16th March 2023
Chris Bowden, MD, Squeaky
5 minute read
From NFFO to CfDs: three decades of renewables support in the UK
The UK’s current renewable energy support landscape is the result of more than 30 years of policy innovation and reform.
National governments around the world have brought forward many different mechanisms to support renewable energy generation, to develop technology and to pump-prime supply chains. Many of these schemes can be traced back to the Kyoto Protocol, adopted in 1997, which gave developed nations obligations to reduce their carbon emissions and to sponsor reductions in developing countries. Since then, as the climate crisis has become more pressing, emissions targets have become more ambitious, renewable energy capacity has proliferated and production costs have plummeted.
In the UK, renewable energy support pre-dated Kyoto. The Non-Fossil Fuel Obligation (NFFO) was introduced in 1990, under which the Non-Fossil Purchasing Agency (NFPA) purchased long-term contract supplies from low-carbon generators (which initially included nuclear) on behalf of suppliers and, indirectly, their customers. The last purchase was made in 1998. Under the electricity pool, suppliers were simply credited with their overall share of the energy they sold and billed accordingly by the NFPA. When market arrangements were changed in 2001 to the New Electricity Trading Arrangements, the NFPA instead auctioned output on the basis of six-month power purchase agreements (PPA). As the prices paid for long-term energy by the NFPA were lower than the auction prices, the NFPA built up a £500m surplus.
The Renewables Obligation
In the Utilities Act 2000, the government created powers for the Secretary of State to require energy suppliers to purchase a proportion of their energy from renewable sources, and the Renewables Obligation (RO) was born. From 2002 onwards, new or refurbished qualifying renewable generation received one Renewable Obligation Certificate (ROC) for each MWh of output, for a period of 20 years from accreditation. Suppliers were required to purchase and surrender ROCs to meet their annual obligation, calculated as a gradually rising percentage of their overall supply, or alternatively ‘buy out’ their obligation with cash. The sale of ROCs thus created an additional revenue stream for renewable energy generators, making them competitive with then-cheaper fossil generation.
The obligation as a percentage of demand and the buy-out price are set annually. The cash received in the buy-out fund is recycled back to those who surrendered ROCs. This means that, if there is a shortfall in overall compliance against the obligation, ROCs become worth more than the face value of the buy-out price. The greater the shortfall, the greater the subsidy, and the greater the incentive to bring forward renewable generation. An important feature of the RO is that it is a pure subsidy. The value of the electricity generated is determined by the power market, and usually reflects the market price of fuel for marginal dispatchable power stations.
Reforms to the RO
The Renewable Obligation ultimately was judged to be too blunt an instrument to effectively support both mature and emergent technologies, and from 2006 the RO was reformed, including with the introduction of banding. This rewarded different types of generation with differing amounts of ROCs per MWh produced. The RO support scheme was phased out between 2014 and 2017, replaced with the Feed-in-Tariff (FiT) for small-scale generation, and the Contracts for Difference (CfD) mechanism as the government’s main support scheme for large renewable generation (see below). Unless otherwise disbanded, the RO scheme will continue to run until 2037 when the last RO-accredited facilities stop receiving certificates.
In the Finance Act of 2000, the government also created the Climate Change Levy (CCL), a tax on business users related to their energy consumption, collected on behalf of the government by energy suppliers. One feature of the CCL regime was that most renewable generators could qualify to claim Levy Exemption Certificates (LECs). Suppliers could purchase LECs from generators on behalf of customers; the customer would then pay the supplier for the LECs rather than the CCL itself. In this way, LECs became a further subsidy support for renewable generators. The government closed the exemption regime – and hence ended the subsidy – in 2015.
In 2009, the EU Renewable Energy Directive introduced a new certification process for renewable electricity supplies – Guarantees of Origin (GOOs, also called REGOs in the UK). The aim was to support the directive’s broader aims, supporting and monitoring the progress of member countries towards their renewable energy targets. One side effect, however, was that ownership of GOOs could be used to evidence renewable energy supplied by individual suppliers. That allowed UK electricity suppliers to buy REGOs from generators and use them to back ‘green tariffs’ and their annual ‘fuel mix disclosures’.
FiTs and CfDs
The following year, the government introduced the Feed In Tariff support scheme for renewable generation assets under 5MW, which was seen as more practical alternative to the RO for small generators. As used widely in continental Europe, the FiT required electricity suppliers to buy power from licensed generators at set prices, with support lasting between 10 and 25 years. The costs of the scheme are spread across all suppliers through a levelisation process run by the regulator, Ofgem. The FiT scheme was closed to new participants in 2019.
Contracts for Difference were introduced in 2014 as part of the wider Electricity Market Reform package of measures. It is now the only central support mechanism available to new renewable generation. Under the CFD regime, the Low Carbon Contracts Company – a private company, owned by the UK government – contracts privately with generators of low-carbon power.
The scheme works through a series of auctions. Generators are invited to bid in a strike price which they are prepared to receive to sell power. If the market price of that power is below that strike, they receive payments from the LCCC. If it is above the strike, they agree to pay the difference to the LCCC. This provides the generator with revenue certainty, and transfers this market exposure to the LCCC which in turn is passed on to consumers.
Since its introduction, four auction rounds have taken place. As of the end of 2022, just under 6GW of capacity was operating under CFD contracts, with offshore wind accounting for 4.2GW, biomass for 1GW, and onshore wind for 650MW. By 2030, almost 30GW of renewables are projected to be operating with CfD contracts agreed through these four auctions.
The CfD has been enormously successful in reducing the market risk faced by generators, and in helping to reduce cost and scale capacity – particularly in offshore wind. But, as we will discuss in the next article, that risk does not disappear, but is transferred – and could yet threaten the future role of the CfD in decarbonising the UK’s power grid.