A reliable guide to the RHI issue (without the Hot Air)

Northern Ireland RHI has developed two clear issues, one political including allegations of fraud, ulterior motives, bullying and harassment, the second is the failure in the policy to deliver what was supposed to be an efficient and sustainable increase in the deployment of renewable heat. 

As an engineer and an energy researcher with a bias towards biomass over the last ten years, it’s the latter issue that interests me.

Why have an RHI?

The Renewable Energy Directive set a binding target for the EU to provide 20% of energy consumption from renewable sources by 2020.  This includes electricity, transport and heat.

The target is spread across all member states, and the UK target is 15%. This is to be achieved by 30% renewable electricity generation and 12% renewable heat.

Failure to achieve the target will result in a fine from Europe, so the idea is to incentivise renewable heat and if it is lower cost than the fine, it can be considered good value for money.

Both the NI and GB versions of the legislation were designed to be low administration solutions.  Where the GB implemented tiering and degression to control costs, NI did not in the first instance.

The difference between NI and GB – why not copy and paste?

In the press, in recent days, there have been a number of comments regarding NI’s reliance on oil as the reason for a difference in structure and tariff. 

Oil is more expensive than gas, therefore this should lead to lower RHI tariffs than the GB, as the rate of return of replacing an oil boiler with renewable heat is greater than replacing gas.

The real reason to provide a different structure was that the GB scheme was significantly under-subscribed.  The economic consultants, (Cambridge Economic Policy Associates Ltd and AEA Technology) from the beginning, proposed a non-tiered tariff to achieve the required interest in the incentive. 

Tiering and costs.

The economic consultants employed to cost and investigate NIRHI suggested that a tiering system would not achieve the required uptake.  In their report they recommended rates for payment and no tier.

“We considered tiering for the NI RHI rates, using the DECC approach. However, when setting the NI recommended levels for this report, the incremental fuel cost was higher than the subsidy rates in all cases. Therefore no tiering is provided in the rates in this report.”

So the rate proposed was designed not to be above the cost of production, therefore there would be no reason to burn fuel if the heat was not useful.

The problem arose when the public consultation started and, of course, turkeys will not vote for Christmas so the respondents asked for a higher rate. The department took this back to the consultants and a higher rate was proposed.

Even this rate wouldn’t have been a problem as it was only marginally above the cost of fuel at the time so probably wouldn’t have caused a burn to earn situation.

The issue that arose was due to inflation causing the RHI rate to increase while the cost of fuel plummeted with increased competition.

It seems when this rate was originally set after consultation, the department remembered about the “no need for a tier” line in the economic report, but forgot about the “as fuel cost was higher than subsidy” caveat.

I have a copy of the original economic report, however the addendum which proposed the higher rate (published on the 12/02/12 after consultation) has disappeared from the department website, along with the non-domestic RHI consultation and the responses that asked for a higher rate.

Costs in detail.

Many people have asked how could a policy be approved that allows the rate paid to be above the rate of production.  However, if the figures are analysed, the problem may not have been as evident in 2012 as it is today.  These figures are taken from NIAO and State Aid documents:

Initial rate proposed by economic consultants 2011 – 4.5p/kWh

Final rate proposed by economic consultants 2012 – 5.9p/kWh

Cost of pellets in 2012 – 4.39p/kWh

It’s important to remember that the above cost is the kWh price of wood pellets, however claims are made on the heat produced after combustion, so the efficiency of the boiler must also be taken into account.

A number of reports and policy are quoting 85% efficiency for this scale of biomass boiler, which is reasonable. Therefore the cost of the production of heat in 2012 is 4.39/0.85 = 5.16/kWh. 

What this doesn’t include is the capital costs (5 times the cost of oil) nor the increased operational costs (30% greater than oil).  There are also other operational and upfront barriers considered in the state aid economics. 

It is plausible to assume that adding these to the conversion costs of 5.16p/kWh led to the offered rate of 5.9p/kWh without any concerns. At the time, it looked like the rate of return would not be large enough to combust fuel when you have no legitimate need for the heat.

The plan started to deviate when inflation took the RHI rate paid for 99kW biomass boilers to 6.5p/kWh and competition in the pellet marked deflated the cost of fuel. 

From speaking to a few who purchase pellets regularly, the cost to produce heat, including conversion efficiency, is now as low as 3.8p/kWh.  At this rate, it is now a lucrative “business” to burn fuel regardless of the need for heat.

Considering the above, the lack of tiering was a mistake, however much worse was the lack of regular reviews of both the subscription rate and market costs.  Especially so in 2015 when competition between fuel producers and technology installers increased dramatically.

Who missed it?

So with hindsight many mistakes were made. When thinking about who had the opportunity to spot these in 2012, the list is quite significant.

  • DETI RHI officials (there were a few persons back then whose sole responsibility it was to deliver RHI)
  • DETI Energy Team/Economists
  • DETI Permanent Secretary
  • Minister & SPAD
  • DETI Committee
  • State Aid

Why did they all miss it?  Perhaps it was not as obvious in 2012 as it is today!

Another contributing factor may have been that the department was under the impression central government would be funding this RHI indefinitely (not an excuse to waste money though!).  Westminster confirmed this was not to be the case in January 2016.

Weak Legislation

RHI legislation, both in the GB and NI, is clearly designed to be uncomplicated and low administration.  However, keeping things simple, not over-regulating and not implementing cost controls has appeared to be the downfall, and perhaps could be the issue when trying to right this wrong.

From the 2012 NI RHI regulations paragraph 3:

“the department must pay support payments for generating heat in a building for any of the following purposes –

heating a space

heating a liquid

carrying out a process”

So within the letter of the law, heating an empty shed for no real reason is not against regulations. It may be completely outside the ethos but, at the end of the day, it is heating a space inside a building!

Where this may be able to be tidied up is paragraph 12 “heat generated must be used for eligible purposes”.  Also paragraph 15 “a plant will be excluded if in the Department’s opinion, generating heat solely for an ineligible purpose”.

Department’s opinion leaves good scope to deem what is eligible and what is not.  I would hope to see some form of Department position paper fairly soon on eligibility.

Spike Explanation

Another great area of concern has been the spike in applications in Autumn 2015, the end of the initial rates. There was also a spike in the February 2016 closure but as this was tiered it doesn’t really get much attention. 

But it does show that any change in legislation causes a spike.  Consider the introduction of PPS14 and every time there is a building control change, people rush projects through. 

Probably an even larger spike than RHI will be the spike heading into the closure of the Renewable Obligation (renewable electricity) for NI due April 2017.

Given that it generally takes more than 10 weeks to plan, finance and install a boiler, receiving 50% of the applications in the last 10 weeks looks really bad, and it’s likely some of these installations will be outside of the ethos, but I would suggest they will be in the minority. 

What is perfectly rational, is that part of the spike was caused by “in process” installations requiring paperwork to be accelerated to meet the deadline.

Installations that had taken place during the summer still required paperwork to be processed and then there was a rush to submit when a warning of closure was given in early September. 

The paperwork is commonly submitted by installers, not the owners of the plant.  This would be easily checked by looking at commissioning certificate dates and when the first load of fuel was delivered.

One last saving grace is that boilers are not designed to operate 8000hrs per year. This is probably three times the manufacturer’s intention, so it is likely that any installations wasting heat to maintain the boiler in “cash for ash mode” will not last the 20 years expected.

I believe the scope to reign in costs is massive; there are relatively simple engineering solutions, data analysis to identify heat wastage and some elements of the legislation that can be enforced.

  • Whogetstosay?

    Good summary.
    You could add in the June 2013 Report Conclusion:

    “In short, if DETI is spending more than 4.2p/kWh, it is not going to be able to afford the 10% target with its assumed budget.”

    DETI – Development of Phase II of the Northern Ireland RHI (2013) {June}

    http://www.cepa.co.uk/publication-deti-renewable-heat-incentive-phase-two?flBack=PB&selYear=2013

    No one, short of a judge, will get Foster to directly answer :
    “DID YOU READ THE CONCLUSION OF THE 2013 REPORT?”

    “Jot & Tittles” – Sidestepping the question.
    “No one brought me a recommendation” – Sidestepping the question.
    Was clearly NOT saying that she did not read the report.
    At £660M without any overspend. I do not believe she did not read it.

    If she didn’t read it, she is not first ministerial material.
    If she did, she is not first ministerial, and then some…

  • Mark Anderson

    Indeed, fair point on the Phase II report (domestic renewables)

    The same conclusion also says that the “achieving the 10% renewable heat target is likely to be extremely difficult.”

    Below this is also states “as noted earlier, there has been essentially no uptake of the NI RHI to date”

  • On the fence!

    No matter how this particular farce plays out it just re-emphasises what has been seen so many times before. When the powers of governance get involved with “helping” the environment, it never goes well!!!!

  • Old Mortality

    This is a very useful and illuminating piece. It also shows a degree of complexity surrounding the calculations that may prove too challenging for those calling for heads to roll. However, it is shocking that the subsidy appears to have been raised in response to ‘public consultation’. Foster was culpable in allowing the implementation of a scheme that apparently failed to envisage the possibility of energy prices falling so low that a bonanza was encouraged. But did the senior civil servants fail to appreciate that risk as well and why did the consultants pander to the demands for a higher subsidy?

  • Whogetstosay?

    Domestic was indeed a part of the phase 2 report.
    I believe the conclusion/warning was in relation to the TOTAL target from all parts considered.

    To use low uptake as a reason not to heed the warning that you may be are operating at a loss is perhaps a bit like saying,
    “We aren’t selling very many! Lets sell at a big loss and see how many we can sell. If that doesn’t work lets tell everyone we are selling at a loss. Then tell them sale ends Friday.”

    (Academically interesting as to whether the introduction of domestic helped drive the spike in interest in non-domestic)

  • Katyusha

    the lack of tiering was a mistake, however much worse was the lack of regular reviews of both the subscription rate and market costs. Especially so in 2015 when competition between fuel producers and technology installers increased dramatically.

    Nail on head Mark. I’ll confess I haven’t read the CEPA or Ricardo consultancy reports, so forgive me if they address this point, but as a research engineer myself, the setting of a fixed flat-rate subsidy, with an absolute price fixed to it, seems ludicrous.

    Why are such feed-in tariffs not index-linked? The whole point of the tariff is to encourage growth in a new industry that has significant barriers to establishing itself, unlike an established heating network like the oil or gas network. It’s an initial push to help the fledgling industry get on its feet, and isn’t supposed to apply in perpetuity.

    As the industry expands due to this support, it would be natural to assume that
    a) as the demand for biomass increases, producers are able to lower their operational costs, and perhaps be subject to new competition entering the market; driving down the cost of the fuel.
    b) Similarly for boilers and installers, they will be able to reduce their own manufacturing costs and operational costs as production ramps up and designs are refined. (I’m not sure if it possible to achieve a meaningful improvement in efficiency of a biomass boiler. I might have a go sometime).

    As such, it seems obvious the price of fuel and hardware are both going to reduce over time. There’d be little point in the subsidy if biomass is going to remain as expensive as it was before the scheme was introduced. Why not set the tariff at, say, 40% of fuel costs + operational costs per kWh, assuming a 20 year lifetime for the boiler itself, and review year-on-year?

    If this wasn’t feasible (to collect cost data yearly and update the tariff accordingly, although I can’t see why it should be impossible) a simple regression model might have served the same purpose.

  • jonty13

    Very interesting and well written piece. Mark has set out the proper context of this whole issue, without some of the sensational (and I don’t mean it in a good way) journalism over the past number of weeks. As a follow on it is also worth noting that the RHI in GB was brought in by DECC (Dept of Energy & Climate Change). Last year under the new Conservative Govt, DECC was replaced by a new Department BEIS (Dept for Business Energy & Industrial Strategy), and very interestingly just last week BEIS substantially reversed some of the Degression on RHI that DECC had introduced over the last 2 years. The Consultation Document can be found at https://www.gov.uk/government/consultations/the-renewable-heat-incentive-a-reformed-and-refocused-scheme. Ultimately it just goes to show that Energy and especially Renewable Energy is a very dynamic market and London can get it wrong as well.

  • Mark Anderson

    Another fine point unfortunately I couldn’t include everything in the above or it would be a thesis not a blog. There have been significant reduction in rates in the GB scheme, including the most recent.

    An issue this does have for NI is that it will effect that AME payment, ironically the bigger the uptake of the GB scheme the more AME payments to the NI scheme.

    Attached is a screen shots of the applications per month for the GB scheme, you will see very signifiant spikes these are always the month before a tariff changes comes into effect.

    https://uploads.disquscdn.com/images/07b0e464d98191db4a2a870f24d3285685938a1351e6effc75f3e6b70450539f.png

  • npbinni

    DETI RHI officials (there were a few persons back then whose sole responsibility it was to deliver RHI)
    DETI Energy Team/Economists
    DETI Permanent Secretary
    Minister & SPAD
    DETI Committee
    State Aid

    Why is only one group from this list being targeted?

    Speaks volumes, doesn’t it?

  • Sharpie

    Thanks for the dispassionate description that has been totally lacking in the coverage to date. The move from the scheme being undersubscribed to massively over subscribed is the key and you would wonder why they didn’t have a “first come first serve” policy – even as a qualifier – you find that most contract specifications in there have risk stop-gaps.

    I think the installers have gotten off lightly in the analysis and would reckon that some of them got into marketing overdrive in that space. Some of them will have done very well out of this and they are the reason the uptake grew so fast – once word gets out – everyone is in like Flynn.

    The details in this overview demonstrate that the mob approach does not do good investigation. The noise and heat generated by Nolan has singed the rest of the media and the public. It was over zealous and misleading.

  • Gopher

    Forgive me if again I’m quite unimpressed. The sixth century history student in me is always pragmatic enough to ask the painter and decorator to provide a quote for the paint and not leave it open ended. If I go over the data limit on my phone there is a price cap that will limit further data. Perhaps University educated ministers and civil servants are incapaple of such common sense that we take for granted in every other contract in life. If you substitue pellet and boiler for any other product it should be just the same as every other invoice. Absolutely no mystery.

  • Neonlights

    I think that it is also important to understand who dealt with the complaint or complaints from the whistleblower(s). Why, when a mistake was pointed out multiple times, by these outside sources, was no action taken? Who approved that no action taken after considering these external criticisms of the scheme, which must have been easy to assess as being valid criticisms? This aspect is still not well understood.

  • Mr Angry

    I assume you would propose to pay your painter and decorator and your data plan on your phone out of your own pocket and, as such, are more mindful of your spend – anticipated or otherwise.