Shrouded in mist rolling off the Welsh hills, the newly-opened Elan Valley hydro power scheme is championing the cause for small hydro in the UK. Officially opened by the Secretary of State for Wales in January, this £5.2M brainchild of Welsh utility Hyder, will spearhead hydro power’s competitive bid for a larger slice of the UK power industry.

With the capacity to produce 4.2MW per annum, Elan Valley has been described as the latest addition to the UK’s ‘green’ power stations, and comes complete with the government’s seal of approval through the Non Fossil Fuel Obligation (NFFO).

To increase the percentage of electricity generated from renewable sources, the government’s Department of Trade and Industry (DTI) introduced NFFO in 1990. Described as a policy to develop economically attractive and environ-mentally acceptable renewables, NFFO requires regional electricity companies to purchase specified amounts of power from ‘green’ sources. In addition, government support for NFFO is funded by a Fossil Fuel Levy on such electricity sales; guaranteeing that power produced under this scheme will be bought at economic rates for the length of the NFFO contract.

At the present time, hydropower accounts for the majority of electricity derived from renewables in the UK (2%), and the industry is eager to keep its piece of the action. Hyder, who secured a NFFO contract for the Elan Valley scheme in December 1994, is right up there with the leaders of the pack.

Harvey West, Hyder’s general manager, says: ‘The government would like to see small hydro become as competitive as possible and was pleased when we became involved with NFFO. The industry needed some kind of “champion” who has the technical creativity and financial muscle to make things happen.’ Hyder currently has 14MW of small hydro in operation, with another 14MW under development. All of these schemes have been awarded NFFO contracts and over the next two years the company will have invested £70M in such projects. ‘The British Hydropower Association’s view is that small hydro has a lot to contribute to the UK power market,’ West says. ‘And, although you do hear moaning in the ranks, at the end of the day NFFO is helping small hydro fulfil its potential.’ If, as West claims, NFFO is supporting hydro, why are there audible sounds of discontent? ‘The main problem,’ he explains, ‘is that under NFFO, hydro and other renewables are not competing on a level playing field.’ One cause of such imbalance appears to be the calculation of declared net capacity (DNC). Some renewable energy supplies suffer due to erratic weather patterns and, to compensate for this, it has been necessary to introduce a factor into NFFO by which the installed capacity of a plant is multiplied to calculate its DNC; similar to the load factor of the generating station.

Hydro has a DNC rating of 100% which ultimately affects operating costs and pushes prices up. Wind power has a DNC of 43% and some believe that this is unfair. ‘As hydro power relies on the same weather patterns as wind power the British Hydropower Association believes that the basis of the DNC rating is wrong and prejudiced,’ West said.

Such strong sentiments have been aroused as the rating may affect hydro’s prospects with NFFO, and ultimately its competitiveness in the power market. ‘The DTI’s view is that it will give hydro NFFO awards as long as the price is competitive,’ West explained. ‘The minister of the day can reserve the right not to give a certain band of renewables any awards if he does not think it is competitive. It’s a risk and we can only hope that hydro can continue to get a good chunk of the awards,’ he added.

Competitive forces

The stark reality is that competitive economics are the motivating forces behind NFFO’s support for small hydro. ‘The DTI’s view is that small hydro in the UK will not rock the world in the environment camp,’ West commented, ‘but is looked at more on how it can help business. The DTI is supporting small hydro in the UK to support UK businesses in gaining export market share.’ Indeed, for companies such as Hyder, NFFO-supported small hydro schemes are important. ‘At the end of the day these schemes are very important to propel Hyder forward,’ West said. ‘They are a springboard to a wider hydro market and form a strong foundation on which to base our future initiatives.’ Described as the company’s flagship project which will launch Hyder to greater things, Elan Valley has proved to be successful. ‘This particular project is generating electricity with little adverse effect on the natural environment,’ the Secretary of State for Wales, Ron Davies, said. ‘I certainly hope that companies will learn from Hyder’s success in balancing environmental, planning and economic interests,’ he added.

As is the norm, after the initial award of the NFFO contract in 1994, Hyder had five years to get the Elan Valley project, which incorporates five reservoirs and four major dams, up and running. After this specified period the contract starts ticking away automatically, giving the scheme 15 years of levied fuel prices and a competitive edge in the electricity market.

‘The high capital intensity of small hydro power schemes generally means they are uneconomic at market prices of electricity,’ Iain Evans, chairman of Hyder, commented. ‘The subsidies available under the DTI-run NFFO scheme have changed all this, and now the Elan Valley project will reap benefits over the next 15 years.’ Evans went on to add that the project has a service life of around 60 years, and this means that for 75% of its lifetime it will receive no subsidy at all. Inevitably, this raises questions about the scheme’s competitiveness in the power market after the NFFO contract expires.

As Harvey West explained, it all depends on how well the project has fared in the first 15 years; the period during which the bulk of financial return is gained. ‘If you’ve got your return during the first 15 years, afterwards it is more a case of using good judgement to see what you get in the market,’ he said. ‘It basically depends on how well you play the market.’ As if to emphasise the point that the end of a NFFO contract does not spell doom and gloom for hydro schemes, West spoke of Hyder’s 3.8MW project called Lyn Celyn in Wales. The project is nearing the end of its NFFO contract but West commented: ‘We are confident the plant will continue to make good return.’ As with Lyn Celyn, the future prospects for small hydro and NFFO are encouraging. The Labour government, which came into power in May 1997, has increased the momentum behind its environmental agenda and is determined to put the environment at the heart of all its decision-making.

Furthermore, commentators from within the small hydro industry report a noticeable ‘step change’ in how renewables are viewed by the government. When asked if this will give small hydro more of a competitive edge in the UK power market, West replied: ‘I would say that I am more optimistic now. We’ve got to be positive at this stage.’ The only problems clouding the horizon for UK small hydro is that prices may soon have to rise. ‘The DTI must realise that hydro prices will soon reach the bottom of the curve,’ West warned. ‘The “better” and more competitive sites have now been completed and we will have to start looking at “more sensitive” areas for development. This will increase costs so that soon we will have no choice but to instigate a small price increase. However, we are remaining positive about NFFO.’

NFFO orders

To date there have been four NFFO orders, awarded in 1990, 1991, 1994 and 1997. Proposals for a fifth tranche are currently underway with announcements expected later this year. Small scale hydro of less than 5MW DNC has been included, and once again Hyder is taking up the challenge. ‘For the future,’ Hyder’s chairman said, ‘we are in discussion or negotiation with the owners of 23 sites which either have schemes approved for construction or have been registered under NFFO-5. We ourselves have registered 36 sites under NFFO-5 for which we hope to submit proposals in due course.’ For the foreseeable future, small hydro has a significant role to play in helping the UK government achieve one of its environmental objectives – the generation of 10% of UK electricity needs from renewable sources by 2010. Only time will tell what will become of hydro’s DNC rating, and the consequences of price increases in the UK market. In the meantime, as the Elan Valley project completes its second month of operation in the Welsh valleys, Hyder continues to fly the flag for small hydro.

The Non Fossil Fuel Obligation

The 1989 Electricity Act stipulates that regional electricity companies (RECs) must supply a certain amount of electricity from non fossil sources. Under the Non Fossil Fuel Obligations, which are issued by the Secretary of State, the RECs are obliged to do this.
Once a NFFO order has been announced with guidelines as to which bands of renewables can qualify (eg hydro under 5MW), potential renewable generators forward their expressions of interest to the Non Fossil Purchasing Agency (NFPA) which acts as an agency for the RECs. Technical details also have to be submitted to ensure that availability predictions for the renewable energy resource are large enough to supply the capacity requested by the RECs. For example, rainfall data and mean flow data for water courses over a 15-year period are required from hydro generators.
Competitive bidding then takes place, where generators give the price at which their renewable electricity will be sold, and from this the DTI decides who should be awarded NFFO contracts. Under the contract NFPA pays the generators a premium price for electricity (which is guaranteed throughout the entire contract). To compensate for the difference between the premium price and the market price paid for electricity, the RECs are paid a percentage of the Fossil Fuel Levy (which is financed by consumer electricity sales).
The DTI says that their decisions as to which renewable schemes receive NFFO contracts are motivated by normal business and commercial factors. The DTI is spending public money (through the levy) and so has to ensure that schemes will be commercially viable. In addition, the RECs also have economic purchasing conditions to follow and so they must purchase ‘economic’ electricity.