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.