Select Committee on Science and Technology Appendices to the Minutes of Evidence


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 contracts.

  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 made—between 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/kWh—this 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 financial support.

6 February 2001

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