Innovation Policy: Ofgem, distributed generation and innovation: Recent Initiatives

Bridget Woodman, Warwick Business School

Increasing levels of distributed generation are expected to connect to distribution networks in the UK over the next few years, largely as a result of government targets for renewables and CHP.  Connections of distributed generation (DG) could maintain the current passive mode of network operation, with the DG operated separately from the system as a whole.  Alternatively, the new generation could be incorporated into the working of the system.  This will require an active mode of connection and network operation, which is arguably more efficient in terms of network design and enabling greater levels of distributed generation. However, achieving such a shift will require innovation in both network design and operation.

The monopoly networks are regulated by Ofgem, mainly through five yearly price controls.  These regulate the profits of the distribution network operators (DNOs), and in the process also shape their business and investment strategies.  It has been recognised for some years that the design of the price controls can raise barriers to DG, or at the very least does not provide DNOs with incentives to encourage deployment.

The most recent price control review for the period 2005 – 2010 explicitly took innovation in network design and operation, and DG, into account, with Ofgem recognising that this could contribute both to security of supply and to achieving government targets and potentially a longer term shift to more active network management.  The challenge for Ofgem and DNOs is how to realise greater levels of DG cost effectively.  This paper outlines the three main initiatives in the price control designed to encourage innovation and greater levels of DG – the DG incentive, the Innovation Funding Initiative (IFI) and Registered Power Zones (RPZs).

Early results show that, while there is general support for the DG incentive and RPZ mechanisms from the DNOs, they do not appear to have resulted in higher rates of DG connections.  In addition, while DNOs also support the IFIs, much of the work undertaken so far has focused on network asset lifetime extension, rather than innovation in connections or progress towards active network management.  The paper concludes with some ideas for possible improvements in the schemes when they are reviewed at the end of this year.

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