Innovation Funding Incentive

As part of the Distribution Price Control Review (DPCR) and Transmission Price Control Review (TPCR), Ofgem has introduced the Innovation Funding Incentive (IFI) mechanism. IFI was consulted on as an integral part of the DPCR and TPCR proposals and was widely supported by a large majority of consultees. The primary aim of the incentive is to encourage network operators to apply innovation in the technical development of their networks.

Ofgem recognise that innovation has a different risk/reward balance compared with a network operator’s core business. The incentives provided by the IFI mechanism are designed to create a risk/reward balance that is consistent with research, development, demonstration and deployment.

The IFI is intended to provide funding for projects primarily focused on the technical development of the networks, to deliver value (e.g. financial, quality of supply, environmental, safety) to end consumers.

The detail of the distribution networks operators' IFI mechanism is set out in the Special Licence Condition C3, Standard Licence Condition 51 (for the Distribution Licences). The electricity transmission licensees’ IFI mechanism is set out in the special licence condition J5 Part 3 or special licence condition D5 part 2, and standard licence condition B16 Part C. The gas transmission licensee’s IFI mechanism is set out in Special Condition C8B and Special Condition C14B.

They can be summarised as follows:

  • A network operator is allowed to spend up to 0.5% of its combined distribution network revenue or its combined transmission network revenue (subject to a minimum of £500,000) as the case may be on eligible IFI projects.

  • Network operator IFI expenditure that is internal expenditure will be allowed as part of the total IFI expenditure accrued by the network operator.

  • The network operator is allowed recover 80% of its eligible project expenditure via the IFI mechanism within the network operator's Licence.

  • Ofgem will not approve IFI projects but network operators will have to openly report their IFI activities on an annual basis. These reports will be published on the Ofgem website.

  • Ofgem reserves the right to audit IFI activities if this is judged to be necessary in the interests of customers.