectors. For utilities, drawing successful outcomes from this period of change and uncertainty is largely dependent on the regulatory frameworks that impact their business. While successful regulation encourages innovation and the proliferation of new technologies, poorly placed regulation can hamper innovation and benefit no one.

According to the Utility Week Live survey, carried out by Insight Advantage in the build-up to this year’s show, just 6.4% of utilities professionals strongly agree that the regulatory regime under which their business operates is currently fit for purpose. The majority of respondents (29.7%) neither agree nor disagree, while 10.9% strongly disagree. When asked if they have confidence in their business’ regulator, 31.7% somewhat agree, while 10.4% strongly disagree.

There is also some disparity across different sectors in terms of how much confidence businesses have in their regulator. For energy networks (62.5%) and water companies (62.1%), the overwhelming majority have a positive perception of their regulator. However, just 36.1% of the supply chain and 21.9% of energy generation and retail businesses voiced confidence in their regulator.

The survey questioned whether current regulatory regimes offer sufficient freedoms and incentives to foster innovation. Interestingly, 41.1% either strongly or somewhat agree, while just 12.4% strongly disagree that today’s regulation facilitates innovation.

There are myriad examples of the positive impact regulation can have in terms of encouraging innovation and new technologies across the industry. For example, the essential work on hydrogen blending for the HyDeploy project, supported by Ofgem innovation funding, is laying the foundations for decarbonised heat in the UK.

The impact of RII02

While the introduction of the RIIO model was centred on innovation and how innovative systems and products can benefit consumers, there is a concern that Ofgem’s RIIO-2 price control proposals will have a negative impact on the type of projects that network companies take on. Randolph Brazier, head of innovation and development at the Energy Networks Association (ENA) believes companies will be less inclined to undertake riskier projects, and more focused on “vanilla” projects where a return is guaranteed. 

“That means overall they will be less inclined to innovative. That is a particular concern given the specific changes to the way innovation will be funded,” explains Brazier. “All the focus will be on incentive-based innovation…The existing successful NIA/NIC (Network Innovation Allowance/Network Innovation Competition) funding models will be scrapped or heavily restricted. This would seriously impede progress towards a smart, flexible, low carbon energy system and all the progress that network companies have made in recent years.”

According to Brazier, the regulator should retain NIA/NIC-like funding mechanisms, as well as improved incentive-based innovation design. “We also believe the regulator should be incentivising low TRL [technology readiness level] projects, longer-term projects, projects which deliver benefits that are beyond the scope of the networks, and cross-vector projects, including where these are not well supported by existing arrangements,” he says.

It is a worrying prospect that a lack of regulatory reform in key areas could block utilities firms from being able to meet customer demands and achieving long-term decarbonisation goals. “[Regulatory reform] is absolutely critical if we want to make this transition in a timely and cost-effective manner,” says Brazier.

“Every part of the energy system has a role to play, and the network research and innovation is particularly important given the central role our energy infrastructure needs to play in decarbonisation.”

Sandbox Solutions

With innovation at the top of the agenda for energy firms looking to find solutions to the long-term challenges facing the industry, Ofgem’s regulatory sandbox offers an opportunity to identify rules which pose barriers to innovation. 

Ofgem launched the regulatory sandbox service in February 2017, enabling innovators to trial new products, services and business models without some of the usual regulatory red tape applying. Engaging with innovators through the process has provided input to regulatory policy development, such as Ofgem’s Future Retail Market Design project.

As part of the second window of the sandbox initiative, oil and gas company BP is developing a platform that will allow consumers who generate their own electricity, known as prosumers, to sell excess electricity within a marketplace. This could create market-based revenues for prosumers, often not available to small-scale domestic generators.

Renewable energy supplier Tonik Energy is partnering BP to explore the opportunities for using a platform to match supply and demand, as well as how customers might interact with and benefit from it. BP’s digital platform simulates energy trading from prosumers. While simulated trades will be based on real-time user data, no physical electricity will be bought or sold during the trial.

The company says it wants to do much more than simply supply clean, affordable gas and electricity. “We plan to halve our customers' bills by 2022 through accelerating the uptake of microgeneration, battery storage and electric vehicle charging infrastructure,” says Tonik’s managing director Chris Russel. 

“The trial contributes to Tonik’s vision of changing the way people generate, store, use and now trade energy for a smarter, more dynamic and decentralised electricity market. It is a step towards connecting our members to new technologies and innovative ways of powering their homes with clean energy.”

Up to 250 domestic customers will be involved with the project. During the trial, participants will pay no more than the price of their normal tariff from Tonik. Where simulated trades on the platform create a lower price of electricity, that value will be provided to trial participants by Tonik, representing a saving.

A Word from our platinum sponsor

Transition means change, and change can mean uncertainty. Regardless of the type of utilities service you provide, you can be sure of one thing – success depends on delivering a consistently great service for your customers. That’s where O2 can help.

A ground-up approach 

Your engineers are the lifeblood of your organisation. When communities are facing a broken pylon, a burst water main, or a potentially life-threatening gas leak, they rely on your engineers to sort it out. They need someone with the right skills, the right kit, and fast. And they expect the problem to be fixed first time.

Understanding a business from the ground up is what leads to real transformation.

The O2 Utilities team 

Our dedicated team takes time to listen to field workers so we know what they need to be their best. We balance their insights with your priorities. And then we deliver solutions that help workers stay connected, efficient, and safe. 

We keep engineers and other field workers connected to those at the office, so they’re always able to access the data they need to get the job done safely and efficiently. That free flow of information also means boardrooms and local offices have complete visibility over what’s happening on the ground and can make better decisions, faster.

Solutions that work

Our approach delivers results. That’s why Northumbrian Water chose O2 as their technology partner. Together we’re creating a connectivity platform to transform their business, helping them to get real value from IoT innovations and take customer service to the next level. 

“We were looking for a partner that has the same feeling of being innovative, that’s at the heart of a community, and really cares about its customers. We think we’ve found that in O2," says Nigel Watson, Group Director of Information Services, Northumbrian Water Group.

Can we talk?

We’d love to get a better understanding of your challenges and discuss how we can help you support customers and employees.

Email Head of Utilities David O’Brien and his team on utilities@businesso2.co.uk, and we’ll arrange a time to meet you at Utility Week Live – you’ll find us at stand F56.

Water Pressure

Water companies play a similarly pivotal role in improving environmental outcomes across their sector. For the Environment Agency (EA), which works closely with Ofwat in a bid to get the best outcomes for water customers, expectations for water companies are high as the sector works towards the 2019 price review (PR19).

“Water companies will need to make big improvements if they are to achieve the commitments set out in their business plans,” says Anne Dacey, the EA’s deputy director.

“The Environment Agency expects to see a significant reduction in pollution incidents, investment to increase resilience to drought and flooding, and a commitment to enhance the environment.”

The organisation’s role as a regulator sees it provide advice to water companies on their environmental responsibilities and the action needed to meet those obligations. As part of this drive to challenge the water sector to invest in a more sustainable water network and the long-term future of the environment, the EA and Natural England have outlined some ambitious targets as part of the Water Industry National Environment Programme (Winep). The programme will contribute to delivering the environmental outcomes set out in the government’s 25 Year Environment Plan. Last year, government announced that it expects water companies to invest up to £5 billion as part of Winep to improve environmental outcomes from 2020 to 2025. 

According to the EA, the programme will “help tackle some of the biggest challenges facing the water environment, from the spread of invasive species and low flows, to the effects of chemical and nutrient pollution”.

As well as throwing down the gauntlet to water firms by setting out the Winep obligations, the EA is encouraging water companies to work together to deliver innovative catchment-based solutions and to share examples of best practice in environmental management and saving water. 

The EA is also leading the development of a National Framework for Water Resources which brings together water companies, regulators and other water users. “We are also supporting and facilitating regional water resource groups,” adds Dacey. “These regional water resource collaborations will be crucial to inform the next round of water resource management plans.

“We see control and reduction of leakage as a fundamental component of water resource management planning and work closely with Ofwat on this issue.”

Collaboration is Key

Simon Chadwick, central operations director at United Utilities (UU) agrees that the collaborative approach advocated by water regulators is integral to building resilience across the sector and transitioning to a more sustainable water system.

“The most important thing is to look outside the traditional company boundary and build on the interrelationships between the assets of the water companies and the assets of other related sectors and the associated funding regimes,” says Chadwick. 

“At the local level, greater utilisation of sustainable drainage systems (SuDS) can help improve resilience further in the sector and working with local authorities and local flooding authorities, along with developers, is key to realising the benefits.

“Thinking more nationally, there is also potential for intra-sector asset and financial relationships to be optimised in order to encourage cross-border network connections and national water trading. Ofwat is providing an allowance for the development of North-South strategic supply solutions as part of the current price review process.”

With PR19 firmly at the forefront of water companies’ business planning, Chadwick explains that innovation has played a vital role in helping his business tackle the challenges associated with the seventh asset management plans (AMP7).

“AMP7 is going to be stretching for the sector, but we were always clear that the 2019 price review would be about delivering more for less. It’s innovation through market testing and the use of our supply chain which has enabled us to reduce costs and it’s innovation in our operations that allow us to deliver better service standards at lower cost,” he says.

“Our business plan reflected over £440m of savings (AMP7 compared to AMP5) from innovation in how we operate the business – in particular our adoption of systems thinking as a long-term strategy.”

Regulatory Pressure

While Chadwick admits AMP7 will require water companies to meet some ambitious commitments, UU is approaching the challenge head on. In January, UU was one of just three companies praised by Ofwat for setting a “new standard” in their individual business plans for PR19. Alongside Severn Trent and South West Water, UU was placed in “fast track” and given the green light to begin delivering its plans for customers.

Despite this positive feedback from Ofwat, is the company confident that the current regulatory model facilitates the level of innovation required from water utilities to meet the long-term challenges facing the sector? “The regulatory model isn’t static; it has evolved at each and every price review,” says Chadwick. “If you look at the changes made changes at both the 2014 (PR14) and 2019 (PR19), these have made a big difference in encouraging companies to be more innovative, shifting the focus from output-based regulation to outcome-based regulation. 

“The regulatory regime allows a lot of flexibility to adapt to different situations and changing circumstances and there are plenty of opportunities left for companies to challenge themselves to use it.”

While UU is already well-placed to deliver against the challenges set out in PR19, it remains to be seen whether other utilities across the country with varying assets and financial pressures will be able to perform within regulatory constraints while also continuing to drive valuable innovation.

CASE STUDY – CANNOCK CHASE TRIAL

CASE STUDY – CANNOCK CHASE TRIAL

The smarter prosumer trial will take place in Cannock Chase, Staffordshire, where many local residents are considered to be at risk of fuel poverty. The aim is to optimise existing community solar PV energy installations and reduce energy costs for tenants. 

The trial seeks to benefit both the customer and network operator by allowing consumers to further reduce energy use and costs through smart integrated and embedded energy storage systems in the home. The network operator can benefit from the availability of excess power at peak periods to support and balance the local distribution network.

In 2016, Cannock Chase Community Solar was established to supply and install 313 roof mounted solar systems. Homes selected for the smarter prosumer trial had these existing solar systems installed as part of the 2016 initiative. A home energy storage system (ESS) and “behind the meter” technology will be installed as part of the new trial.

Helping to deliver better balanced networks will reduce the timing and need for capital investment for networks upgrades and reinforcements. It will also reduce operational costs and relieve the pressure on system loadings, freeing up capacity for more renewable energy connections, battery storage solutions and provisions of electric vehicle charging infrastructure to meet future demand.

Assisting National Grid and Western Power to better manage the balancing of the end-to-end energy system has the potential to open up new revenue opportunities. These revenues can be shared with customers changing their demand at peak times and allowing renewable energy to be stored, used and exported.

The trial started in January 2019 and will run until July 2020, including tenant engagement and site surveys.

Ofgem’s regulatory sandbox means that current regulations are relaxed, but the trial will be conducted in a controlled environment. Renewable energy developer Green Energy Networks (GEN) and SmartKlub, which helps citizens form community energy groups, will act as the community energy services company (ESCO) to ensure the conditions are adhered to for the duration of the trial.

CASE STUDY – UNITED UTILITIES’ PETTERIL CATCHMENT SYSTEM

CASE STUDY – UNITED UTILITIES’ PETTERIL CATCHMENT SYSTEM

United Utilities’ (UU’s) approach to catchment management has already started to deliver against the “more for less” challenge from all of its regulators, including the EA, Ofwat and the Drinking Water Inspectorate (DWI).

As an environmentally sustainable and cost-effective approach, catchment management will be more significant in 2020-25 than ever before. It brings together the challenges and opportunities for water quality, water resources and flooding initiatives in a more integrated and systems-led approach.

UU is working with academic institutions, customers and stakeholders to design and deliver innovative and sustainable treatment solutions alongside catchment interventions to deliver an integrated catchment strategy in 26 catchments across the North West of England.

As part of the River Petteril Catchment project in Cumbria, the company has worked in partnership with key stakeholders to act as the catchment system operator and explored opportunities to use alternative market mechanisms to deliver catchment improvements.

The successes and learnings from the Petteril project have been used to inform UU’s strategy and plan through to 2025 and beyond, including:

  • Rolling out the Petteril project to the full river basin catchment of the River Eden, including:
  • Co-hosting a market trading platform to pull in multiple investors and drive increased natural capital value. Securing resilience for investor supply chains and increased environmental resilience for UU, its partners and the communities across the Eden.
  • Achieving risk reduction and increased resilience in drinking water quality, flooding and surface water removal, nutrient recovery and river water quality.
  • Regional deployment across the North West including:
  • Working across the River Wyre catchment in Lancashire to build a fully quantified model and natural capital investment planning tool with full cost benefit analysis capability.
  • Supporting flood risk reductions by partnering with the EA, bringing in businesses such as Co-op and Flood Re to drive lower insurance premiums, alongside increasing UU’s network asset resilience, and reducing flooding and associated issues such as blockages while mitigating risks of pollution.
  • Adapting this system thinking approach to cover Greater Manchester, working with the Greater Manchester Combined Authority and Natural Course to tackle urban challenges, such as population growth (for drainage and wastewater management planning), delivering environmental improvements, and helping address public health challenges by improving air quality and access to green spaces.
  • In Cheshire this approach is offering an alternative to delivering UU’s environmental obligations from the Water Industry National Environment Plan which includes achieving stretching levels of phosphorus removal on many of the company’s small rural works.
  • UU’s academic and partner collaborations have enabled the development of low-tech solutions, reducing its reliance on chemicals and power, such as the company’s site in Wrenbury where it is using constructed wetlands as a passive treatment option.

What does the energy regulator say?

Andrew Burgess, deputy director, electricity network charging and access, Ofgem

Our energy system is changing rapidly as we now have more renewable electricity generation and in the future we will be heating homes and businesses with electricity or cleaner forms of gas. New technology and services are developing. Millions of electric vehicles will also be on the roads in the coming decade. We need an energy system that can support these changes at a lower cost to consumers.

Together with government we are revamping 20-year-old energy regulation so that it doesn’t hamper progress towards a smarter, more flexible energy system.

We are working to bring in a smarter, fairer and cleaner energy system. We need to capture the benefits of new technology, new approaches and cleaner forms of electricity generation and lower the cost of the system for consumers. We also need regulation that supports innovation and new ways to help consumers engage more in the energy market, and cut their bills.

There are some areas where the industry is making significant progress. For example, as part of the Smart System update, we highlighted the work that the industry, the government and ourselves are doing to remove barriers to smart technologies, enable smart homes and businesses and make markets work for flexibility. To date we have completed 15 of the 29 actions and we are committed to implementing the remaining 14 by 2022.  

Where we are concerned that the industry is not progressing reforms quickly enough we have intervened. For example, in December 2018 we launched a Significant Code Review into access arrangements (the nature of users’ access to the electricity network) and forward-looking network charges (the type of network charges which signal to users how their actions can either increase or decrease future network costs). A Significant Code Review is a tool for Ofgem to initiate wide ranging and holistic change and implement reforms to detailed, industry code-based issues.

The energy system is changing rapidly, and regulation must change too. In this changing world, firms should focus on changes that deliver real value to consumers. Our work is shaped by five consumer outcomes. I would advise all utility companies to consider what changes they could make within their business to help ensure that consumers benefit from lower bills, lower environmental impacts, improved reliability and safety, better quality of service and better social outcomes.