Search: go

Reference

History of NFFO

NFFO and the Fossil Fuel Levy

In 2000 the Government stated that there would be no further NFFO orders and that future supporting arrangements will be an obligation on electricity suppliers to contract (or 'buy-out' their obligation to contract) an increasing percentage of electricity from renewable sources. The Renewables Obligation will see 10% of the UK's electricity supply being met from renewable sources by 2010. View the Statutory Consultation document.

The Government's previous policy for renewables arose as a consequence of privatisation and the need to subsidise nuclear power. When the electricity supply industry was privatised in 1989, the nuclear power stations remained in public ownership, as they would not have been an attractive investment for shareholders. The Government therefore made provision for nuclear power in the Electricity Act of 1989. This is the Non Fossil Fuel Obligation.

The money needed to support the nuclear industry is raised by the Fossil Fuel Levy. A small amount of the levy is also used to support renewables.

The Fossil Fuel Levy

The levy is currently set at 2.2% on the price of electricity. The levy originally was set at 10%, and most of the money raised was used to subsidise nuclear power.

As of the end of 1998 there was no further subsidy to the nuclear industry. The levy still continues and is used to pay for projects with renewables order contracts still running. A follow-on policy will be needed to ensure that new renewables projects are developed at a significant rate.

The extra cost of supporting renewables is about 1% of the cost of electricity, this represents £3.50 per year for an average household. It is not possible to say how much households pay for wind per year. At a very rough estimate, 25% of the cost of supporting renewables may go to wind, that is less than £1 per year for an average domestic household.

When critics of renewables calculate how much money was spent on supporting renewables they often calculate the difference between the pool price and the renewables selling price, thus giving an as been reached.

The achievements of the NFFO

The UK now has over 60 operational wind farms, and many more single turbines, with a total installed capacity of over 412MW. For the latest updated information on installed capacity, see the map of projects in the UK.

The price of electricity from renewables has come down dramatically, particularly for wind. The average bid price for wind energy projects (regardless of size) fell by 31% between NFFO 3 and NFFO4. This is a larger fall than any other technology.

Looking at the prices paid under NFFO contracts gives some idea of the falling cost of wind energy. However the basis of each order has been slightly different and so they cannot really be used to illustrate a trend.

Wind energy, however, has consistently shown the most dramatic fall in prices. The average bid price for wind energy projects (regardless of size) fell by 31% between NFFO 3 and NFFO4. This is a larger fall than any other technology.

Prices p/kWh NFFO3 (1994) highest NFFO3 (1994) lowest SRO (1994) highest SRO (1994) lowest NFFO4 (1997) average SRO2 (1997) lowest
Wind 4.80 3.98 4.17 3.79 3.53 2.74
Wind (<1.6MW) 5.99 4.49        
Hydro 4.85 4.25 3.94 3.24    
Landfill gas 4.00 3.29        
Waste combustion 4.00 3.48        
Other combustion 5.23 4.90        
Sewage gas            
Energy crops 8.70          

Generators with contracts awarded under NFFO1 and NFFO3 received their bid price, whereas NFFO2 contracts were paid a single price for the whole technology band. The NFFO2 price was set at the bid price of the most expensive project awarded a contract, at 11 pence/kWh.

Another crucial difference was that NFFO1 and NFFO2 contracts expired in 1998. This meant that the capital costs of the projects had to be recovered within 6 to 8 years. This has a dramatic effect on technologies like wind energy, which has high capital costs but low running costs.

Analysis of the results of the second Northern Ireland renewables order (NI-NFFO2), the third Scottish renewables order (SRO3) and NFFO5 is expected to show further convergence. See list of NFFO5 contracts for wind energy.

Why has the cost come down so fast?

The dramatic reduction in the cost of wind power is a remarkable achievement considering the youth of the industry. The modern wind energy industry began in the mid 1970s. It has already reached the same cost as nuclear power, which has received colossal R&D funding since the 1940s.

The fall in price paid under NFFO contracts has occurred for the following reasons:

  • longer duration contracts
  • fall in the cost of turbines
  • increase in the size of turbines means that fewer of them are needed for the same electrical output. This reduces infrastructure costs
  • the cost of financing has fallen, as investors have gained experience of renewables projects. Many projects are now funded from balance sheets rather than equity loans.
  • the cost of project development has fallen as developers have gained experience

For further information about the economics of wind energy, see the economics of wind energy.

These are indeed important achievements. However there are problems with the NFFO.

Criticisms of the NFFO

The short duration of NFFO1 and NFFO2 contracts resulted in a high price as developers had to pay of all capital costs before 1998, rather than spread it over the lifetime of the project. The price paid to all wind farms with NFFO2 contracts was 11 pence/kilowatt-hour. This lead to the perception that wind power is very expensive. It also put pressure on wind energy developers to commission their projects as rapidly as possible, in some cases forcing developers to use imported turbines. Both factors resulted in criticism of the wind energy industry.

The tranche system, bringing projects together in groups so that they can compete on price, results in flurries of activity, interspersed with long periods of relative inactivity. This caused problems for local authorities and for the wind industry. Large numbers of planning applications for the erection of anemometers, few of which would be developed into wind farms caused concern amongst local communities. For the wind industry, the stop-start nature meant it was problematic to support project development teams through periods of inactivity.

The intense competition results in the exploitation of the highest wind speed sites, which often coincide with areas valued for their scenic beauty. Lower wind speed sites, which still have good potential for wind energy development, are not favoured. It has also made it difficult for developers to bring forward community owned projects as they are more expensive.

Initially commentators had expected the price of renewables to converge with the 'pool price'. It has now been acknowledged that this is not the best measure of the market value of electricity. This had given gave the impression that the subsidies being paid to support wind energy were much higher than in reality.