The Energy Transition | Strategic Innovation Fund projects awarded £95.3m

This week we look at £95.3 million of funding awarded under the Strategic Innovation Fund, the launch of Great British Nuclear, and more.

Ofgem awards Strategic Innovation Fund projects £95.3m

Ofgem has awarded £95.3 million in funding to 10 projects under its Strategic Innovation Fund (SIF). The energy regulator first announced the SIF in September 2021, as a five-year programme with up to £450 million available to promote energy network innovation.

The 10 projects have received "beta funding" under the final stage in the SIF’s first round, which began in 2022. £33.3 million of funding will go towards a project led by National Gas Transmission to adapt existing gas compression units for use with hydrogen, to enable it to be fed into networks. A further £18.6 million of funding has been allocated towards the CrowdFlex project led by the National Grid Electricity System Operator. The project aims to build a forecasting model of domestic demand and flexibility, with the objective of establishing household flexibility as a resource to help decarbonisation.

Ofgem is delivering the SIF in partnership with Innovate UK, the government's innovation agency. Matt Hastings, Deputy Director of the SIF programme at Innovate UK, said, “The SIF has already funded more than 100 innovative projects since 2022, and we encourage more innovators to come forward with great ideas that could become the transformative technologies of tomorrow.”

The second round of the SIF is underway, with Ofgem announcing in April 2023 that it has awarded over £6 million in funding to 53 projects as part of the initial phase. The third round of the SIF is due to open for feasibility study proposals in autumn 2023 and will be the first round that is accessible to electricity distribution networks.

Great British Nuclear launches alongside SMR competition

The government has launched Great British Nuclear (GBN), an arms-length body operating through a repurposed British Nuclear Fuels Ltd, to deliver the government's long-term nuclear program. The government hopes that GBN, which was first announced in March, will play a key role in helping it meet its target of providing nearly a quarter of the UK’s electricity from domestically generated nuclear energy by 2050.

Alongside the GBN launch, the government also announced that registration is open for a competition to support the development of small modular reactors (SMRs). Successful applicants will enter into detailed discussions with GBN as part of an Invitation to Negotiate phase, with an initial shortlist being prepared in the autumn.

The government has also announced a grant funding package totalling up to £157 million for nuclear projects. This funding package includes up to £77.1 million of funding for companies to accelerate advanced nuclear business development in the UK and up to £58 million of funding for the further development and design of a type of advanced modular reactor (AMR) and next generation fuel.

Energy Security Secretary Grant Shapps said, "Today, as we open Great British Nuclear and the competition to develop cutting-edge small modular reactor technology, which could result in billions of pounds of public and private sector investment, we are seeing the first brush strokes of our nuclear power renaissance to power up Britain and grow our economy for decades to come."

For further information on the GBN and SMR announcements, see our Insight.

Government issue response on future Contracts for Difference scheme rounds

The government has published a response to a consultation on policy considerations for future rounds of the Contracts for Difference (CfD) scheme. The initial consultation invited stakeholder views on potential changes for Allocation Round 6 (AR6) (due to open in 2024), and the response confirms that the government intends to implement its proposal to amend the Private Network (PN) CfD Agreement from AR6 onwards. These amendments will provide that renewable generators which directly supply offshore oil and gas facilities will be ineligible for the PN CfD Agreement. The specific amendments to be implemented will be the subject a further consultation before AR6 opens.

The government also provided a response to several other policy considerations for future allocation rounds beyond AR6, including:

• developing a long-term definition of eligible floating offshore wind projects to alleviate any ambiguity within the current definition;
• building an enabling framework which facilitates coordinated infrastructure, thereby supporting the creation of a first multipurpose interconnector (which formed part of the Powering Up Britain: Energy Security Plan);
• maintaining phasing policy for offshore wind projects;
• considering how to streamline CfD appeals system process; and
• exploring the best mechanism of revenue support for repowering existing renewable generation assets.

ESO addresses market distortions created by the CfD scheme

The National Grid Electricity System Operator (ESO) has suggested that the CfD scheme is no longer fit-for-purpose. The comments were made by Sarah Keay-Bright, market strategy co-manager at ESO, at a webinar as part of its Net Zero Market Reform project.

While acknowledging its success to date, Keay-Bright identified two key concerns with the CfD scheme in its current form:

• it has the potential to disincentivise assets from adding additional system value; and
• the CfD design distorts the incentives that would otherwise be available to renewable assets to provide ancillary services.

Under the CfD scheme, generators are awarded compensation based on their metered output, which establishes a negative pricing rule. Keay-Bright highlighted that this negative pricing rule can incentivise generators to adjust their price to a level which undercuts the subsidised generator, and results in distorted bidding for other Balancing Mechanism participants. The consumer ultimately pays the costs of these distortions.

Keay-Bright also identified another issue with the negative pricing rule referred to as the "herding effect", which creates operability issues and high balancing costs. She commented that any future retail market reform should align generator incentives with market signals within operational timescales, and that policies should stimulate demand-side contracting.

The ESO has evaluated potential reforms to address distortions caused by the CfD system whilst retaining current benefits, with a revenue soft cap and floor option scoring highest in their assessment. ESO’s final Net Zero Market Reform report will be published this autumn.

This article was written with the assistance of Jack Duffy and David Herron, trainee solicitors.