Memorandum submitted by Ofgem
Many of the questions and issues raised in your
Press Notice are more the concern of policy makers within government,
rather than the concern of the regulator. For example, it is government
that decides what funding should be available for research and
development, and the role that wave and tidal energy have in its
renewable energy strategy. It may therefore be helpful in putting
this into context if I explain Ofgem's involvement, both past
and present, in renewable energy generally and in particular wave
and tidal energy.
In the past government support for renewables
has been primarily through the Non Fossil Fuel Obligation (NFFO)
programme in England and Wales, and the Scottish Renewables Obligation.
Public Electricity Suppliers (PESs) are required by Orders made
by the Secretary of State to enter into contracts to take a certain
amount of electricity generated from renewable sources. These
contracts were awarded to renewable generators on a competitive
tender basis for periods of up to 15 years, the last of which
run until 2018. Ofgem (previously OFFER) was responsible for assessing
the proposed projects submitted by developers of new renewable
generating stations before the contracts were awarded. This entailed
consideration of the technical, commercial, legal and economic
details of the projects to establish whether they were capable
of contributing the stated capacity (MW) to the Orders made by
the Secretary of State.
Ofgem was also responsible for advising the
Secretary of State on the possible means of meeting an Order and
in doing so took into account of the cost to customers of supporting
the projects. Projects awarded contracts under the Orders are
supported by the Fossil Fuel Levy, which is paid by electricity
customers. The projects are paid a fixed price (the contract price)
for each unit of electricity produced (based on the project's
bid price in the competitive tender). These prices are generally
higher than the market price for electricity and the difference
between the market price (Pool price) and the contract price is
met by the Fossil Fuel Levy.
However, it was the responsibility of the Secretary
of State, rather than Ofgem, to decide which technologies should
be included in an Order, and which projects should be awarded
A total of five NFFO Orders were made in England
and Wales between 1990 and 1998. Contracts were awarded to 794
projects with a total contracted capacity of 3,271 MW. No wave
or tidal projects were included in these Orders. Three Scottish
Renewables Obligation Orders were madebetween 1994 and
1999. Contracts were awarded to 109 projects with a total contracted
capacity of 336 MW. Three wave projects were included in the contracts
awarded under the third Scottish Renewables Obligation Order (SRO3).
The three projects range in size from 43 kW to 500 kW. One of
the wave projects is now generating. The contract prices for the
three projects range from 5.95p/kWh to 7.0/kWhthis compares
to prices ranging from 1.89p/kWh to 7.0p/kWh for the SRO3 Order
as a whole. (All prices are in 1998 prices).
The Government has announced that there will
be no more NFFO and SRO Orders (although the contracts awarded
under Orders made previously will continue). Future support for
renewables will be provided by requiring all electricity suppliers
to supply a certain percentage of the electricity they supply
from renewable sources. Suppliers will be able to meet the obligation
by buying and supplying to their customers renewable electricity
or by demonstrating that another supplier has done so, evidenced
by green certificates. Suppliers who fail to meet the obligation
will be required to pay a buy-out price per kWh shortfall. The
Government has proposed that the buy-out price be set at 3p/kWh.
This means that renewable generators might expect to receive up
to the market price plus 3p per kWh of electricity generated.
The contract prices for the three Wave projects included in SRO3
suggest that this amount would not be sufficient to encourage
wave projects to come forward.
A single buy-out price means that the more expensive
technologies such as wave and tidal power are unlikely to make
a contribution to the overall target for renewables. This could,
however, be achieved by having a banded renewables obligation,
with different buy-out prices for different technologies, to reflect
the costs associated with developing and building the projects.
The requirement could be for part of the Obligation to be met
from technologies such as wave and tidal power. These more expensive
technologies could have a higher buy-out price than others, such
as landfill gas, which are close to being competitive without
6 February 2001