There's always a risk with early adopters of new regulations and technologies that if they go wrong, reputations can be harmed. Set against this is the kudos gained from being the first-mover; not only do the media sit up and take notice but customers and investors are reassured that these forward-thinking companies are willing to take controlled risks to move ahead of the competition and to anticipate, rather than simply react to, regulatory changes.
The utility sector is facing huge challenges as it begins the transition to a low-carbon economy. On the one hand, its products-and-services offering is about to get much more complex as centralised generation gradually gives way to a decentralised system, with the introduction of smart meters and customers able to sell power back to the grid; on the other, grid infrastructure needs to be upgraded to cope with the increasing complexity. The challenge is to do this without disrupting energy supply, customer service and potentially companies’ reputations.
The regulator Ofgem has played a key role in mitigating these risks by including relationship-building measures within a new regulatory regime. The RIIO framework for network regulation (RIIO: Revenue = Incentives + Innovation + Outputs), which the regulator introduced late last year, is designed to encourage companies to be more customer-focused.
According to the regulator, this will come about through a number of mechanisms (there will be a broad measure of customer satisfaction, for example) and distribution network operator companies (DNOs) may need to talk with customers to see if they can persuade them to alter their demand patterns to avoid periods of network constraint.
The changes will therefore require the DNOs to talk to customers, suppliers and the regulator, helping them to build and develop relationships with each of these stakeholders, manage the impacts of the changes the RIIO regime will bring and reduce the risk of any potential reputational fall out. Consumer buy-in is a vital aspect of the transition to a low-carbon energy network.
If the projects succeed, the companies could benefit in reputation terms from their readiness to be at the forefront of the low-carbon revolution. But there is a potentially wider reputational impact, too. Ofgem has been working closely with DECC and BIS to ensure that the LCN Fund is complementary to initiatives such as the Green Investment Bank to ensure they are complementary, along with other initiatives targeted at funding renewable energy generation.
But there are doubts that this will be adequate. An Ernst & Young report, Capitalising the Green Investment Bank , published last year, calculated that of the estimated £450bn of low carbon investments the country needs, only £50bn-£80bn of funds is available from traditional sources of meaning the GIB will have to plug the estimated £370bn shortfall.
Further investment is clearly needed, but mechanisms such as LCN Fund, RIIO and GIB, are among the schemes that should help build the UK’s reputation as an attractive low carbon investment opportunity for institutions, the private sector and individuals.
—- Nicholas Chrysanthou, Energy Consultant Analyst at Alva