went on: ‘The result is a “perverse incentive” for farmers needing more heat than a 198kw unit will produce to install a number of small wood chip boilers rather than one larger [poultry manure to energy] system.’ Attwood forwarded the letter to Foster, his ministerial colleague. The letter went to energy division where Peter Hutchinson and Joanne McCutcheon drafted a response to be issued by Foster’s private secretary on behalf of the minister. It dismissively told the company that whereas it had claimed that two smaller boilers could be used to ‘game’ the system by attracting a higher subsidy than a single larger boiler, ‘I can assure you that this is not the case’.
In fact, it very much was the case. The warning was to be the first of many, which might have been a prompt for civil servants to read the regulations and investigate whether what they were being told was happening was in fact possible. Instead, the consistent response was an implicitly arrogant dismissal based on the premise that the department knew best.
The accompanying submission to Foster was even more strident. It said that the firm’s concerns ‘relate to a perceived flaw in the RHI whereby installers are incentivised to install multiple smaller boilers instead of a single large boiler – this is not the case’. Intriguingly, Andrew Crawford again took an interest in a specific detail of the scheme at this point. After reading the submission, he sent a query back to energy division to ask: ‘If two boilers are installed at different times will they not attract greater support than a single boiler?’
It had taken the industry weeks to work out something officials would never work out for themselves. It was not until after the scheme had closed that civil servants realised – after it was pointed out to them by the Audit Office – that an uncapped scheme where the subsidy is higher than the cost of the fuel was a perverse incentive for claimants to run their boilers as long as possible. Although focus would later turn to the fact that the tariff was set higher than the cost of the fuel, that in itself was not the problem. The intent was to pay off the cost of buying and installing the boiler – in the region of £45,000 – the fact the tariff was above the cost of fuel was a means of doing that.
The core problem was the lack of either tiering, to cut rates as the boiler ran for longer periods, or a simple cap on how much could be paid in subsidy for each piece of equipment. The combination of the fuel being cheaper than the subsidy and the absence of a cap meant that if someone had already splashed out on the costs of installing a boiler they were being financially incentivised to recoup those costs as quickly as possible – and then make pure profit – by running it for long periods. The fact that many boiler owners ran their boilers for long periods was not in itself proof of fraudulent intent. Some, such as poultry farmers, had huge heat requirements and it just so happened that RHI turned that otherwise expensive outlay into a profitable activity of its own. But there have been far too many stories of calculated abuse of the scheme – boilers running for long periods with windows open or in areas which were barely insulated – to believe that everyone who made huge claims did so in good faith.
Though a depressing example of flawed human nature, it is hardly surprising that if a scheme is set up so that it is easy to fraudulently claim – and very difficult to get caught – then some people are going to exploit it. In doing so, not only were they stealing money, which could have been spent on worthwhile causes such as hospitals or schools, but they were corrupting the very essence of the scheme. Having intended to improve the environment by moving people from finite and heavily polluting fossil fuels to sustainable and cleaner sources of energy, RHI led to the opposite: public money was incentivising the public to damage the environment.
In April 2013 – some five months into Stormont’s scheme – Westminster legislation was passed to give greater powers to DECC, the Whitehall department running the GB scheme, to ensure that its budget was not exceeded. Although at that point there was no immediate budgetary concern, the department publicly explained that it thought it was prudent to put in place measures which would allow it to quickly step in if there was a sudden increase in demand. It was a recognition of the unpredictable nature of RHI. Unlike most government grants, which involve getting approval from officials before making an investment, RHI involved people installing boilers themselves and then applying to enter the scheme. So long as they met the criteria for the scheme, there was no legal means whereby they could be rejected at that point. That meant that the department could never be sure how many people had installed boilers and were just about to apply to enter the scheme – a fundamental weakness in being able to predict the required budget.
The GB ‘degression’ changes allowed DECC to ‘degress’ the tariffs according to how much of its budget had been committed. It meant that the more people who applied to the scheme, the less lucrative it became for those who joined after them. The ability for DECC to reduce its tariffs had only been on the statute book for a month when it was used for the first time. DECC minister Greg Barker wrote to Foster to say that the uptake for small and medium-sized biomass boilers was ‘a real success, even beyond our initial expectations’. But that meant, he said, that DECC had considered the likely cost to taxpayers of that success. As a result, Barker said that it had decided to cut the most popular biomass tariff. It was an indication that the level of tariffs in GB were now judged unsustainable and was in line with how many green energy schemes had operated in the past. With new technologies, subsidies often started high, but as it either became apparent that they were too generous or as the cost of the technology dropped, then the subsidy was reduced.
On the same day that Barker’s letter went to Foster, DECC issued a press release setting out how the tariff was being reduced. DETI officials certainly saw the press release and judged it relevant to their work because that day they saved it into the Northern Ireland Civil Service’s TRIM data management system.
Just six months into Stormont’s RHI scheme, there had now been a barrage of prompts to look at the issue of cost controls and some of the key assumptions behind the scheme. At this stage the number of claimants was in single figures, and although those who had entered the scheme would have locked in lucrative uncapped subsidies for 20 years, action at that point would have contained the problem. But, for whatever reason, nothing was done.
The following month, there was another moment that might have jolted DETI to spot ‘cash for ash’. On 3 June, Ofgem sent Hutchinson a spreadsheet with the Northern Ireland RHI data for that week. It gave considerable detail about the applicants’ behaviour. It set out the size of the boilers, showing that they were generally far bigger than the 50 kW boilers which CEPA’s modelling had expected and on which it had based the tariffs. Aside from any other problem with the scheme, if CEPA’s assumptions were wildly wrong then the tariffs were going to be wildly wrong. One number in the data gave away that something potentially problematic was going on. The spreadsheet showed that several of the early biomass installations were running for 168 hours per week. There are only 168 hours in a week so that meant that the boilers were running round the clock. A simple calculation would have shown how much money they were making.
That same month, senior Ofgem figure Edmund Ward attended an event organised by the green energy charity Action Renewables. Promotional material for the event to explain RHI to potential claimants included the strapline: ‘Find out how to generate heat and get paid for it!’ Subsequently, the organisers circulated some of the speakers’ presentations to those who had attended. Ward was sent a presentation by the chief executive of the Renewable Energy Association in which attention was drawn to perverse incentives. Under the heading ‘lessons for DETI’, it said: ‘Don’t let there be perverse incentives’ and argued for tiered tariffs. DETI was not present at the event – and was criticised by some attendees for not being there. However, the energy division team were regularly going to similar events to promote RHI. Their evidence to the inquiry was that they never picked up on the flaws of the scheme at such events, despite what multiple witnesses described as participants’ open discussion about the extremely lucrative nature of the subsidy.
Solmatix, a firm which attended such events, had a leaflet that literally marketed RHI as ‘cash for ash’. Its literature said:
