Does the RHI have a future?

With a scandal in Northern Ireland and a damning NAO report for the rest of the UK, is the Renewable Heat Incentive reformable, or should it just be scrapped? David Blackman reports.

Over the last four months, Northern Ireland has been regularly entertained by the spectacle of the public inquiry into the so called “cash for ash” scandal.

Ballooning overpayments from the renewable heat incentive (RHI) scheme, which was set up to encourage uptake of low carbon heating, triggered the collapse of Northern Ireland’s devolved administration in January last year.

The UK version of the RHI has not proved in the same way, but it was the subject of a withering report from the National Audit Office, which vets Whitehall spending, last month.

The publication of the report comes at a time when the future of the entire initiative, which has been running in the rest of the UK since November 2011, is up in the air as part of a wider review of heat decarbonisation policy that is due to kick off this year.

The scheme, which was scaled back in 2015 to focus on homes and businesses not connected to the gas grid, only has a budget for new applicants until March 2021.

Total payments under the RHI have amounted to £1.4 billion since 2011, the report calculates, which will rise over the lifetime of the initiative to £23 billion.

However, the Department for Business, Energy and Industrial Strategy (BEIS) “cannot reliably estimate” the level of overpayments to RHI participants who have flouted the scheme’s regulations, such as by using it to heat domestic swimming pools, according to the NAO.

The report also accuses the department of not knowing the impact that gaming of the RHI’s complex regulations, such as by installing multiple boilers to take advantage of the higher tariff rate for smaller units, has had.

The NAO says that Ofgem, which runs the scheme, admitted last year that overpayments were worth 4.4 per cent and 2.5 per cent of non-domestic and domestic RHI expenditure respectively in 2016-17, equating to a total of £3 million.

And it criticises Ofgem for focusing more on the most commonly occurring types of non-compliance rather than those with the biggest financial hit.

An Ofgem spokesperson defends the regulator’s actions to tackle non-compliance. “Ofgem is committed to ensuring that public money is being spent properly and people are following the rules of the Renewable Heat Incentive scheme.

“We have systems and checks in place to protect against errors and fraud – and we take firm action in any cases we detect. This can include stopping further payments, withdrawing accreditation and recovering previous payments. We are continuing to make improvements to our monitoring and compliance processes to make them even more robust.”

But Jonathan Marshall, energy analyst at the Energy and Climate Intelligence Unit, agrees with the NAO’s conclusions. “Problems of gaming will persist as long as the system is not effectively monitored. It was a failure to identify this from the start, and a failure to act, that led the NAO to their conclusions. If there is another incarnation of the renewable heat incentive, thorough monitoring is vital.”

Keith MacLean, director of Providence Policy, suspects that those who want to game a subsidy system will find a way of doing so. “The government designed an ever more complicated scheme in order to deal with that (problem) and has probably not succeeded. The market will always be better at that sort of gaming than the government will be at dealing with it.”

More broadly the report concludes that the RHI has not delivered value for money and the promised carbon savings. Even taking into account the increasing popularity of wood burning stoves, 10 per cent of heat is being supplied from renewable sources, 2 per cent shy of the UK’s 2020 target. Following the scaling back of the RHI in 2015, it will deliver 44 per cent of the originally anticipated carbon reductions.

The value for money problem is embedded in the demand-led design of the scheme because it does not incentivise suppliers to offer cheap prices, suggests MacLean: “The supply chain can see exactly how much people are able to afford. One of the problems of having a scheme where there is a signal to the supply chain about how much they are able to charge.”

In addition, the stop-start nature of the way the scheme has been run has set back investment that may have delivered efficiencies, he argues: “These are the sort of negative signals that make it difficult for the supply chain to invest and keep costs down. If people don’t think there is a long-term market they are not going to cut prices and make investment to try to do it better and faster.”

When considering the future of subsidy regime, particularly for non-domestic heat, the government should learn the lessons from the competitive approach used in the contract for difference and capacity market auctions.

However, Marshall questions whether this is the right approach, based on the limited enthusiasm for the RHI amongst consumers. “For a CfD-style system to work effectively, it would need to pit competitors against each other. Considering that one of the main failings of the RHI was lack of uptake, it is hard to see how homeowners could either be tempted into participating in an auction, or to consent to a company bidding on their behalf unless engagement is dramatically improved.”