How the UK energy and water regulators are trying to ease project financing

In the UK, energy regulator Ofgem and water regulator Ofwat have announced different initiatives to open and accelerate financing for projects in their respective sectors. Here’s what you need to know.

Ofgem and Ofwat have made different moves in their respective arenas to enhance financing for sector projects, albeit in different ways.

Ofgem has announced a more open funding window for innovators in the sector to apply or re-apply for the Strategic Innovation Fund (SIF).

On the other end, Ofwat has more than doubled the allowance for, and increased the scope of, the Regulators’ Alliance for Progressing Infrastructure Development (RAPID) scheme of £1.2 billion ($1.6 billion).

RAPID was formed to help develop and fund new large-scale strategic water supply options by UK water companies while the SIF aims to help transform gas and electricity networks for a low-carbon future.

So, what do these changes mean for the regulators’ sectors and how will projects benefit? Let’s look into it.

Ofgem’s funding window

Firstly, what is the SIF?

Part of the RIIO 2 price controls (Ofgem’s regulatory framework), the SIF is a funding mechanism for the Electricity System Operator (ESO), electricity transmission and electricity distribution, gas transmission and gas distribution companies.

The fund aims to help transform gas and electricity networks, funding projects that could speed up the transition to net zero.

The fund launched in 2021 and is expected to invest £450 million ($591.7 million) by 2028.

According to the regulator, projects currently being developed include technologies that will enable more flexible use of energy, AI and weather data systems to predict energy network risks and faults and circuit breakers that enable the increasing amounts of power generated by offshore wind to be connected to the grid more efficiently.

Although these projects are much needed, they were hampered by the application phases, causing the regulator to update procedures.

Now, with Ofgem’s changes, the SIF will be more flexible and create more opportunities to apply for funding in three ways:

First, rather than a single application window for each SIF phase annually, there will be three each year for all phases, which include Discovery, Alpha and Beta.

Second, flexible start dates and duration will allow project teams to decide which phase to apply to depending on their progress. Thus, project teams can decide their start date to suit the project and their resources. Projects will also be able to deliver within a flexible window of time.

Third, projects will be able to move through their life cycles faster – the shortest route from a successful Discovery to Beta phase can now be completed in 23 months, saving up to eight months compared to the previous process.

Have you read:
A sales lag is threatening EU and US clean tech targets – here’s what you need to know
Inflation Reduction Act: Two years on, to whom has the clean tech money gone?

Ofwat's RAPID scheme

Whereas Ofgem is easing applications for financing, Ofwat is funnelling more pounds into the RAPID scheme.

For some context, after a 2019 price review (PR19), Ofwat announced a £469 million ($616.7 million) ring-fenced development fund for water companies to investigate and develop strategic water resource options (SROs) in England and Wales.

This funding allows companies to develop solutions in a way that they are ‘construction ready’ for the 2025-2030 period.

Now, fast forward to 2024 and, after another price review (PR24), Ofwat has more than doubled the allowance for these solutions. It is here where RAPID comes in, formed as a collaboration between Ofwat, the Environment Agency (EA) and the Drinking Water Inspectorate (DWI) to facilitate the development and funding of these large-scale solutions.

Updated procedures and wider scope

Ofwat’s updates also concern procedural efficiency and an expansion of eligibility.

For solutions accessing RAPID’s funding, each needs to pass through a gated process, where RAPID and Ofwat assess progress, ensuring that companies complete the activities necessary to receive additional funding.

Ofwat is now exploring a 'lighter touch' approach for select projects in their initial gate one assessment - the stage at which decisions are made about incentives, costs and, of course, whether a solution will pass to stage two.

These projects will typically either involve potential quality risks that are likely to have a significant impact on feasibility, cost and timing of the project, or have been identified as a project that will be influenced by the development of new regulatory frameworks.

Then, when it comes to scope, Ofwat has said they are also looking at whether the risk and complexity of solutions warrant additional regulatory support and oversight from RAPID.

Said Ofwat in their PR24 draft determination for the RAPID programme: “We have learnt lessons from the process so far and recognise the importance of continuing to collaborate and work through addressing regulatory and commercial and environmental gaps and barriers which have been identified since PR19.

“Given the new evidence of increasing challenges in some regions, we welcome new solutions into the programme.”

Enter Labour

The moves from Ofgem and Ofwat come amid political change in the UK after Keir Starmer’s Labour Party won their landslide victory in July.

The new Party's pledges included creating a clean power system by 2030 by boosting renewables, setting up Great British Energy as a national entity, and creating a National Wealth Fund to help decarbonise industry.

When it comes to Ofwat and Ofgem, Labour’s position sees them speeding up these processes to accelerate the country’s energy transition.

According to KPMG in What does a Labour Government mean for energy and utilities?, with Labour’s win, for Ofgem there will be changes to reflect both the pace Labour wants to move at in building new infrastructure such as electricity grids and in sorting out the grid queue.

At the time, KPMG said that Ofgem would need to demonstrate they are adhering to their new net zero duty in facilitating the deployment of new grid infrastructure at pace. And considering Ofgem’s move to easing applications for network projects, it would seem that this is the case.

In the case of water, says Robbie Owens, partner and parliamentary agent of law firm Pinsent Masons in a blog post, “The PR24 process was already well underway before Labour came to power, so there was limited scope for Ofwat to influence the outcomes this time round."

"However, the strong rhetoric from the new secretary of state leaves water companies in no doubt that things will need to change across the sector moving forward.

“That being said, there is no getting away from the fact that significant financial investment is required across the piece, given the genuinely critical need for new and improved water supply and wastewater infrastructure in England and Wales.”

According to the firm, the need for capital investment for both water and wastewater assets has become more apparent since PR19, but this has happened at time when new regulatory and environmental standards and targets have been imposed on water companies and their operating costs have risen significantly.

Owen adds that it is now essential that regulators look beyond the short term to secure the long-term capital investment required, as changes to the policy and regulatory framework since the last price review place an increased focus on planning for future uncertainties.

In this context, the publication of Ofwat’s draft determinations has been highly anticipated by the sector, as it provides the first indication on how Ofwat will approach ambitious plans for investment until 2030 and beyond.

Stay tuned into the Power Playbook, as we continue to cover these important developments in the sector.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

Follow me on LinkedIn