Do Ofgem help or hinder innovation?
Those of you who are regular readers of these articles will know that I am passionate about innovation. It’s a word that gets thrown around frequently yet I am still a firm believer that the utilities sector has a solid grasp of the concept and its benefits.
Something that often gets brought up in the numerous conversations I have each week is the role of the regulating body Ofgem in efforts to bring a more diverse portfolio of innovation to the industry. Sometimes it seems they’re trying to help the consumer but in putting such strict regulations on the suppliers, it could be argued that they’re actually hindering some innovations that would offer real value.
Not one to be happy remaining in the dark on issues, I spent a part of my Sunday afternoon conducting a little research and, from an innovation perspective, I would make the case that they are actually trying to help more than hinder. A prime example of this is their regulatory sandbox initiative. Allow me to break down exactly what this initiative is, what it does and why I think it works. In a nutshell, Ofgem’s regulatory sandbox allows innovators to trial new products, services and business models in a real-world environment without some of their usual rules and restrictions applying.
So why offer regulatory sandboxes?
Ofgem recognises that we’re all facing a profound and wide-ranging transformation in the energy system. Due to this evolution in technology and expectation, it makes sense that the associated rules and regulations would also change in order to allow progression in areas like technology whilst at the same time maintaining Ofgem’s duty to the interests of the customer.
But, as it’s rather uncertain what the future will look like, Ofgem believe that the best way in which to regulate for uncertainty is to adopt a more flexible approach that relies on continuous learning. The regulatory sandbox has been developed to provide innovators with an environment to experiment with new ideas and new ways of operating . Those of you with a background in software won’t be strangers to the concept of an environment where code can be tested in a ring-fenced setting without affecting the operations and safety of the wider system. This is exactly the sort of environment that Ofgem is trying to foster too.
How does it work?
Organisations working on innovations are given the opportunity to run a trial of their product over a set period of time with a limited number of customers with some of the normal energy market regulations removed.
As part of the criteria for entry, participating companies must have set learning objectives in mind which will then be tested within the confines of the sandbox. Whether it’s new energy generation strategies, new ways of buying and selling energy or new business approaches, effectively what is happening here is that companies are being given the opportunity to test the market viability of new technologies and approaches within a controlled environment.
Once the trial has finished, participating companies then feed back their findings from the trial to Ofgem who, depending on the success or failure of the project, might look at amending energy policy in the future.
Are results made permanent?
Ofgem are quick to point out that this is not a means to change regulation on a permanent basis. Their sandbox trials are there to provide evidence to help understand whether regulation should change permanently. It’s the learnings from this evidence gathering that help them to decide if an industry-wide change needs to come into effect.
The initiative has already attracted some huge names in the energy sector, with the likes of BP and British Gas taking part in the most recent sandbox.
Just last week, Ofgem published their update on the lessons they have taken from their sandboxes to date a mere 20 months after it was first launched.
Out of the 70 expressions of interest to participate in the sandbox, a total of seven projects have been brought forward, three from the first in February and four from the second window in October.
BP and the sandbox
Ofgem had previously disclosed projects successful in the first window and yesterday updated the market on those to have gained support in the second window, including a notable project from fossil fuel giant BP.
Within the sandbox, BP’s intention was to develop a platform that would allow consumers who generate their own energy (using solar panels for example) to sell excess electricity in a marketplace.
According to Ofgem: “An unnamed existing, energy supplier, was also involved in the sandbox in order to explore the value proposition of accessing more domestic distributed generation from their customers. This could allow the licensed supplier to enhance their ability to match supply and demand, as well as offer lower cost power to their customers.”
The licensed supplier and BP wanted to understand 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 trial of this platform will see up to 250 domestic customers across Great Britain simulate energy trading. No actual electricity will be bought or sold during the trial.
The project echos a similar development that another big player in the energy market, Centrica, have been exploring The British multinational energy company’s Local Energy Marketplace pairs domestic and commercial customers with renewable energy generation and battery storage all within one single, trading framework.
Verv and the sandbox
Another notable entry in the second sandbox window was that of Verv, which is working with Repowering London and British Gas on a peer-to-peer, solar-powered co-operative in Hackney, a project already noted for its use of blockchain technology.
The idea of this is to help residents access the environmental and financial benefits of renewable energy, solar panels that have been fitted to the roof of a tower block. However, at the moment the solar panels only power the communal areas and so residents benefit only indirectly.
Obviously, the largest benefit from a trial such as this is to allow residents to profit from solar energy and reduce their electricity bills. Verv and British Gas will trial a new arrangement that maximises the benefits from local generation and tests peer-to-peer electricity trading across a distributed ledger platform (blockchain).
Energy supplied by the solar co-operative will be traded on a software platform developed by Verv. The trial allows Verv to test practical applications of thei rtechnology, including how users respond to it.
I’m a huge fan of companies who put user-testing at the forefront of any new platform or solution. So often you see people get caught up in how modern or feature-heavy something is and they forget about the people who will be using it.
All the projects that are successful in being accepted to the sandbox have two years in which to operate and test their hypotheses. After this time Ofgem will publish a report listing their findings and any possible objections.
As I said at the start of this article, I am huge fan of meaningful innovation. That is to say, innovation that addresses a challenge and offers value to the user as well as the innovator. When I started looking into this I was worried that Ofgem would too rigid in their policies to allow any valuable innovative work to take place. However, after reading through their sandbox reports I have to say that I’m really pleased that they’ve developed a forward-thinking and effective way in which suppliers can test new platforms.
Kudos to Ofgem and to all those are looking to push this industry forward.
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