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Renewable Heat Incentive Scheme (Amendment) Regulations (Northern Ireland) 2017

Part of Executive Committee Business – in the Northern Ireland Assembly at 4:15 pm on 16th January 2017.

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Photo of Simon Hamilton Simon Hamilton DUP 4:15 pm, 16th January 2017

No I will not give way.

Let me continue. As the Assembly knows, the renewable heat incentive scheme was introduced in November 2012 with the aim of increasing the uptake of renewable heat to 10% by 2020. The renewable energy directive 2009 sets out the following:

"It will be incumbent upon Member States to make significant improvements in energy efficiency ... to achieve their targets for energy from renewable sources".

The scheme sought to compensate investors for the additional cost of renewable heat compared with traditional fossil fuel. Following extensive consultation and consideration of expert advice, a set of tariffs was introduced with the aim of providing a subsidy to scheme participants that would appropriately compensate them for the additional costs of renewable heat compared with traditional fossil fuels.

However, as Members now know, the tariff that was set for what would become the most commonly used boilers — small to medium biomass boilers — was at a level higher than the market price of the relevant fuel, which is mainly wood pellets. There was also an absence of a tiered tariff that would have restricted the number of hours for which the higher tariff could be paid.

These serious mistakes combined to create a perverse incentive to overuse the scheme and left it far too open to abuse. This led to a significant budgetary pressure, and, then, when steps were taken to amend tariffs, a major spike in applications occurred, which left us with no option but to suspend the scheme completely, as approved by the Assembly in February of last year. As a result, even participants who were using the scheme legitimately found themselves being compensated for renewable energy usage to a level far beyond the original intentions of the scheme. Furthermore, it did not provide incentives for the beneficiaries to promote the efficient generation of heat, and much of that has been played out in the media recently, with much understandable public concern.

Although uptake for the scheme was initially low, application numbers increased rapidly from the start of 2015. This increase led to budgetary pressures and led to the introduction of tiered tariffs and a cap, in November 2015, through amending regulations. These tariffs apply to installations accredited after 18 November 2015, but, unfortunately, an upsurge in applications in the three months immediately preceding the introduction of the regulations meant that the annually managed expenditure budget for the scheme would be exceeded and the cost of future payments would become a burden on the Executive's departmental expenditure limit (DEL) budget. As a result, a second amendment to the regulations was made in February 2016. This, in effect, closed both the non-domestic and domestic schemes to new applicants.

In his report on my Department's resource accounts in June 2016, the Comptroller and Auditor General estimated the total 20-year costs of the scheme, if nothing is done, to be £1·15 billion. This is far in excess of the £660 million that should be available as the expected 3% Barnett share of the allocation for the GB scheme.

The proposals today are the first steps towards reducing the burden on the Northern Ireland Budget of an estimated £490 million. I am determined to take steps that will effectively reduce the overspend in future years to zero. This is not the occasion or place to rehearse or come to a conclusion on the whys and wherefores of what went wrong. That will be the work of the Public Accounts Committee (PAC) and an independent inquiry.

My immediate priority is to bear down on the costs of the scheme for the 2017-18 financial year. The costs for that year are projected to be around £50 million. Against these costs, an annually managed expenditure budget of around £22 million is projected to be available. If no action is taken, that will give rise to a shortfall of £28 million in 2017-18, which will have a significant impact on the affordability of other priorities. That would be simply unacceptable.

Under my direction, Department for the Economy officials have been working for some considerable time on a range of cost control options. Last week a business case was submitted to the Department of Finance, and I would like to thank the Minister, Máirtín Ó Muilleoir, for asking his officials to give priority to the scrutiny of that business case and for approaching the work with their usual professionalism and objectivity.

The draft regulations before the Assembly today are designed to give effect to the option which has been demonstrated, through that business-case process, to offer the best way ahead at this time. This will bring payments for small and medium biomass boilers accredited before 18 November 2015 into line with those accredited on or after that date. Future payments to the owners of small and medium biomass boilers accredited before 18 November 2015 will be based on the tiered tariffs set out in the draft regulations.

The tariff will be 6·5p per kilowatt-hour (kWh) for the first 1,314 hours each year, after which the tariff will drop to 1·5p. There will also be an annual cap on the number of hours eligible for payment of 400,000 kWh, which was adopted in the November 2015 regulations as the appropriate ceiling for any of the main business models supported by the scheme. This annual cap is also consistent with the November 2015 regulations for installations accredited since that date. As well as placing a limit on the high tariff, which was the main perverse incentive in the scheme, these changes will promote behavioural changes, as the tiering will encourage greater attention to the efficient use of heat. The business case makes a prudent projection of some cost savings from that effect.

While these changes will virtually eliminate the shortfall in the 2017-18 budget, they will not eliminate it totally. Our modelling shows that there will still be a comparatively small deficit of around £2 million. We anticipate that stronger enforcement will further reduce the cost of the RHI scheme to the Northern Ireland Budget. The new tariffs and cap will ensure that owners of small and medium biomass boilers will receive a rate of return on their original investment within the range agreed by the European Commission when the scheme secured state aid approval. That would move the scheme back towards its original policy intentions, as expressed publicly at the outset of the scheme.

The proposal today will tackle the perverse incentive to continue to produce heat beyond the amount truly needed simply in order to increase payments. From the outset, the original regulations made it ineligible to generate heat for the sake of securing payments. We can and will improve enforcement to address that abuse, but this measure will cut off immediately the most blatant, perverse incentive to use heat for financial gain.

I hope that Members will know that one of my first acts in office as Minister for the Economy was to commission an investigation of accusations of fraud and abuse in the scheme. That investigation and the continuing audit process carried out by Ofgem has already seen the suspension of payments to 33 installations from the scheme. The PwC report on this work was shared with the PAC in November.

PwC undertook a targeted programme of unannounced site inspections to address the allegations of abuse of the scheme received in January 2016. Sites to be inspected were selected using some key potential risk factors. These included the value of the projected support payments, the date of application, the presence of multiple small boilers and high utilisation. There were clearly more concerns about the applications submitted before the introduction of tiered tariffs in November 2015 than those subject to the tiered tariff. PwC also looked for cases where there was evidence of significant increases in heat output generation or usage over and beyond what was expected.

In phase 2 of the work, the sample targeted the top 20 sites by projected payments, non-poultry farms with projected payments of over £1 million, and three sites chosen based on particular observations drawn from a review of application data. Given this targeted selection of sites for inspection, it is not valid to extrapolate the findings to the total range of installations under RHI. Fully eligible small and efficient installations will be under-represented.

It is important that we do not rush to a judgement or tar all RHI installations with the same brush. Many are valid and wholly legitimate and are delivering the original intention behind the policy. However, the PwC report confirmed the very serious weaknesses in the scheme and identified the weaknesses in the design, implementation and oversight of the scheme. It is of great concern that most of the anonymous allegations were confirmed as true.

Since receipt of the report, the Department for the Economy and Ofgem have been working to ensure improved monitoring and enforcement, reflecting the very significant insight and analysis presented in the PwC report.

The change in tariffs under these regulations will be accompanied by new action on inspection, audit and enforcement. It is absolutely imperative that we continue to crack down on any abuse of the scheme. Work by my officials is advancing on going to tender for 100% site inspections. This major project will take a little time to procure as it will have a value above the threshold where EU-wide tendering is required. However, once in place, we will have a new and much stronger process that will challenge abuse and take enforcement action against any fraud that is identified, including clawback of any payments that can be proven to have been illegitimate.

I am also well aware of concerns about potential fraud and abuse in respect of other aspects of renewable energy in Northern Ireland. While initial investigations have not revealed any problems, I know that people inside and outside the Assembly will want to have confidence that the problems that occurred with the RHI scheme are not present in other renewable energy schemes. To that end, I have tasked Department for the Economy officials to produce a risk assessment and audit plan to ensure that all potential vulnerabilities are identified and that proportionate action is planned and executed urgently to ensure that public confidence in the system can be restored. In the meantime, the Department for the Economy is working with Ofgem to ensure that the existing arrangements for inspection, fraud prevention and enforcement are applied as rigorously as possible.

I also wish to signal my intention to begin work immediately on establishing a new strategic energy team in the Department for the Economy. This will bring together experts from across the public and private sectors to seriously strengthen the quality of the strategic energy advice that the Minister receives, as well as assisting to progress the overall departmental energy agenda.

The changes in the draft regulations before the House today are subject to notification to the European Commission under the state aid regulations. Subject to the approval of the Assembly, I will initiate the process of notification as soon as possible, and my officials will work with the Commission to help progress the necessary approval process. The commencement clause in the draft regulations acknowledges that that process is a necessary step.

I referred earlier to the introduction of the draft regulations being the first step of a process to restore the original policy objectives of the scheme and bring costs under control. Members will note that the draft regulations contain a sunset clause and that they will cease to have effect on 31 March 2018. That is to enable further detailed consideration to be given to future options for the operation of the scheme to ensure that the best available permanent way forward is secured. It is intended that such options will be subject to the normal legislative process, with public consultation and scrutiny by the Committee for the Economy. Precise process will depend on the policy approach adopted when fuller analysis has been completed. At a minimum, businesses benefiting from the RHI and other affected parties will be consulted, but, clearly, the more significant the change, the greater the case for fuller consultation. A significant advantage of taking the first step is to limit the flow of funds so that we secure time for that fuller consideration of the issues and to develop a longer-term solution. It will be necessary to complete the process in time for further revised regulations to be adopted well before 1 April 2018.

Before I conclude, I want to address some obvious questions that Members will have about the legalities of the approach that I am introducing today. Legislation has the power to give rights to individuals or, where it is reasonable, to restrict those rights. It is our responsibility as legislators to behave reasonably and respect the rights and legitimate expectations of the beneficiaries of the scheme. We recognise that the regulations may be subject to challenge on two main possible grounds. First, it could be argued that the scheme gave recipients a legitimate expectation that the original tariff would be kept in place. However, the proposed approach gives beneficiaries of the scheme payments for the next financial year that align with the levels that they were led to expect at the outset of the scheme. I do not see how it can be reasonably argued that anyone has a legitimate expectation of rates of return that are far in excess of the returns announced in 2012. As we are making a change with effect for only one year, we can and will make any necessary reasonable corrections when a long-term solution is developed for implementation from 1 April 2018. We will consult and listen to the views of boiler owners and other affected parties as we do so.