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Published: 03 January 2017
Sector: Energy

RHI gets its fifteen minutes of fame

The Renewable Heat Incentive (RHI) was introduced in 2011 to encourage businesses and other organisations to move towards renewable forms of heat by providing payments for heat generation from renewable and other low-carbon heat generation.    

Whereas the feed-in tariffs scheme, which offers payments for renewable power generation and has led to the huge growth in solar energy, has produced considerable controversy regarding subsidies for “green crap” (in David Cameron’s memorable phrase), no such opprobrium has fallen the way of the RHI.  Until now, that is.  Now, the Northern Ireland RHI scheme (which was introduced in 2012) has the dubious distinction of almost causing the fall of Northern Ireland’s First Minister, Arlene Foster, in what has become known as the “cash for ash” scandal.

Whistle-blower allegations
The background to the scandal is that, in January 2016, an anonymous whistle-blowing letter was received by the Office of the First Minister and Deputy First Minister of the Northern Ireland Executive alleging abuses of the RHI scheme. These included a claim that the owners of large factories, which had no previous heating, had installed three biomass boilers with the intention to run them all year round in order to collect approximately £1.5 million over the next twenty years; and that a farmer, who has no need for a biomass boiler, is aiming to collect approximately £1 million over the next twenty years for heating an empty shed.   

In February 2016, the Northern Ireland Executive took action and closed the domestic and non-domestic schemes to new applications.  In media reports just before Christmas 2016 it was claimed that, under increasing pressure, the Northern Ireland Executive was now looking at closing the scheme altogether and buying out existing contracts.   

Audit Office report
The Northern Ireland Audit Office looked into the matter and issued its report in June 2016.  The key problem identified by the Audit Office was that the Northern Ireland scheme failed to include key cost control measure that were included in the RHI scheme that applies in the rest to the UK.   These measures are the tiering of payments and what is known as degression.  

Tiering of payments provides a higher rate (Tier 1) for the initial amount of heat generated, which is intended to compensate the installer for the capital expenditure of the boiler; and a lower additional payment (Tier 2) for heat generated above the initial amount.  Crucially, in the rest of the UK, the Tier 2 payment is significantly lower than the cost of fuel required to generate the heat.  This acts as an in-built disincentive for installers who might otherwise be looking to pump out heat in order to get more payments.  However, in the Northern Ireland RHI scheme, there is only a single tier of payments and that tier is higher than the cost of fuel; hence the opportunity to game the system.  
Degression is a process whereby the tariff for new installations is reduced in response to increases in RHI applications in order to maintain control over the overall budget.  As the Northern Ireland scheme did not operate a degression mechanism, it was unable to respond to the high level of applications that started to come in during 2015.    

It is regrettable that a scheme set up to encourage renewable heat should have been so badly tarnished by structural flaws with the consequence that genuine projects will now no longer be able to proceed.  It does, however, demonstrate the importance of anti-abuse measures and cost-control measures in a scheme of this nature. Whilst developers and installers in the rest of the UK may grumble about the effects of such measures, one of which is inevitably to restrict the volume of projects that are able to go ahead, the “cash for ash” scandal is an illustration of the fact that these measures do at least allow the schemes to continue in the way that they are intended.      

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