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Insights and News /

21 February 2018

Selling innovation to regulated utilities

Chris Collins

Chris Collins
Senior Manager | Energy, utilities and resources | London

Traditional network companies – water, gas, electricity – are not typically thought of as bastions of blue sky thinking. With a focus on safety and continuity of supply, and regulatory incentives to keep costs down, they have tended to opt for tried and tested approaches. And yet, significant change is underway, perhaps nowhere more so than with the electricity Distribution Network Operators (DNOs).

Great Britain is at the forefront of a number of these changes – in the ways the electricity markets are organised, in the role that DNOs play, and in the way in which they operate – but it is a trend seen in Europe and across the world. Innovation is more firmly on the agenda than ever before, with significant incentives placed on DNOs to manage the more flexible and dynamic electricity system of the future.

DNOs have innovation allowances and can apply for additional funding through innovation competitions, meaning they are on the lookout for new ways of doing things. They have recently started to invite third parties to propose innovation projects, potentially opening up the path for more radical ideas. Some DNOs are considering funding innovation from their own balance sheets or through their unregulated arms – potentially retaining more of the direct benefit and enabling them to commercialise the resulting intellectual property in other markets.

Whatever the funding route, there is significant potential for innovative technology providers to access a lucrative market. In one sense, selling to a GB DNO is like any other business-to-business transaction – they are private, profit-seeking enterprises, after all. But a successful innovator should be considering a number of questions that reflect the particular nature of these regulated industries:

  1. Does it benefit DNOs? Most of a DNO’s upside comes from explicit outcome and efficiency incentives set by Ofgem for the duration of a price control period (currently eight years). If the innovation doesn’t address one of those incentives the DNO will not benefit
  2. Does it benefit DNOs today? DNOs have limited scope to look for benefits beyond the current price control. There are some regulatory mechanisms in place to encourage it, but a developer may need to consider novel commercial arrangements to get a DNO to proceed
  3. Does it benefit this DNO? Not all DNOs are created equal: some have network capacity issues, some are trying to handle large numbers of connection requests, and others are looking to improve their systems or back office processes
  4. What is the impact on other network stakeholders? Distribution networks connect end consumers, distributed energy resources, and the transmission network operated by the System Operator. If an innovation affects any of these parties – positively or negatively – this could affect a developer’s business case and engagement strategy
  5. Is this a transaction or a partnership? Any innovation will need to be tested before full-scale adoption, but the formal innovation route involves collaboration between DNO and developer. For a developer, this can be an opportunity to develop and market its innovation, but the implications for its deployment timelines and existing intellectual property protections need to be considered.

DNOs are large organisations that procure in bulk from one or two suppliers. They share information and are benchmarked against each other, and because distribution networks are fairly similar across the developed world, a successful innovation has the potential to scale rapidly. For the right innovation – one that benefits network operators and the end consumer – the market opportunity is potentially huge.