1. Capturing the value of innovation Introductory comments – 2012 LCN Fund Conference Hannah Nixon – Senior Partner, SG&G (Distribution)

2. 2 The Low Carbon Networks Fund Key part of our regulatory tool kit Designed to kick start innovation by network companies and drive behaviour change £64m per year available for electricity distribution Planned roll out to transmission and gas networks Today is essential part of delivering LCNF’s key benefit - learning 2010 2011 2012 11 bids worth over £150m, 4 successful projects worth £63.6m 6 bids worth nearly £60m, all 6 successful 7 bids passed initial screening, worth over £80m

3. 3 LCN Fund - success to date Positive response to a significant opportunity Level of DNO & 3 rd party participation Broad range of projects Acceptable level of 3 rd party funding Approach to knowledge dissemination Evidence of an evolving mindset LCN Fund launched in 2010 to provide DNOs with the opportunity to respond to the challenges for the networks created by the low carbon transition

4. 4 Delivering value for money Project Selection Higher risk, not business as usual Diversification (projects and partners) leads to a wider range of ideas and more efficient pricing Project Management Appropriate costing Timely and efficient delivery Effective compliance with the legal framework Project Learning Annual LCN Fund Conference Smart Grids ENA Portal Closedown reports IPR arrangements

5. 5 Value for money (2) Approach to RIIO-ED1 –Innovation in business plans –‘In period’ innovation –RIIO efficiency incentives Measures to ensure value for money: –Two year review: implemented a number of refinements to improve value for money following public consultation –Monitoring Systems and Compliance Measures: we monitor the companies’ performance against significant obligations –Smart Grids Forum: seeking to incorporate all learning into the cost benefit model Further steps –Consultation on closedown reports –2016 LCN Fund benefits review

6. 6 Innovation in RIIO RIIO framework seeks to drive innovation : –Encourages longer-term view and efficient management of uncertainty –Consideration of innovation and alternative techniques in business plans –DNOs incentivised to respond to developments or face penalties –Strong incentives to innovate as companies keep a large proportion of savings made in delivering outputs LCN Fund approach has also influenced the development of our proposals for RIIO-T1 and GD1: –Time limited innovation stimulus for high risk projects (NIC and NIA) –Innovation strategy alongside business plan

7. 7 The uptake of new technologies is uncertain …

8. 8 LCNF&NIC (DSR, Time of Use Tariffs, Energy Efficiency Smart Meters Smart Grids development during ED1 (from Incremental to Top-Down?) LCTs (PVs, HPs, EVs) Role of the DNO is changing (DSO?) Commercial/Market Arrangements Evolving … as is what this means for distribution networks

9. 9 Innovation in RIIO-ED1 Timing –RIIO-ED1 Strategy Consultation – now open –February 2013 – Strategy Decision –July 2013 – Business plans due Innovation and the business plans –Uncertainty around the characteristics, rate and location of take-up of low carbon technologies (LCTs) –Need to ensure these technologies (inc. generation) can connect in appropriate time at appropriate cost, without causing network problems –Consideration of use of smart grid technologies & DSR to maximise flexibility at minimum cost

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