The RHI scandal explaine
Posted By: December 21, 2016
News Letter. Belfast. Friday, December 16, 2016
The RHI scheme had been dubbed by some “cash for ash”
Here is a breakdown of how the RHI scheme was meant to work, and how it ended up being so beset by problems that it had to be shut down.
HOW IT WAS SET UP:
The Northern Ireland government had aimed to have 4% of the Province’s heat generated by renewable sources by 2015. The aim was to grow this to 10% by 2020.
In order to help meet these targets, two types of Renewable Heat Incentive schemes were introduced by Arlene Foster’s Department for Enterprise Trade and Investment (DETI).
One was for homes and was called the “domestic RHI” scheme (introduced in December 2014), and another was for businesses or public buildings and was called the “non-domestic RHI scheme” (introduced in November 2012).
Of the two of these, the “non-domestic” scheme is far more problematic, because it will cost much more to run.
Both schemes were shut to new applicants from February this year after a surge in demand.
RHI works by paying out a subsidy based on every kilowatt of heat energy produced by renewable technologies, and subsidies continue for 20 years.
By far the most popular means of generating heat was via “biomass” (ie; wood pellet) boilers.
Northern Ireland’s RHI schemes were run by Ofgem (which is the official energy watchdog on mainland UK, but which does not actually have regulatory powers in Northern Ireland).
The way the scheme works is this: applicants must first install a boiler at their own cost, then get it approved by Ofgem, who would pay subsidies out to successful RHI applicants four times a year, increasing along with the rate of inflation.
DETI would give Ofgem the money to do this.
RUSH FOR MORE GENEROUS SUBSIDIES:
Initially, there was very poor uptake of the RHI scheme – so much so, that DETI was actually underspending on the scheme for the first few years.
But in 2015, there began to be a spike in applications for RHI.
As a result, DETI decided to alter its rate of subsidies to try and cope with the cost.
The new arrangement (called tiering) involved giving recipients a much lower subsidy after their boilers had been running for 1,314 hours per year.
In other words, after having used a boiler for about 15% of the year, the value of the subsidy would drop well below the cost of the fuel.
This kind of set-up was used in the mainland UK from the outset, to discourage wasteful use of fuel.
But the Northern Irish scheme was so poorly set up that it actually encouraged wasteful behavior.
At its outset in 2012, the rate of subsidy was 5.9p per kilowatt (for non-domestic biomass boilers of up to 100kw).
But the cost of the fuel required to generate this was 4.39p.
The result? That people could make 1.51p per kilowatt of heat energy they generated – and the more fuel they burned the more money they made.
Despite this already-high subsidy in 2012, the amount continued to grow, reaching 6.4p by 2015 – whilst, at the same time, the rate of subsidy was dropping in mainland UK.
Plans to start creating a tiered system, where subsidies would drop off after 1,314 hours, were finally announced on September 8, 2015.
But they did not come into force until November 18.
This left a 10-week gap for people to apply for the far more generous old tariff scheme.
As a result, there was a final huge surge in applications for the old, more generous scheme.
On a bizarre side note, which helps to illustrate the chaotic nature of how the scheme was managed, the RHI program was actually left running for part of 2015 without any permission from the Department of Finance, which is in charge of the public purse strings.
Essentially permission to continue the scheme had expired in April, and DETI simply forgot about it.
It was noticed the following month, and they then moved to renew it.
The error was due to what the department said was a combination of “staff changes” and “ administrative oversight.”
FALLOUT FROM THE FIASCO:
An audit report into the fiasco this summer castigated those behind the scheme for a range of failings.
It was the first major public sign that something had gone very badly wrong with the scheme.
As well as pointing out many of the failures above, it also said that less than 1% of all boilers were inspected – a rate less than half that of the mainland UK – and that even when problems are found “it is very unclear if anything is done about it.”
It was critical of the fact that the running of the non-domestic RHI scheme specifically had been left “almost entirely to Ofgem.”
Ofgem – which is supposed to have an intimate understanding of the UK’s energy markets, and was already running similar schemes in mainland UK – was savaged by MLAs in October for its involvement in the scheme.
On the crucial question of why no one had put a “tiering” system in place, making sure that the rate of subsidy dropped off after a certain number of hours, the report is scathing.
It said that in 2012, DETI had wrongly stated that the subsidy rate would not cover the cost of the fuel.
The reason? This had simply been copied “without thought” from a report written by a consultancy firm the previous year.
In fact, it was even set out in black-and-white in the initial business case for the scheme that the proposed subsidy rate was higher than the cost of fuel.
However, no officials in DETI (which wrote the report) or the Department of Finance (which approved it) noticed this.
UPSHOT FOR NI TAXPAYERS:
According to the Northern Ireland auditor, the consequence for the public purse is this.
Profits running into hundreds of thousands of pounds can be obtained via subsidies received over a full 20 year period, by just installing a boiler and running it pointlessly for 24 hours a day.
From 2012 until 2016, 2,128 non-domestic RHI applications were made, and 2,721 domestic ones were made.
Over a 20 year period, the auditor estimated that £1.15bn will be paid out in subsidies for the non-domestic applicants, while £30m will be paid out for domestic ones.
The auditor estimated that to cover these costs, it is possible that around £140m would have to be found out of Northern Ireland’s public budget over the next five years alone.
According to a detailed analysis by the BBC on December 16, Westminster was expected to cover up to £660m-worth of spending on the RHI scheme in Northern Ireland over 20 years.
However, the scheme has ballooned in cost to more than £1bn, and the Province may now have to find more than £400m from its own budget.
