Cash for ash: how the Renewable Heat Incentive got Northern Ireland overheatedMarch 29, 2017
An article on flaws in the design of the Northern Ireland Renewable Heat Incentive (NI RHI).
by Karen Blair and Peter Lockhart of Cleaver Fulton Rankin
BACKGROUND TO THE NORTHERN IRELAND RENEWABLE HEAT INCENTIVE
The phrases “Cash for Ash” and “Burn to Earn” refer to the Renewable Heat Incentive scheme (RHI) which has dominated the headlines in Northern Ireland for the past number of months and precipitated the recent fall of the Northern Irish Assembly.
The RHI was set up to contribute to the UK’s EU commitment to increase its share of renewable energy and is the first of its type in the world. However, the Northern Ireland RHI (NI RHI) was designed differently to the Great Britain RHI (GB RHI) in a way that has made the NI RHI easy to abuse. NI RHI participants have been incentivized to burn more fuel simply to receive a larger subsidy. This has been economically disastrous for the government and contrary to the policy objectives of reducing emissions and protecting the environment.
HOW THE RHI WORKS
The RHI is intended to cover the additional capital and running costs of renewable heat installations (compared to traditional installations) through quarterly RHI payments. The most popular way of generating renewable heat is using ‘biomass’ boilers. Successful applicants to the RHI are able to claim a payment on every kilowatt of heat energy produced using renewable methods, with these payments continuing for up to 20 years. The intention is to make the subsidy rate lower than the cost of fuel to prevent participants from burning fuel purely to make a profit.
For more information on the RHI, see:
• Practice note, Renewable Heat Incentive (RHI): non-domestic scheme.
• Practice note, Renewable Heat Incentive (RHI): domestic scheme.
THE DIFFERENCES BETWEEN THE NI RHI AND GB RHI
The first phase of the GB RHI began in November 2011 for non-domestic property under the Renewable Heat Incentive Scheme Regulations 2011 (SI 2011/2860). The Renewable Heat Incentive Scheme Regulations (Northern Ireland) 2012 (SI 2012/396) came into force to implement the NI RHI just under a year later in November 2012. The NI RHI is very similar to the GB RHI. However, there are a couple of important differences. The GB RHI incorporates the following cost controls which are omitted from the NI RHI:
• Tiered tariffs. Payments are reduced after a certain level of heat generation has been reached. Payments are made for energy produced up to a certain level and, after that, payments are made at a lower rate up to an upper limit. No support payments are made above that upper limit.
• Degression mechanism. This provides that tariff levels for new installations will decrease if uptake of RHI technologies is greater than forecast.
• Budget caps. From 2016, this provides a backstop in addition to the current degression mechanism. Once the cap is triggered, regulations are made to prevent new deployment from being accredited.
The main purpose of a tiered tariff is to ensure that above a certain level of reasonable use there is no continued incentive to produce heat solely to gain payments from the GB RHI scheme. The system of reducing payments in response to high uptake is designed to prevent overspending on the GB RHI.
WHAT WENT WRONG WITH THE NI RHI?
The problems with the NI RHI stem from a lack of costs control. The NI RHI tariff for biomass boilers was effectively set at a level well above the cost of the fuel. To compound the problem, the tariff then increased further in line with inflation while the cost of fuel went down. This means that the more heat you generate, the greater the subsidy you are paid. Ultimately, for every £1 a participant spends on fuel, they received £1.60 in subsidy payments.
From 18 November 2015, amending regulations introduced an equivalent of the GB RHI tiered system of tariffs for new installations. Inevitably, there was a spike in applications before the amendment was introduced. In February 2016, the NI RHI was closed to new applicants. The overspend on the NI RHI is currently estimated at around £490 million over the course of the next 20 years.
WHY DID NI NOT COPY THE GB RHI?
The GB RHI was initially undersubscribed. In developing the NI RHI, it was suggested that, to ensure sufficient uptake, a tiered system of tariffs should not be introduced. A tiered system of tariffs appears to have been deemed initially unnecessary because it was thought that the cost of fuel would effectively be higher than the tariff rates and so there would be no incentive to burn more fuel than was needed on site.
NEXT STEPS: JUDICIAL INQUIRY
A judicial inquiry has been established, chaired by Sir Patrick Coghlin (a retired Lord Justice of Appeal), which will review how the situation arose. It is anticipated that the inquiry will take approximately six months to produce its findings.
THE POLITICAL FALLOUT
When the scale of the problems with the NI RHI came to light, the deputy First Minster, the late Martin McGuinness, put pressure on the First Minister, Arlene Foster, to step aside to allow a full independent inquiry into what happened. Arlene Foster had previously been the Minister of the department responsible for implementing the NI RHI in 2012 and which had been warned of its flaws by a whistleblower in 2013. However, the First Minister refused to step aside and, on 9 January 2017, Martin McGuinness resigned as deputy First Minister. Under the power-sharing agreement, this triggered new Assembly elections which took place on 2 March 2017. The implications of the cash-for-ash debacle are still being understood, but go much wider than tarnishing the reputation of renewables subsidies. We still have to see if an effective power sharing government in Northern Ireland remains possible.
This document is published by Practical Law and can be found at: uk.practicallaw.com/3-512-5828
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This article has been produced for general information purposes and further advice should be sought from a professional advisor.