A playbook for turning energy innovation into business as usual

As the backbone of the energy system, networks must be prepared to support a surge in renewable power, the electrification of transport, the decarbonisation of heating and industry, and the transition to low-carbon gases like hydrogen. Without a smarter, more flexible, and more resilient grid, many countries will fall short of their net-zero goals. 

In the UK, the Office of Gas and Electricity Markets (Ofgem)—the country’s independent energy regulator—is tackling the challenge in part through its Strategic Innovation Fund (SIF), which supports innovation projects through three progressive stages—Discovery, Alpha, and Beta—each representing increasing complexity and deeper understanding. In Beta, ideas are developed into pilot projects, typically over two to three years, though some projects extend across a longer period. If the final pilot outcomes show sufficient consumer value, the project has the potential to transition to business as usual (BAU), ensuring that innovative solutions benefit all networks and, ultimately, consumers.

With the first Round 1 SIF projects reaching completion of the Beta phase over the next 12 months, a clearer picture is emerging of the distinct challenges the innovation-to-BAU transition presents—and of the potential moves network players can make to mitigate those challenges. Looking at how one such SIF-supported project—the Digital Platform for Leakage Analytics (DPLA), which deploys modelling and in-field sensors to track methane leakage across the network of the UK operator Cadent—has navigated this transition clarifies the picture further.¹

Challenge No. 1: Securing funding to scale up

While in an innovation environment, the cost of funding a project is relatively low, as a small, trial-scale section of the energy network can be used. In the case of the DPLA (see Figure 1), the project has so far been deployed across around 15% of the UK’s gas network as measured by length, comprising Cadent’s East Anglia and North London networks, an extent deemed sufficient to test the project’s probabilistic modelling and sensor technologies. At a cost of £9 million, this phase of the project is on track to deliver a platform to track methane emissions across those two Cadent networks by June 2025. The requested funds for the next phase of the roll-out, which will cover just the remaining Cadent networks over the RIIO-3 price control period (2026 to 2031), is vastly higher: £53 million. The upshot: Innovation-to-BAU scale-ups can place a potentially daunting onus on regulators and funding recipients if projects are to deliver real consumer value. 

Figure 1: The DPLA’s transition to BAU

Mitigation No. 1: Specific innovation-to-BAU funding 

For many SIF projects, enough evidence of consumer value emerges in the Beta phase to secure BAU scale-up funding. But for other projects, including the DPLA, scaling from the minimum-viable-product phase to a fully deployed solution requires more development and testing across all networks than what the innovation funding allowance covers. 

A potential solution? A specific innovation-to-BAU funding allocation. This transitional funding would allow projects like the DPLA to further share learnings with other networks, allowing all networks to understand the role of the innovation within the context of their own business drivers. Scaling projects across energy networks can often be challenging, as there is limited incentive to adopt innovation developed by other networks. This could be addressed through an incentive whereby a portion of funding could be made available only where networks are actively collaborating. This is the funding approach adopted for the Vulnerability and Carbon Monoxide Allowance (VCMA) program in the UK. This kind of funding pot would also provide an opportunity for the regulator to provide feedback on areas where they lack confidence, giving projects time to address any issues.

Challenge No. 2: The complexity of network funding mechanisms

In the UK, there are two mechanisms for funding energy innovation projects through the RIIO process (the regulatory framework in the UK to allocate funding to networks): baseline funding and uncertainty mechanisms (UMs). Projects for which specific needs and costs can be accurately forecast typically request baseline funding as part of the business plan submission. Projects subject to unforeseeable variables and costs for the price control period typically receive funding allocated via UMs, which are designed to mitigate risks and ensure that consumers fund only projects that can deliver proven benefits.

This two-track funding structure can introduce complications for energy innovation projects. To transition from pilot to BAU and unlock their full value, such projects must be deployed not just across the lead network chosen for the Beta phase, but ultimately across multiple networks. Should those networks take different approaches to their funding request from the regulator, their speed of deployment will differ, and, as a result of this discrepancy, the value to consumers will be lower.

The DPLA project is an example of this. Should the networks deploy the DPLA in the manner set out in their business plans for the period 2026 to 2031, with all networks other than the lead network (Cadent) funding the deployment using UMs, there will be a significant disparity in the speed of deployment, as funding under UMs will require:

• Waiting until the start of RIIO-GD3 (April 2026) to begin drafting an application.
• A reopener with Ofgem, a process potentially taking between six and 12 months, with significant administrative effort required by both Ofgem and the networks

By contrast, Cadent has already deployed the project on their North London and East Anglia networks, placing them 12 months ahead of the other networks. Customers outside of the Cadent network may have to wait up to two years to see the benefit of the innovation. The delay may also have a knock-on impact on the development of any potential shrinkage incentive for future price control periods, limiting the data available to Ofgem when setting a floor and performance targets.

Mitigation No. 2: Regulator and network engagement 

Close coordination between the networks is critical for overcoming funding and timeline complexity and can often be facilitated by equally close engagement with the regulator. Ofgem, for example, has mechanisms in place—namely the Sector Specific Methodology Decision (SSMD) and Draft Determinations (DDs)—that drive significant engagement with the industry and coordination between networks. Whatever the specifics of the regulatory framework, each innovation project must thoroughly engage with the regulator, the other networks, and other innovation projects in the same challenge areas to ensure they are all on the same journey.

Challenge No. 3: Developing incentive mechanisms

Regulators overseeing the innovation-to-BAU transition face a persistent challenge: how to develop a metric that accurately tracks the progress of a project’s deployment so that they can measure networks’ level of implementation and, just as critically, incentivise action. In the case of the DPLA, the incentive metric is the amount of methane leakage across the gas network. But until this metric is informed by robust data and analysis, the regulator will be unable to set incentive mechanisms to motivate the networks. Once those mechanisms are developed, Ofgem will be able to benchmark networks based on the successful deployment of the innovation project into BAU, but until this point, the motivation for realising the full value of the innovation project will remain low. 

Mitigation No. 3: Building relevant KPIs into the development process

As mentioned in Challenge No. 1, regulators need confidence, and a specific KPI to track progress can provide this. In the case of the SIF initiative, building a tracking KPI into the existing development process would be relatively straightforward, as each innovation project in the SIF initiative is required to develop a cost-benefit analysis, which in turn could provide the basis of a KPI for Ofgem. Any mechanism must be repeatable across networks, so that the regulator can ensure that projects deployed across all networks are delivering the benefits as proposed.

The path forward

Turning energy innovation into business as usual is vital to enable gas and electricity networks to transition to a low-carbon future. But regulators must first overcome significant hurdles to ensure a flow of funding to different projects at different levels of maturity, execute a smooth roll-out, and incentivise action on the part of networks. Doing that requires nimble management of funding mechanisms, robust stakeholder engagement, and reliable ways to track progress and implementation. By putting the right solutions in place, regulators and networks can help make energy innovation synonymous with consumer value and the attainment of net-zero goals.