down who precisely decided not to include tiering, it is clear that its absence was the result of a conscious decision. In early April 2011, the issue was explicitly raised by Connolly, the DETI economist. Having read CEPA’s first draft report, he asked Hutchinson why the scheme was more generous than GB’s. Connolly asked specifically: ‘Why has tiering not been used as per the GB RHI?’
DECC had the previous year – in publicly available documentation which DETI might have been expected to be studying – recognised that the biomass tariffs could lead to a ‘perverse incentive to over generate heat’. That was, it explained, because the subsidy was higher than the cost of fuel. It said that ‘this perverse incentive is expected to be significant for non-domestic biomass space heating installations that are less than 1MWth’ – that is, every type of biomass boiler eligible under the Stormont scheme. DECC went on to explain in simple language why, as a result of this obvious danger, it was implementing tiered tariffs. At the rates being proposed for Stormont’s scheme, the problem might have been modest, but it was about to be amplified.
In response to the consultation, the department asked CEPA to carry out a second piece of work – what would become known as the CEPA addendum report – to consider some of the responses and make final recommendations before the scheme was launched. Throughout this entire period, the evidence points to DETI repeatedly attempting to make RHI more generous and more widely available. On one such occasion, Hutchinson, after seeing a draft of the addendum, wrote in the margin to query why the consultants were not proposing to allow claims for large industrial biomass installations. CEPA had already made clear to the department that the reason for doing so was that there was no need to subsidise such large biomass heating systems – they were already economical without any subsidy. But Hutchinson told CEPA he was ‘still concerned about not having a tariff for this sector given [the] possible disadvantage in comparison to GB market [which was subsidising such boilers] … some calculation attached for your consideration’.
Hutchinson, a young civil servant being asked to deal with a complex area in which he had little expertise, was under considerable pressure. The softly spoken official was working so hard that he was recommended for bonuses by his superiors in this period, with the citations referring to him having ‘performed exceptionally well’ and having ‘worked largely on his own’ managing CEPA.
The final 47-page CEPA report was delivered in February 2012 and agreed to hike the level of tariffs for every one of the technologies being subsidised. Even an outsider could have seen that the obvious effect was that Stormont was going to draw down more of the Treasury money than if the tariffs were less generous – higher rates were more likely to encourage people to join the scheme, so there would be more participants, and each of them would also receive more.
CEPA now recommended more than doubling the size of biomass boilers getting the most lucrative subsidy from 45 kW to 99 kW. And the tariff for that boiler was also increased by 31%, rising from 4.5 p/kWh to 5.9 p/kWh. Aside from the growing overall cost, there was a clear problem: the same report gave the price of biomass fuel as being massively lower. Research for the report had found that biomass fuel in Northern Ireland could be as cheap as 2.85 p/kWh for those buying wood chip in bulk – one of several places in the report where it was clear to a casual reader that there was now a big gap between the cost of running a boiler and the subsidy rate. On CEPA’s own figures, that meant that the subsidy was more than double the cost of fuel. But the consultants, whose main report had said there was no need for tiering, did not point out the obvious difficulty.
At the inquiry, Hepper was grilled as to how she and her colleagues could not have spotted the problem. Audibly exasperated, chairman Sir Patrick Coghlin put it to her that ‘you didn’t need to be an expert to see this differential … you wouldn’t need to be an expert in economics or, indeed, energy to see that if you have a tariff that is paying you more than the [cost of] fuel you’re using to burn and to achieve that tariff, there’s a problem.’ Setting out a complicated logic for how she and her team had justified the situation to themselves, Hepper replied that ‘in our thinking about how that came to be, we took the price of the fuel, we took it …’ Sir Patrick interjected to say that ‘any common-sense person would’ve seen that difference, and if they didn’t appreciate the significance of it, they would’ve asked’. Hepper said she ‘had a narrative in my head’, which rationalised the apparently illogical proposal. She suggested that because RHI was meant to include payments for the ‘hassle costs’ of installing green technology as well as a rate of return to cover borrowings, there was an explanation for the gap. There were other costs involved with biomass boilers, such as increased electricity costs, which slightly complicated the calculation.
The picture which emerged from the inquiry was that Hepper – and the multiple civil servants who saw the proposal – had been bamboozled by the ‘experts’, leading them to miss a basic fact staring them in the face. Although the biomass tariff was the most glaring mistake in CEPA’s work, the consultants had been responsible for a series of other basic errors with numbers in tables which did not add up. The inquiry’s technical assessor, energy expert Dr Keith MacLean, put it to Hepper that ‘if you looked at almost any of the numbers in the tables in that report, they would not allow you to calculate any of the tariffs … it seems to me nobody actually just got a calculator out and checked, “does this make sense?”’ Hepper said she ‘assumed’ that her colleagues had done some checks, ‘but I also would’ve assumed that the expertise that we were buying in would’ve checked their basic figure work, too’. The blind were now leading the blind, with each believing that the other could see.
***********
More than four years later, as CEPA prepared to come before the Assembly’s Public Accounts Committee – the precursor to Coghlin’s later public inquiry – its top brass attempted to understand how things had gone so disastrously wrong.
Internal emails, which the public inquiry compelled them to release, show that senior figures in the company – which has worked for governments all over the world – knew that it was responsible for a huge error.
In November 2016, CEPA director Kirby Owen emailed fellow director Ian Alexander to inform him that it ‘turns out that the first report in 2011 wasn’t all that bad at all but whomever did the redo in 2012 [addendum] … missed completely (or skated over) the fact that in the 2012 recommendations the subsidy value per kwh was greater than the fuel cost per kwh.’ He went on: ‘The result … people were heating empty barns because you could make a financial profit on the whole thing even if you just vented all the heat … it’s a true problem, a truly bad recommendation on subsidy design … ouch’. Speaking frankly in the expectation that his email would never emerge publicly, Owen went on to say: ‘Happily, the 2011 report says a lot of words about “monitoring is necessary”, although I don’t think it meant watching out to correct the mistakes we made is necessary and the tariff design error … was indeed an error. But we won’t call it that.’
Owen commissioned an internal analysis of how RHI operated. One graph showed that if boilers were run for about 55% of the year, ‘the whole thing turns into a money-making machine’ – even if there was no use for the heat. In the event, it was clear that most of those using RHI had a use for the heat and would have had to otherwise pay for it themselves, so it was even more lucrative for them than for those who may have been just generating heat to receive the payments. And in some cases boilers were running for far longer than 55%, with nearly round-the-clock usage. CEPA had based all of its calculations on the assumption that boilers would run for an average of just 17% of the time.
In another candid internal email, Owen – who was not involved in the scheme’s design – marvelled at the ‘super profits’ available to those running boilers for long periods. In one email, he concluded by saying: ‘So the folks who heated empty barns were evil villains indeed, but they needed a poor tariff design to abet them … Sure, we’re not on the hook for fraud. But – assuming I’m right – our tariff design … encouraged it.’
