EVALUATION

AN INDEPENDENT EVALUATION OF THE LCNF
1. INTRODUCTION
This study has been commissioned by Ofgem to provide an independent evaluation of the
Low Carbon Networks Fund (LCNF). The project has been undertaken by Pöyry
Management Consulting (UK) Limited (“Pöyry”) and Ricardo Energy and Environment
(“Ricardo”).
1.1 Background to the LCNF
The Low Carbon Networks Fund (LCNF) provided approximately £250m 4 of funding to
projects sponsored by the six Distribution Network Operators (DNO) of Great Britain over
the period 2010-2015. The original objective of the LCNF was to help all DNOs
understand what needs to be done to provide security of supply whilst achieving value for
money – as GB moves to a low carbon economy – and also what role the DNOs could
play in facilitating low carbon and energy saving initiatives to tackle climate change. The
LCNF aimed to help DNOs explore new technologies and to and develop alternative
operating regimes and commercial arrangements.
Prior to the introduction of the LCNF, Ofgem were concerned that the price control
mechanism was encouraging companies to seek short term cost savings to the exclusion
of innovation research which needs a longer term for pay off. In establishing the LCNF
Ofgem was aware of the challenges regulated businesses face in the area of innovation
and aimed to replicate the incentives on unregulated companies to innovate. Innovative
companies which compete in competitive, liberalised, markets usually stand to gain
commercially from innovation. Businesses which are subject to economic regulation –
such as the DNOs – have argued that they may incur the costs of innovation projects if
they fail (as the cost may not be allowed by regulators). In addition they will not be able to
fully capture the benefits of successful innovation as it will be fully or partially clawed back
at subsequent price control reviews.
In April 2013 Ofgem introduced the Revenue = Incentives + Innovation + Outputs (RIIO)
framework for the economic regulation of gas and electricity transmission companies and
for gas distribution companies. The new framework embedded ‘innovation’ into price
control regulation and Ofgem replaced the LCNF with a more comprehensive Innovation
Stimulus package.
In the longer term Ofgem expects the incentives within the RIIO framework to encourage
the DNOs to innovate as part of their normal business practices 5 . Until this happens it is
likely that some form of innovation stimulus will need to continue to exist if the objectives
of the LCNF remain.
1.2 Overview of the LCNF
The LCNF was designed to meet the following objectives:
• incentivising the DNOs to include innovation as part of their core business;
• helping the DNOs to move towards a low carbon business whilst maintaining security
of supply and delivering value for money to customers;
4
5
This is the approved funding by Ofgem and net of the contribution from DNO and project
partners. It includes both Tier 1 and Tier 2 projects.
https://www.ofgem.gov.uk/ofgem-publications/84601/assessmentofinnovationstrategies.pdf
PÖYRY MANAGEMENT CONSULTING
October 2016
713_Poyry_Report_Evaluation_of_the_LCNF_FINAL_Oct_2016_v700.docx
5