§ Mr. David NicholsonTo ask the President of the Board of Trade when he expects to announce the details of the third renewables non-fossil fuel obligation order; and if he will make a statement.
§ Mr. Charles WardleI have today laid before Parliament an order requiring the regional electricity companies in England and Wales to make arrangements to secure 626.92 MW of new electricity generating capacity from a range of renewable energy sources. This is the third renewables order under the non-fossil fuel arrangements—widely known as NFFO3—and covers the period 1 April 1995 to 31 March 2014.
The prime purpose of this third renewable order is to create an initial market for those renewables-based 1047W electricity generation technologies which have the prospect, in the not-too-distant future, of competing against conventional generation technologies in the open market for electricity. In addition to market enablement, it will contribute towards the Government's broad aim of working towards 1,500 MW of new renewables-based generation capacity in the United Kingdom by the year 2000, thereby assisting the Government in meeting their Rio commitment of returning United Kingdom emissions of carbon dioxide to 1990 levels by same year. NFFO3 will also contribute to the policy objectives of establishing diverse, secure and sustainable energy supplies and encouraging the development of internationally competitive renewable energy industries.
I am pleased with the response to the tender invitation, which resulted in 520 firm bids coming forward, for a total of some 2,500 MW of capacity. The Government are therefore able to set an order covering technology bands previously supported under the first and second orders and showing clear convergence towards the market price for electricity, while also enabling a number of projects using energy crops and agricultural and forestry wastes to come forward. I understand the regional electricity companies have met their obligations arising from this NFFO3 order by signing collective contracts for 141 projects. I
Summary of third renewables orders(NFFO—3) Technology Band Contracted capacity MW dnc Number of projects Lowest contracted price p/kWh Weighted average price1 p/kWh Highest contracted price p/kWh Wind Exceeding 1.6 MW dnc 145.92 31 3.98 4.32 4.80 Not exceeding 1.6 MWdnc 19.71 24 4.49 5.29 5.99 Hydro 14.48 I5 4.25 4.46 4.85 Landfill Gas 82.07 42 3.29 3.76 4.00 Municipal and industrial waste 241.87 20 3.48 3.84 4.00 Energy crops and agricultural and forestry waste Energy crops/forestry waste-gasification 19.06 3 8.49 8.65 8.75 Residual (other) 103.81 6 4.90 5.07 5.23 Total 626.92 141 — 4.35 — 1 Average price to be paid, weighted according to the expected output from each project. Detailed consultations have taken place throughout the NFFO3 process, from the formulation of initial plans for the third order, to the decision on the shape and size of the order-the latter taking account of the cost and quality of bids received. The Government acknowledge the contribution of all those bodies which have been involved in many ways in the making of this order. In particular, it welcomes the advice from the Director General of Electricity Supply, as a contribution to the debate and the perspective it brings.
The Government's overall consideration has been to strike a balance between the degree of market stimulation brought forward through the obligation and the cost to the customer. The difference between the "pool price" for electricity and the price paid to the generator for electricity supplied under NFFO contracts is funded through the fossil fuel levy, which is applied to sales of electricity to the final customer. If contracted projects do not go forward to commissioning and generation, then the
1048Wunderstand also that letters of notification will be issued shortly to all tenderers bidding into NFFO3.
Successful bidders will now need to obtain planning permission for their projects—if they have not already done so. The award of a NFFO contract is totally without prejudice to the planning approval process, which must be carried out in the normal way. Developers will also need to secure firm fuel supply contracts where this is relevant. For these reasons therefore, among others, the Government expect that around 300 to 400 MW of the 627 MW contracted capacity are likely to go forward to commissioning. The order provides for the obligation placed on the RECs to be reduced to reflect non-commissioning of projects. To the extent that it appears in later years that the outturn will be outside this range, the Government would expect to take that into account in setting the policy for the further orders foreshadowed last year in my Department's "Renewable Energy Bulletin No. 5".
The following table shows the breakdown of contracted capacity under the obligation, according to technology band, together with the number of contracts signed, the lowest price to be paid for the electricity produced, the average price paid—weighted according to the expected output from each project—and the marginal highest price paid.
cost to the fossil fuel levy will reduce accordingly. The Government have also considered the balance between support for renewables technologies covered by previous orders and support for newer renewables technologies. The Government are determined to work towards convergence between the price for electricity from renewables and the open market price, and believe that the inclusion of promising newer technologies in NFFO3 is the most likely way to achieve this for these technologies.
The Government believe that, in addition to the general prospects for the utilisation of agricultural and forestry wastes, there is considerable long-term potential for short-rotation coppice as an energy crop. However, the commercial exploitation of coppicing will require substantial reductions in costs through experience and optimisation of both the fuel supply chain and the conversion technology. I believe, therefore, that the time is now ripe to include within NFFO a tranche of capacity 1049W based on biomass gasification, which is both technically efficient and offers the prospect of significant economies of scale and replication. In addition, I am pleased to announce that, as a contribution to the process of optimising the production of coppice wood, the Government have awarded a £500,000 contract to the Forestry Commission research division for coppice field trials over the whole of the United Kingdom, bringing the total DTI R and D support in this area to £2 million per year.
The Government have also reflected on how best to continue the stimulus given to wind power. The Government consider that they should distinguish between wind farms and smaller projects involving single individual turbines or small clusters of them—perhaps community based and serving a different market. They expect that only 20 or so of the wind farms will commission, having regard to factors such as the need for planning permission referred to. In addition, the Government have noted that one developer was responsible for a large number of the bids for wind farms put forward under NFFO3. By holding this developer to no more than 10 projects, the Government have been able to secure increased diversity of supply within the wind band. At this early stage in the development of the market for wind, the Government believe that this diversity is desirable, in order not to lose the potential benefits that may arise from a spread of players in this field.
I welcome the publication in late November of the "Best Practice Guidelines for Wind Energy Development" by the British Wind Energy Association. This is a constructive step, representing a responsible approach, which should ensure that wind projects are appropriately sited. I welcome also the announcement this morning by "The Wind Fund plc" of its intention to open an investment fund to the public in January 1995, which will offer an opportunity to individuals to invest in wind projects—particularly smaller projects—and possibly other renewable energy schemes. This is a further positive step forward in bringing renewable energy projects from conception to commissioning and generation, and in part results from research funded by the DTI.
With the conclusion of this third round of bidding, it is important to enter a period of analysis, reflection and full consultation, so that lessons can be fully learned from NFFO3, before contemplating options for the size and shape of any future order—or the bidding process which might be employed. Nevertheless, the Government hope that a fourth order can be announced in 1995, to come into effect in 1996. Views on the future of NFFO would be welcome, preferably expressed collectively by the relevant association or trade body.
NFFO is a success, with over 340 MW of capacity already operational under NFF01 and NFFO2 contracts, and this third order is expected to double that capacity. NFFO has an international reputation, as a process that works, stimulating the market and manufacturing industry. By continuing our policy, we have high expectations of enabling a significant contribution to electricity generation—at market prices—from renewable sources of energy in the medium and longer term.