Oral evidence: Changes to NI Renewable Heat Incentive Payments, HC 2070

Oral evidence, 8 May 2019.

Witnesses

Noel Lavery, Richard Rodgers and Jamie Warnock.

Chair

Good morning, everyone. Welcome to the Northern Ireland Affairs Select Committee. I am grateful to you, Mr Lavery, and your team for coming to talk to us today, the better to inform the report we are writing on the RHI issue. I wonder if I can start by inviting you to introduce yourself and your team. Perhaps give us a little thumbnail sketch of the situation as you see it, in three or four minutes, to introduce the written evidence you have submitted already, for which we are grateful.

Noel Lavery

I will do the introductions and then the thumbnail sketch, Chair. I am Noel Lavery, Permanent Secretary of the Department for the Economy in Northern Ireland. I have been in post since 19 February 2018.

Richard Rodgers

I am Richard Rodgers. I was seconded into the Department to be head of the RHI task force in July 2017. Since November 2018, I have been head of energy. I have 30 years’ experience in the energy industry from outside before that.

Jamie Warnock

I am Jamie Warnock. I head the policy and legislative aspects of renewable heat for the Department for the Economy. I have been a civil servant for the best part of six years now and, before that, worked in the financial industry.

Noel Lavery

I will just give you a bit of background, Chair. I am conscious of the Committee’s time. The RHI issue is well documented. It is well documented in the press. The best place to start is that it was a scheme to incentivise renewable heat. That is what it was. It was not a business-expansion scheme; it was a scheme to incentivise renewable heat. The regulations in 2017 were an interim measure and the then Economy Minister Simon Hamilton made a commitment in the Assembly to review the tariff. The tariff was brought down; that was essentially a budgetary control measure. You are aware of the issue, which was well documented, of £700 million of over-expenditure. So it was an interim tariff and then the Department employed Ricardo consultants, a well-known international firm, to do a full review of the tariff independent of the Department. That commenced during 2017 and ran into 2018. The Department then consulted on that tariff. The main issues were in relation to rate of return and state aid. They were the limiting factors for us, which brings us to where we are today. There are a couple of unusual factors that I will just mention. With no Assembly, the only legislative route to amend the tariff was through Westminster, which is one of the reasons we are here today. In amending the tariff, we put proposals to the Secretary of State. I want to be very clear on that point. In coming to our view, I took the decision in terms of what the recommendation was to the Secretary of State. At that stage, there were two options: basically close the scheme or keep it open at a prospective rate of return of 12%. The Secretary of State put that through Westminster, and then there were debates at Westminster and it was passed into legislation. One of the issues I am sure we will come to is the overcompensation of the past. We have taken the view not to seek to recover the overcompensation of the past, but to go with the prospective rate of return. I think that is a fair and balanced approach.

Chair

Can I ask you about underspend? It seems to those in a position to know about these things that the restructured scheme is heading for a significant underspend. I am wondering what your assessment of the level of that underspend is.

Noel Lavery

There are a couple of things on underspend. We need to be very careful. One of the reasons, and the inquiry will report on this—I do not want to prejudice the inquiry—is that AME was free money, but this is not free money. It is taxpayers’ money. As an accounting officer, I have a responsibility to all taxpayers. I looked at my accounting officer letter again recently. It is not to the Department or the Northern Ireland taxpayers; it is to all taxpayers. The AME budget will not be spent, probably by about £20 million. We have had to stop overspend, because it was hitting the DEL budget to a tune of £33 million. There was £33.8 million overspend to date, directly impacting public services. To go back to your question, will we spend the existing AME budget? No. We need a value-for-money scheme that is legally compliant. You can have a budget, but you need a legal value‑for‑money scheme for which you can use that budget. Chair, can I make one more point?

Chair

Please do, yes.

Noel Lavery

There may be a CSR or there may not. We do not know what the AME budget will be in the future. I would like to be in a position of having a scheme or a new proposal that we could seek Government support for, which has a strong reputation and is legally viable, state-aid complaint and offers value for money. That is something Richard is looking for in his role because, as of today, we have no incentive schemes for renewable energy. The NIRO is closed; the RHI is closed. I would like to use whatever budget is available for a new scheme.

Chair

You have no scheme. Uniquely in the United Kingdom, you have no scheme of this sort, which means that the Northern Ireland contribution to the reduction of our carbon footprint is being significantly impacted, is it not?

Noel Lavery

Yes and no: it would be better to have a scheme, but we still have 2,000 participants using biomass as opposed to carbon. That is one. I will bring Richard in.

Chair

We have heard from Moy Park that people are going back to using fossil fuels.

Noel Lavery

Yes, I have heard that and a couple of participants on the scheme said they are going to do that. My advice would be not to, having made the investment they have.

Chair

They are doing it because their business model does not stack up. These folks are concerned about climate change but, at the end of the day, their principal concern is not to go bankrupt.

Noel Lavery

I think there are two points here. There is the business model point, and you asked a broader point about renewables. Can I just deal with the business model point? The average cash payback on this scheme is, if I am right, 2.3 years. That is straight cash, from capital investment to cash you have. For a 199 kilowatt boiler it is 3.6 years. It is 1.9 for a 99 kilowatt boiler. That is when you get a straight cash payback. If you use the RHI scheme as intended, that is your cash payback. Clearly, people will have taken out loans, and that is an issue they are facing because the tariff has gone down. You asked, Chair, a wider point on renewables and our contribution to carbon. We are actually in a good place relative to other jurisdictions. Am I right? Do you want to come in on that?

Richard Rodgers

There are a lot of points here, but energy strategy piece is a big picture point, which it may be useful to talk about, if that is okay. We will come back to the issue of people switching back to fossil fuels.

Chair

We will come back to that shortly.

Richard Rodgers

On the wider picture, the Northern Ireland renewables obligation has been running for some years and is now closed. We are engaging closely with our colleagues in BEIS about the future. The future horizon is 2030—that is the short term—and 2050 in the long term. It all sits under the Paris agreement, under which we currently have the EU clean energy directive, and the UK Government’s climate and energy plan sits under that. Under that plan, there is a major commitment to reduce carbon emissions.

Chair

If we were to break this down into the four home nations, is Northern Ireland’s contribution on track? Are you comparable to the other three?

Richard Rodgers

It is for electricity. For electricity, which is the major element of this, the NIRO has been very successful. As members will be aware, the electricity market in Northern Ireland is different from the market in the rest of the UK, as it is a single electricity market across the island. Under renewable electricity today, there are 24,000 generators, which is a significant change from where we were some years back, when we had three major generators. Now we have 24,000-odd micro‑generators, which are typically large wind farms, right down to small wind turbines and some solar as well. The most important thing here is that we are ahead of the rest of the UK in respect of renewable electricity generation. Most importantly, under the single electricity market, wind has become the price maker on the day that it blows. On some days, up to 90% of the electricity supplied in Northern Ireland is from wind. Wind is setting the price in the market, whereas before natural gas, oil and coal set the price in the market. During 2018, 38% of the electricity supplied in Northern Ireland was from renewable sources, which is a significant improvement from where we were, an advance on the rest of the UK and significantly ahead of the Republic of Ireland.

Chair

That is all good to know. Thank you for that clarification. Can I draw you back to RHI? You may have had an opportunity to listen to our evidence session yesterday and in particular the remarks of George Peretz QC. We spent some time examining what exactly the European Commission approved in 2012. I draw your attention to the European Commission’s letter dated 25 January 2019, which seems to claim that the approval given then was based on a rate of return rather than the tariff structure that was submitted to the Commission at the time. George Peretz seemed to think it was debateable as to whether the Commission had approved the scheme based on tariff or on rate of return. What is your view?

Noel Lavery

It was rate of return.

Jamie Warnock

It is true that there is a point to be debated on the 2012 letter, as to whether it was rate of return or tariffs that was approved by the Commission. We had that debate directly with the Commission and, particularly in the correspondence leading up to the revised tariffs, the Commission could not have been clearer at that point that 12% rate of return was the approval limit and not higher.

Chair

That is because you submitted 12% as a reasonable rate of return, having been advised that the envelope was between 8% and 22%. Is that correct?

Noel Lavery

If you look at the correspondence, we pre‑notified 19%. I am very conscious, in looking at all the options of the consultation, that 19% was our favourite approach. It was clear in those discussions with the Commission—Richard and I were there—that the Commission would not countenance anything of that order and reverted to the 2012 approval, which was 12%.

Chair

The 19% was in 2017, was it not?

Noel Lavery

Yes.

Chair

I am interested in 2012 and what was agreed at that time.

Richard Rodgers

In 2012, the range discussed was 8% to 22%, which is in the documentation. However, it is clear that the Commission approved a 12% internal rate of return, which was seen as reasonable after the discussion. That is clear from the 2012 correspondence with the Commission.

Chair

Is that because you proposed that 12%? Did you push back against the Commission at that time? There is a big difference between 12% and 19%, for example.

Noel Lavery

To be honest, I am not sure of the situation in 2012. It was well before my time.

Chair

What I am trying to get round to is that 12% seems quite low. It is possible that the European Commission, presented with an internal rate of return somewhat higher than 12%, may have said, “Okay, that sounds all right”. I am trying to get a sense of the pushback and challenge that the Department for the Economy made to the European Commission to get a better deal for Northern Ireland at that time.

Richard Rodgers

It is clear that the rate of return was set based on the market conditions in Northern Ireland. It is clear that there was a range and that the Commission approved 12%. It is also clear that, just prior to that, the Commission had approved the GB scheme at 12%. In our conversations with the Commission, most recently in December 2018, it was clear that 12% had been the number forever, that 12% was 12% was 12%, and that it was precedent across member states, not just in the UK. It was very clear that 12% was consistent and was what had been approved for the GB scheme at the time.

Chair

We will come back to the GB scheme, but I am particularly interested in the Republic of Ireland scheme at the moment. As you know, on 25 April the Republic of Ireland announced its own scheme, which to most commentators appears to be much more generous than the Northern Ireland scheme, in respect of the rules on state aid. I wonder what assessment you have made of that and what challenges you are preparing, given the competitive disadvantage that producers in Northern Ireland are about to face in respect of people just metres away from their undertakings?

Noel Lavery

I will bring in Richard in a second. Would you mind if I just went back to the previous comment? We pre‑notified 19% last year and ended up at 12%. It is important to say that. We have seen the policy documentation for the Republic of Ireland. As far as I understand it, it is at 8%, it is for 15 years and it targets quite a different market.

Richard Rodgers

What we say is predicated on public documentation. Later this month, we have arranged to meet with officials from Dublin to discuss the impending scheme. As you say, the Commission has approved the scheme at an 8% internal rate of return and it has not yet launched. It was launched previously for air-source heat pumps.

Ian Paisley

You just slipped in the words “internal rate of return”, which is totally different from rate of return. Is that not right?

Richard Rodgers

No, it is very clear from—

Ian Paisley

You have jumped from rate of return to internal rate of return.

Richard Rodgers

I need to be absolutely clear about that. Rate of return is the internal rate of return. All the approvals since 2012 have been on the internal rate of return, which is not for debate, inasmuch as it is a mathematical calculation of the discounted cash flows across the lifetime of the scheme. That is very clear.

Ian Paisley

Now we are at 2019, we are on rate of return.

Richard Rodgers

No, internal rate of return, which is shortened to rate of return. It all applies to the internal rate of return. Back to the RoI scheme, as Noel said, it seems from the policy documentation that it is targeted at a different market. By that, we mean it expects to get much greater volume and greater capacity of renewable heat through larger boilers and larger industrial users. When you dig into the detail and try to compare it, in the Northern Ireland scheme the prevalent boiler size is 99 kilowatts. When you come down to the 99 kilowatt boiler size, under the revised tariffs that have applied from 1 April in Northern Ireland, the maximum payment is £2,200. Under the RoI scheme, the payment for a 99 kilowatt boiler, similarly, will be £5,000 and a bit, so the differential is close to £3,000. When we look at the detail of what was published in the policy document, three key areas are different. One is the assumed capital cost of the boiler. I will come back to that. The second is the ongoing operating cost. The material points there are the cost of servicing and breakdown and, secondly, the fuel cost differentials. As Noel said, the life of the scheme for a participant is 15 years and not 20 years. On the capital costs, they have assumed a higher figure for the cost of the boiler installation. We expect them to publish guidance, as we have done. That capital cost is £550 per kilowatt, which equates to £54,000 for a 99 kilowatt boiler. That is a differential between the £54,000 RoI assumption and £38,000 for what we have seen in Northern Ireland. We do not know why there is a differential. It is one of the things we will discuss with our colleagues in the Republic of Ireland. For example, Grant Boilers is a manufacturer of boilers based in County Offaly, in the centre of Ireland. It has been a long player in the boiler market and it produced solid-fuel back boilers, back in the day, in the 1970s. It produced a very good oil boiler and now it produces a very good biomass boiler, which exists in Northern Ireland. It is a fair question to ask why you would assume differently. Given there is a difference—and I will come back to the other points in a minute—one of the really important things in the public document on the RoI scheme is the provision to retrospectively adjust the tariffs if their assumptions prove to be wrong. We recognise that, if there is a slightly higher tariff than is needed, there is a proposal for it to be adjusted retrospectively for participants. I do not know how that will play with people who want to invest. We will have to see. They have assumed £2,000 a year on servicing and breakdown costs in RoI. That seems a bit high to us. Maybe it is right or maybe it is wrong. In Northern Ireland, over the past year or so that we have been inspecting under the 100% inspection scheme, we have analysed the invoices for servicing and breakdown for 25% of the population, which is a significant sample. For around 500 boilers, we have seen that the average annual costs are £700 a year. That is in the tariff in the Ricardo work at £800 a year, so we believe it is consistent. That £700 a year compares to the allowance in the policy documentation for RoI of £2,000 a year.

Mr Campbell

On that point of the lower figure compared with the £2,000, was that figure assessed in the earlier years of the scheme when you would expect maintenance costs to be low or throughout the entire lifetime?

Richard Rodgers

That is a figure for the scheme as a whole in RoI and it is a forecast. Our figures are actual invoices for the first four years of the scheme.

Mr Campbell

That is when you would expect them to be low.

Richard Rodgers

That is a very good point and that it is important to emphasise today. It is the Department’s intention to keep the tariff under review for costs like this. If costs rise as the plant ages, the tariff would need to be adjusted. As things stand at the moment, under the evidence we have, it is £700 a year. The final point on the creation of a tariff is on relative fuel costs.

Lady Hermon

I am sorry to interrupt you. In response to Mr Campbell’s question, you said that, in a few years’ time, the tariff would have to be reviewed. Would it be reviewed up or down?

Richard Rodgers

If breakdown costs increase as the plant ages, it would have an upward pressure on tariffs.

Lady Hermon

Would the Department respond to that?

Richard Rodgers

Yes, again, it is our commitment to keep it under review.

Lady Hermon

The intention would be to increase from 12%.

Richard Rodgers

No, it would still be 12% but, because of the higher costs, we would keep it at 12% if we increase the tariff. The income increases because the costs are increasing, so it keeps things held at 12%.

Lady Hermon

You are not moving from 12%.

Richard Rodgers

No. Because the cost side of the equation is getting higher, you would have to increase the income side. On the fuel costs, the assumption in the RoI tariff is 4.8 pence per kilowatt hour. The current price of biomass wood pellets in Northern Ireland is 3.8 pence per kilowatt hour based on £180 per tonne. We are not sure why there is a differential. We have not looked at the tax implications and the tax regime in the Republic of Ireland, but we know that they have assumed a penny more. Interestingly, and I am sure we will come to GB, biomass prices are also higher in GB than in Northern Ireland. The Northern Ireland price today of £180 per tonne equates to 3.8 pence per kilowatt hour. A combination of the fuel cost differential, service and maintenance differential, and the capital cost differential leads to that £3,000 a year difference.

Sir Desmond Swayne

On the capital cost, do you take into account the full implementation cost or just the book price of a new boiler?

Richard Rodgers

No, the capital costs from our evidence base are based on invoices for boiler installation. The invoices include the boiler and some associated works, which are set out in the guidance. They include, for example, the fuel store, hopper and the auger to get the fuel from the fuel store to the boiler. It includes things that are laid out in the guidance, but it is important to note that the tariff is based on the differential between those costs and the costs of a normal fossil fuel alternative.

Chair

I have to ask, because this scheme has been approved by the European Commission. It appears on the face of it, and what you have said confirms my point, that the Republic of Ireland scheme is significantly more generous than the one that the Department for the Economy managed to get through in 2012.

Richard Rodgers

I would say it is not, because of the assumed fuel cost differential. It could well be that fuel costs are higher in the Republic of Ireland than in Northern Ireland.

Chair

I think that is most unlikely. Do you not? A case can be made for different fuel costs between Northern Ireland and GB, but it is very difficult to see how they would be different between the two jurisdictions on the island of Ireland.

Richard Rodgers

It depends on the tax regime in the Republic of Ireland, whether there is a carbon tax or whatever it happens to be. It would have to be looked at.

Noel Lavery

To come back to your point, Chair, your initial question was whether we have done an assessment. Yes, we have done an assessment, but it is based on the policy documentation. We want to meet with officials. It has been approved at 8%. We are not experts in the fuel price differential; we are just having a look at what we see. The capital cost looks strange to us, which was Richard’s point.

Chair

You are unhappy with this and you are doing something about it.

Noel Lavery

We need to establish the facts and the evidence. That is where we are at present. You asked if we would raise a complaint. That would have to be through a member state. We will be talking to colleagues in BEIS about that, but we need to establish the facts and evidence.

Ian Paisley

You only have about 60 days left to raise that complaint under state aid rules. If you do not raise that complaint by June, they get away with this. Have you started any legal processes whatever against the Republic of Ireland’s illegal scheme?

Noel Lavery

No.

Ian Paisley

No, not a thing, not a tap. They are being anticompetitive against another member state and you have done nothing.

Noel Lavery

To be clear, we have been looking at our own scheme and preparing for this. That is when we became aware of this. It has been approved at a rate of return of 8% and there is a commitment in their documentation to amend the tariff. There is a claw-back provision, as I understand it. The first thing to do is establish the facts. That is where we are.

Chair

We are going to come back to this, obviously. Before we do, we have Jim Shannon.

Jim Shannon

Gentlemen, it is nice to see you. I see that you do marathons, Noel. RHI is a marathon for you.

Noel Lavery

He is the real marathon runner. I was just a bit-part player.

Jim Shannon

You have run a few more than I have; I can tell you that anyway. The concerns many of us have here are about the disadvantage for Northern Ireland participants in this scheme, as against the Republic of Ireland and UK mainland schemes. My colleagues have asked those questions, so I will not dwell on them. I have a number of personal constituents who have spoken to me about this scheme. The mortgage is a debt taken out, and the loan is a debt taken out for the scheme that was presented to them and supported by your Department. How many farmers are at risk within this scheme, as it is now? Do you have any numbers on that?

Noel Lavery

No, we do not, Mr Shannon. Can I make a couple of points? We need to get some evidence. I have met with a number of participants and had representation from the Ulster Farmers’ Union. Like you, I have had farm participants writing to me. There are a couple of core points here. When you look at the scheme as a whole, the average participant spent £38,000 on a boiler, would have already received £55,000 from the taxpayer and will receive another £35,000. That is how we get to the cash. In cash terms there is a very short payback. By definition, from looking at it, you should not have got into financial difficulty from the operation of the RHI scheme. It was a scheme to incentivise renewable heat, so we need to find the evidence as to why. I am talking to banks, and it may be that people have taken out short-term loans. There is a question of what that loan was for. What I have done is to meet with banks. I see from the evidence of the Ulster Farmers’ Union, consistent with my meetings with the banks, that banks were seen to extend loans. In answer to your core question, we need to get to evidence, because I have had individual pieces of correspondence. The unit that was set up to look at that needs to gather that evidence. Can I just go back to a point, Chair? One of the issues in setting this tariff was to get to something that was legally state-aid compliant, in line with the original 2012 approval for state aid. There has been overcompensation in the past. We could not let that continue as an accounting officer. I had no choice. You will have seen that we sought to pre‑notify at 19%. The Commission would not approve that, which is why we have ended up where we are today. People will have got the payback, so it must be the terms of how they borrowed and their loan. Another point I made in the discussion with the banks is that this tariff is going to be there for another 15 years, on average, so that income is there.

Jim Shannon

The point I am making is that my constituents have business projects. It is not just the RHI scheme; it is that, along with the money you are investing in new houses and so on. If you go to a bank manager, he would look at it in a very cold, financial way. Is it a project or business plan that will succeed? They will look at that. The RHI scheme is part of that. When your tariffs reduce, it has an impact. We cannot ignore and I am not going to ignore my constituents, who are clearly telling me this is about the roof over their heads and feeding their families. It is at that level for some people, on the scheme that was presented for them. Therefore, I feel the Department has some responsibility for presenting a scheme, in whatever way it may end up now, to people who felt that they were going forward with a good, sensible business plan for the future. I am going to ask you this: what support has your Department considered to help those who are facing hardship or having difficulties? What has been done to assist them at this time?

Noel Lavery

Can I go back to what you said there, Mr Shannon? I will repeat the numbers. Somebody spent £38,000. They already have £55,000 and they are going to get another £35,000 from the RHI scheme. You made the point that people make business plans and make certain assumptions.

Jim Shannon

Yes, on the strength of what the Department offers. Let us be honest: you offer something and the bank manager accepts that. Then you take the mat from under their feet.

Noel Lavery

You are taking me into matters that are before the courts, I have to say, on the issue of the grandfathering principle. You are right that people signed up to a scheme offered by Government, but I need to be very careful about what I say, because these matters will be before the courts in about six weeks’ time. Your final point was on what we can and cannot do. We have committed to set up a unit to look at this, under an independent chair. That is what Lord Duncan said in the House of Lords, and we are active on that. It is a priority for us. Through Richard’s delivery team, we will offer advice to people to make sure they are doing the right thing. I am sure we will come on to the voluntary buyout, at some stage. That voluntary buyout looks at individual cases. While 80% of participants will get a 22% return, in looking at it, we think about 1,100 participants could benefit from a buyout. We then need to look at whether Government could or should provide support within what is legally and operationally viable. I am scoping what there is, but I have to say to you that, as of today, we have an RHI scheme, a tariff, a voluntary buyout and can provide advice. As for our scope and the other mechanisms within the Department’s ambit, that is what I am doing.

Jim Shannon

The last question is along those lines. In light of this scheme and how it has impacted the people of Northern Ireland and probably across the UK, will people have any faith or trust in any new scheme that may come forward for renewables? Do you have any plans? If you do, how do you think they will stack up with the people who may be interested? I suspect this scheme has soured a lot of people and, because of that, quite honestly, any future scheme, for the best and noble reasons, which we would all support, as the Chairman said at the beginning, will not be of any interest to people because they have been caught once and maybe caught twice. They will not be caught a third time.

Noel Lavery

You make a very fair point, Mr Shannon. Whether you call RHI a debacle or a botched scheme, as it is called in the press, to me, having come in, the Government got the tariff rate wrong twice. In 2017, they set a tariff and we have now had to amend that tariff again. Representation was made to me, with people saying, as I am sure they said to you, “I have ripped my boiler out. I am not interested in any new scheme. I do not have faith in Government”. I am sure those things have been said to you. They are perfectly understandable comments. I would say two things. First, biomass is the lowest-cost fuel in the market today. Richard says that to me at least five times a day. If you have invested in the boiler, you have got your cash back; you have been compensated. You have your 55k from the Department. You need to think long and carefully before you rip it out, because you have the lowest-cost fuel and you are going to get £2,000. We need to consider the buyout. Going back to your previous question, these are individual cases. I think we have a big job to look at the form in which we need to incentivise the future low-carbon energy strategy. There are a number of mechanisms that will be available to us, within an overall package. The premise of your question is absolutely right, Mr Shannon. The word “RHI” is discredited as a brand, if you will pardon my phrase.

Richard Rodgers

I have a quick point. It is really important to get the message out there, so that one mistake does not follow another mistake and another mistake. If somebody needs 320,000 kilowatt hours of heat a year, which is the typical usage on our scheme, if they stick with biomass, they will save £2,500 a year compared to using either kerosene or LPG. It would be like throwing the baby out with the bathwater to get rid of the boiler. Of course, there may come a time when something happens and the boiler fails but, if at this point in time the kneejerk reaction is to get rid of the boiler, they would not see the benefit of having the lowest-cost fuel in the market. We need to get that message out there and we are trying to do that.

Jim Shannon

The point is this. If you hurt their pockets and disadvantage them financially, be assured that they will not be bitten a second or third time.

Kate Hoey

Thank you for coming along. First of all, so I am clear, how many of you were involved in this and around in 2012?

Noel Lavery

None.

Kate Hoey

Have they all gone off somewhere else or been promoted? You are answering from your knowledge of records, talking to people, the inquiry and so on.

Noel Lavery

To be clear, Richard started working on the RHI task force in July 2017. I came in, in 2018, and Jamie came in last year.

Kate Hoey

You have ended up having to answer for a lot of what has gone on in the past.

Noel Lavery

We are where we are.

Kate Hoey

We are where we are. You said something about six weeks’ time. Are you expecting the inquiry to come out then? I want to be clear, because it sounded like you were, but I am sure you did not mean that.

Noel Lavery

The legal challenge taken by RHANI is being heard again. There is an appeal.

Jamie Warnock

A judicial review has been taken against the 2019 Act and the hearings are currently scheduled for the third week of June.

Kate Hoey

You have no idea when the inquiry is coming out.

Noel Lavery

That is a matter for Sir Patrick.

Kate Hoey

Can I take you to the Bill that went through Parliament? As you know, it went through in one day and there was a lot of criticism about that. The Minister John Penrose made very clear that this had not been plucked out of the air. Why were such important changes rushed through? Did you, as the Department, ask for it all to happen very quickly or had you been pushing for this for a long time?

Noel Lavery

I will bring Jamie in, but I will lead off. We were faced with there being no legal tariff, on 1 April 2019. That was the backstop, if you will pardon my language. I am sorry; I could not think of a better phrase there.

Kate Hoey

You knew that for some time. We all knew that.

Noel Lavery

We had known that. As I said in my opening remarks, in January 2017, Simon Hamilton committed to a review of the tariff. Ricardo did a very extensive review, so we spent a lot of time examining data and gathering evidence. We then did a public consultation on that, trying to make sure we get it right. There was a public consultation and pre‑consultation meetings as well. There was no evidence put forward to the contrary on any of the Ricardo numbers we had. We finished the consultation. In parallel, we entered into communication with the Commission again, which had only approved the one-year tariff. I am sorry that I am going back to the Commission, but it is important. The 2017 tariff was only approved by the Commission for one year. It then rolled that over in 2018, because the work had not been completed. What were the time constraints? The time constraints were completing the work, doing a consultation, engaging with the Commission, getting a business case done and approved, and putting it to the Secretary of State. You will have seen from the correspondence with the Commission that we had a final meeting with the Commission, which we pressed for, on 11 December. The key points are the Commission and then the date of the Commission’s letter. That was when we were getting to a final position; we did not get to a final position until towards the end of January. We then had to get that approved by the Department of Finance and submitted to the Secretary of State. Is this a process made in heaven? It is absolutely not. Would I have liked it to have been earlier? Yes, but we simply could not get it done earlier. I know that parliamentarians were concerned about the timing and process. Would it not have been much better if there had been a devolved Administration and these matters were scrutinised in a devolved Assembly? But we are where we were. I apologise for the timescales, but we had no option.

Kate Hoey

Did the Northern Ireland Office and the Secretary of State challenge any of the proposals in it? Did you have lots of discussion with the Secretary of State? Did you meet her on this?

Noel Lavery

No, I did not meet the Secretary of State.

Kate Hoey

Did the Secretary of State not meet any of you in the Department to discussion your proposals?

Noel Lavery

No is the answer, but we had a lot of discussions with officials—

Kate Hoey

In the Northern Ireland Office?

Noel Lavery

—in the Northern Ireland Office, on an ongoing basis.

Kate Hoey

Who was the most senior one you met?

Jamie Warnock

I am not sure what the convention is on names of officials, but deputy director level would have been the primary interface between me and the Northern Ireland Office.

Kate Hoey

Did they challenge anything you were doing or ask you about it?

Jamie Warnock

They did, yes. From what I could see, there was a good degree of scrutiny and we were very open with the Northern Ireland Office with all our deliberations, internal analysis with Ricardo and discussions with the European Commission. We were very open in saying that this is it; this is what our recommendation is based on, and that was challenged. There was an ongoing discussion, particularly in January/February time, when this was coming to the crunch point and our discussions with the Commission were coming to completion. That is when it really ramped up with the NIO.

Kate Hoey

At that time, we did not have the Republic of Ireland scheme. Was there any discussion then about what would be seen not just as perceived unfairness, but as genuine unfairness between what you were proposing for Northern Ireland and what was happening in Great Britain?

Jamie Warnock

At the time, the focus was on comparisons with the GB scheme rather than RoI. Richard has already covered the difference in markets between Great Britain and Northern Ireland, with regard to capital costs and ongoing fuel costs. That is where our focus was in giving that to the Northern Ireland Office.

Kate Hoey

In looking at the fuel costs, one of the things the Ricardo report said is that the Northern Ireland scheme uses kerosene, to compare with wood pellets, but when witnesses came from the Ulster Farmers’ Union—you probably read their evidence—they said that all the famers they know use gas rather than kerosene.

Richard Rodgers

To pick up on that point, in Northern Ireland kerosene is the predominant heating fuel. Despite natural gas having been available now for about 23 years, it has moved to about 30% of the market, and 67% of the market still has kerosene. It is unusual in the poultry sector, in particular where growers are contracted to Moy Park. The backup fuel that is preferred by Moy Park is not kerosene; it is LPG. You get all sorts of products out of a Brent crude barrel of oil, and kerosene is a cleaner product than, for example, heavy fuel oil and gasoil. Kerosene is jet aviation fuel and the heating fuel we have in the majority of homes in Northern Ireland still. Kerosene is at a price that is very public, because it is quoted publicly and published every week. In fact, the Consumer Council in Northern Ireland monitors it. LPG is a premium fuel to kerosene. Naturally its price will be higher than for kerosene, because smaller amounts of it come out of the barrel.

Kate Hoey

Are you saying that the Ulster Farmers’ Union was not correct when it said that a lot of farmers use gas?

Richard Rodgers

I was going to explain that, unusually in this particular market, Moy Park buys LPG in bulk. That brings the available LPG price, from what we have seen in the invoices, down to the kerosene price so, unusually, the kerosene price is similar to the LPG price available in that particular contract. It is a very opaque market; there are no published prices.

Kate Hoey

Individual farmers are buying it from Moy Park.

Richard Rodgers

Yes, Moy Park buys LPG in bulk and provides that price to the farmer, according to the invoices we have seen. It is a Moy Park price. To be clear, that LPG price at 30 pence per litre, for example—that is a price we have seen on one of the invoices recently—is equivalent to a kerosene price of £430 per 900 litres. It is about 0.8 pence per kilowatt hour higher than the biomass price, at £180 per tonne, so biomass remains at a discount both to kerosene and the LPG price that would be paid by poultry farmers.

Kate Hoey

You have gone into this in great detail and all the costs. Now you will be looking at Republic of Ireland costs.

Richard Rodgers

Yes.

Noel Lavery

Part of the reason is that we have access to the information, so it is real information and real evidence. We can see the real costs, because people are submitting them to us, so we have the data.

Jamie Warnock

To come back to the point about the Ulster Farmers’ Union evidence—I read the transcript, as I am sure you have guessed—it was actually a discussion between the Chair and one of the members. It seemed to me that there was a conflation, with “gas” being used as a paraphrase on the part of the Ulster Farmers’ Union, I think meaning LPG, as opposed to natural gas, which is the more predominant fuel in GB and was the counterfactual fuel used in calculating the original tariffs in GB. That was to add clarification around kerosene, LPG and natural gas, to avoid confusion.

Kate Hoey

That is helpful. Finally, I am genuinely concerned that it does not look like you have done any preparation to challenge the Commission on the situation in the Republic of Ireland. We heard yesterday how short a time there is to challenge. Are you going to look into this soon?

Richard Rodgers

It is very clear that the Republic of Ireland scheme is on the basis of an 8% return.

Kate Hoey

You keep saying that. Are you saying to farmers in Northern Ireland that that means they are not going to be at any advantage with the scheme you have come up with for Northern Ireland?

Richard Rodgers

As I explained earlier, if you get to the 99 kilowatt size, and you have one farm one side of the border and another farm on the other side, the differential is about £3,000 a year. That can be explained by the difference in the fuel cost alone. If fuel costs turn out to be the same and there turns out to be a windfall gain, under the policy statement by the Republic of Ireland, they will look at retrospective adjustment of the tariffs. There may be a short-term differential, but the policy documentation says it would be unwound.

Kate Hoey

Do you think they will do that?

Richard Rodgers

That is what they have said.

Noel Lavery

It is a matter for them rather than us.

Kate Hoey

There will be farmers watching or listening to this who will be asking, “Is the Department standing up for us. Are they thinking about the reality on the ground?” Maybe you have all the statistics and figures but, on the ground, people feel different.

Richard Rodgers

There is regular contact with colleagues in DCCAE, the energy end of the Republic of Ireland’s Government, and we have already arranged to meet. We have had a couple of phone conversations, and we are going to meet to discuss the detail of this.

Kate Hoey

Do you not think you should at least put in a preliminary letter to the Commission, just challenging or at least querying it?

Noel Lavery

To be clear about the process, it would be the UK authorities, so it is something we would discuss with BEIS. If we find material concerns, we will look at that.

Jamie Warnock

We have seen that the Commission has approved a scheme for the Republic of Ireland. We have not seen the detail of what the Commission has approved. The letters we have provided on NI RHI are fairly detailed approval letters, which are published by the Commission. As yet, that detail has not been published.

Kate Hoey

The timescale has started already so, by the time you get this, it could be too late. Should you not at least write to the Commission to ask it to clarify how a country right beside you looks like it is getting a better deal than you?

Jamie Warnock

I am not a state aid expert. We have very good state aid experts in the Department, but we can raise a complaint, or a member state can, at any time if there are concerns about a scheme. I understand from the evidence given yesterday that you can challenge a specific decision by the Commission within 60 days, although my understanding is that it has to be on relatively limited grounds with regards to process. That does not preclude a member state from raising a complaint further down the line.

Chair

That is quite an important point. The 60 days, from the evidence we have received so far, is pretty clear cut. Beyond that, your ability to challenge a decision is extremely limited. You are saying that the competent authority in respect of this is the UK Government, which gets us off something of a hook, in that we do not currently have a Government in Northern Ireland.

Noel Lavery

I am sorry; I did not mean to be rude and interrupt you. Whether there is a Government in Northern Ireland would not make a difference in this case. It is the UK authority, so it would be official to official and then the UK authority.

Chair

That is what I am saying. The UK Government could challenge the European Commission on the decision it has made. Thank you for the breakdown about the 99 kilowatt boiler, which is helpful. It makes it clear that the potential advantage is more than double, from the figures you have given me. It seems, on the face of it, that we have to challenge this decision, which would give a significant advantage to producers with that 99 kilowatt boiler in the Republic of Ireland, beyond that which is enjoyed by their producer colleagues in Northern Ireland, less than a mile away. That is remarkable. What assurances can you give the Committee that you are pushing BEIS, as the responsible Department, to launch a legal challenge within the next month, which is the time we have left to run on this, with the European Commission?

Noel Lavery

On the point about timing, I need to be clear. You had an expert in yesterday and you have referred to 60 days. I personally was not aware of that. I thought you could challenge at any time. The Commission has just approved a scheme at 8%. As I said, we will take this away, have a look at it and meet with colleagues.

Chair

Mr Lavery, the point is that this 8% is all well and good. On the face of it, it looks significantly less than the 12% we enjoy in Northern Ireland, but what actually matters is how it affects individuals trying to carry out a business. Breaking it down by boiler size, in the way you just have, very clearly demonstrates that, on the face of it, the scheme in the Republic of Ireland is significantly better than the one that operates in the rest of the British Isles.

Richard Rodgers

That is a good point, which we will take away. The issue of challenge remains open. You can challenge one decision, which is about the scheme overall but, on your point, it is always open to raise an investigation on the basis of competitiveness and support, at any time during a scheme’s lifetime. We are not time bound by 60 days in that regard.

Noel Lavery

The thing that looked odd to us was the capital cost, in reality. That is what we have a clear knowledge of for our comparisons.

Richard Rodgers

I am sorry; please indulge me. It may turn out that the capital cost in the Republic of Ireland market is as high as that, because manufacturers price to the incentive. This happens with schemes across the world. They price to the incentive level, because the market can afford that, because of the Government’s incentive. That happens so that they can get their R&D expenditure back more quickly. It is quite possible that the price for a biomass boiler in the Republic of Ireland will be higher than in the UK, because the market will price to the incentive provided by the Government. That is one of the downsides to any incentive scheme, anywhere in the world. Effectively it distorts the price in the market. It happened with solar. It happened in RHI. It happened in grant schemes for condensing boilers 20 years ago.

Chair

If I could find a boiler cheaper in the Republic of Ireland than I could in the United Kingdom, I would buy it in the Republic of Ireland.

Richard Rodgers

That is an interesting point, because then there is accessibility to a boiler. You might be able to pop into Belfast to get the boiler and bring it down. That is a really good point and, while we are part of the EU, you can do that.

Chair

You do not just pop in to buy a boiler of this sort.

Richard Rodgers

It can be sourced.

Chair

This is not nipping down to Wickes to get a piece of timber or a pot of paint. This is a major investment and you can expect people to shop around. You mentioned grant; well, I happen to know that grant operates throughout the rest of the United Kingdom. I find it very challenging to suppose that there is a price differential for capital items of the sort you have described.

Noel Lavery

Going back to your point, we will look at this. If we have material concerns, we will raise them with BEIS and look at the need for a challenge, if appropriate.

Chair

I think it would be appropriate.

Ian Paisley

Thank you, Noel, for saying that. I think it is absolutely essential, because I know it is not the intention, but anyone looking at this will think that a great deal of energy has been expended by the experts today in defending the Republic of Ireland scheme. I am sure it is not what you have tried to convey, but that is what has been conveyed: “They are the Republic of Ireland; do not touch them”. A farmer a mile away from Northern Ireland is going to get 19 grand a year in his hip pocket, compared to a Northern Ireland farmer doing this scheme getting £2,000 a year. Richard has already indicated through his evidence that, even if that calculation is wrong, they are still going to get double whatever is happening in Northern Ireland. It is a nonsense that you can just buy one of these boilers anywhere. They are made by about two companies, as I understand it. They are bespoke and at a fixed price. You have already identified all the differences. There is a noticeable capital cost difference in the Republic of Ireland. The operating cost is notably different in the Republic of Ireland, and then there is fuel cost, by as much as a penny, maybe more. Then you identified that there might even be a tax differential. You do not even take into consideration tax from the farmers in Northern Ireland in your assessments, but you are throwing in that the Republic of Ireland might have a tax issue. I will let you answer in a minute. All those things suggest to me, Noel, that you should be in contact with BEIS immediately, saying, “Put the EU on notice that we want the Republic of Ireland scheme put on notice that we are challenging it. We are challenging it from day 1. We are not waiting for four or five years to see if it wrecks and decimates the poultry industry in Northern Ireland. We are going to flag up now that this is detrimental”. I welcome that you have indicated that you are going to look at that, but I hope you really do and that one of the outcomes of this might be that we challenge a scheme that will dis‑incentivise production in Northern Ireland.

Noel Lavery

We have said we will look at it. I said that before. Can I reference your point on tax? Richard’s point was on carbon tax. I saw a reference in evidence elsewhere about tariffs being taxable. From my experience of Government and revenue incentives, they are all taxable. The expenses are tax deductible. That is just my experience. I saw that in evidence elsewhere and that is the way such schemes work.

Ian Paisley

We do not have much time. Let me go into the 2019 legislation that was introduced. There was a consultation process on that scheme. Why did you not just introduce the GB scheme into Northern Ireland? I am sure that would have solved the problem.

Noel Lavery

We did not have that option.

Ian Paisley

Yes, you did. Let me take you to the paper that you submitted. You said in that that part of the consultation would be, No. 7, “Adopt the current GB scheme tariff structure”. No. 8 is, “Adopt the tariff structure for entrants to the GB scheme in autumn 2015”, so you did have that option. Some 700 people who you consulted—remember, fewer than 1,000 came back to you—said they would like that scheme. Why did you not just introduce it?

Jamie Warnock

I am sorry; those options were part of the consultation process.

Ian Paisley

They were part of it.

Noel Lavery

Yes, they were part of the consultation.

Jamie Warnock

They were certainly there as an option. Part of the consultation process was asking for not just views on what they would like to see, but evidence to say why it would be justified. I am sorry; I do not have the detail in front of me now, but my understanding is that there was not support for going for the GB scheme and the vast majority of correspondents favoured reverting to the 2012 tariffs.

Ian Paisley

You could see why everyone would want to go to the original position, which is backed up by a legal case as well. Some 1,040 wanted that, but 700 wanted to go to the GB scheme. You had a perfectly good option to introduce the GB scheme. There was nothing to prevent you introducing the GB scheme, was there?

Noel Lavery

There were a number of options for us. When we looked at it, you can see we pre‑notified the 19% IRR that was our preference. That was to seek the best return. We ended up with a 12% rate of return, which is the same as the GB scheme. Does anybody else want to come in on that?

Ian Paisley

Just before that, all of those were cost effective, Noel. You could have introduced the GB scheme. It would not have affected your budget. It would have been within budget. Is that not right?

Noel Lavery

Yes, it would have been affordable.

Ian Paisley

It would have been within budget. You could have done it and complied with all the regulations.

Noel Lavery

A 12% rate of return was required on the Ricardo-based tariff. Therefore, that is where we had to go.

Ian Paisley

We can see how you can fix the 12%. The 12% can be fixed depending on how you calculate your capital costs, operating costs and fuel costs. That is how member states do it.

Noel Lavery

I am not sure what you are saying to me.

Ian Paisley

It is 12% of something, is it not? If you fix the base of what something is, which the Republic of Ireland has done, you can comply with the 12%.

Noel Lavery

Our 12% is based on actual costs. It is based on actual costs. Jamie, did you want to come in?

Jamie Warnock

To quickly return to the response to the consultation, six people out of the 258 who responded favoured the first GB tariff and one person favoured the second. Those are the figures; that is what we have published. We had 258 responses to the consultation, of which 174 people favoured the 2012 tariffs.

Ian Paisley

You are not disputing that the GB system was affordable and could have been done within the Northern Ireland budget.

Jamie Warnock

I am not disputing that it was affordable within the anticipated AME budget.

Ian Paisley

The question is why you did not introduce that, then.

Jamie Warnock

The rate of return delivered by those tariffs, based on the actual evidence we have of the costs for NI participants, would have delivered much higher than a 12% rate of return, and therefore would not have been allowed under state aid.

Ian Paisley

That is because, you say, the underpinning tariffs were significantly different.

Noel Lavery

You made the point about the costs. You have the GB tariffs, but a different marketplace with a different capital cost, a different biomass cost and different counterfactual costs. Therefore, I could not make this work at a 12% rate of return. That is it.

Richard Rodgers

Some 75% of the boilers in the GB scheme came on before the end of 2014, when the capital costs of the technology were higher. The majority of the participants in the Northern Ireland scheme came on in 2015. In fact, there were 980 between September and November of 2015. There is an NAO report that looks at the cost of biomass technology between 2010 and 2016, which shows there was a 46% reduction in the capital cost of biomass boilers between 2010 and 2016. The difficulty we have with moving to the GB tariff, which has reduced 13 times over its lifetime, was not that the two options did not meet the budget, but that they deliver too high a rate of return.

Ian Paisley

How do you explain using different counterfactuals? In 2012, you used kerosene. In 2019, you used LPG. In 2015 and 2017, you used different counterfactuals. Why do you keep using a different measuring stick?

Richard Rodgers

To be clear, the right counterfactual for Northern Ireland in terms of numbers is kerosene, because 67% of premises in Northern Ireland use kerosene. There is a quirk in the Northern Ireland scheme, because around 800 participants out of the 2,000 turned out to be poultry farmers, who are typically Moy Park growers. They prefer LPG as an alternative.

Ian Paisley

Why do you keep using a different counterfactual? You have used three different counterfactuals.

Richard Rodgers

By using kerosene as the counterfactual, we are giving the benefit to the participants.

Ian Paisley

You are in 2019, but you did not use that as your basis in 2012.

Richard Rodgers

We used kerosene as the counterfactual all the time.

Ian Paisley

According to this you have used LPG as the counterfactual.

Richard Rodgers

LPG is a minority fuel in Northern Ireland. It turned out through experience that 800 people on the scheme had LPG as a backup, because it is a requirement of their industry.

Ian Paisley

You are saying you have been consistent in the measuring stick you have used the whole time.

Richard Rodgers

Yes, kerosene, and what makes us different from GB is that, in GB, 80% of the population has access to natural gas. It is normal for schemes like this that they would use natural gas as the counterfactual.

Ian Paisley

If people go back to fossil fuels, have you done a calculation of how much fossil fuel will be burnt in Northern Ireland?

Richard Rodgers

If people go back to fossil fuels, as I said earlier—and it is important to get the message out—they would be giving up in the order of £2,500 of fuel saving benefits. If they choose to go back, both kerosene and LPG produce different amounts of CO2. This is something we will continue to promote through the workshops we are having.

Ian Paisley

How many litres of that will be burnt in Northern Ireland, as opposed to biomass? You must have a calculation.

Richard Rodgers

At the moment, it is anecdotal about switching back.

Noel Lavery

We have had a number of people saying to us in meetings, “Oh, I am going to switch back”, or “I am not”, and people discussing among themselves. We have no evidence of that.

Ian Paisley

It has only been a month and a half since the legislation. I can understand the anecdotal aspect of it, but the indication and threat is that they are going to go back, because it is not efficient.

Noel Lavery

Mr Shannon made the point about the scheme being discredited.

Ian Paisley

Noel, you would do an assessment. You would do some sort of matrix to say, if they go back, how many litres of fossil fuel will be burnt in Northern Ireland as a result.

Noel Lavery

We would need evidence of who is going to go back. Let me finish this point. The key point here is looking at the policy objective of renewable heat. The danger, as Mr Shannon identified, is that people look at this and say, “I am done with this”. Our job is to continue to promote renewable heat. Biomass is the cheapest fuel. You have an incentive for another 15 years. We will get evidence, because people will come into or off the scheme, and we will be able to do that calculation. Can I make another point? In passing, Richard made the point about the GB tariff being reduced 13 times. There have been a lot of numbers in the media. As I read it—and forgive me because my glasses are over there, unfortunately, and I am of an age—following the 2016 revision, for a 99 kilowatt boiler in GB you will get £5,300 today. In Northern Ireland you get £2,200. There has been £17,000 and £2,000. It comes back to the higher capital costs in previous years. Like the RoI scheme, you have higher capital costs. For 199 kilowatt boilers you have £10,400 and £3,100.

Ian Paisley

That is well and good but, even with that, everyone else on these islands is getting at least double what Northern Ireland farmers are getting. That is the bottom line.

Noel Lavery

I am sorry; that is not correct.

Ian Paisley

You have just quoted five grand, and the scheme in Northern Ireland gives two grand. That is more than double.

Noel Lavery

That is the tariff. You need to look at the operating costs and what people paid for the boiler. We need to be very careful.

Ian Paisley

Are you genuinely saying today that your scheme is generous in 2019 and farmers should be counting their lucky stars?

Noel Lavery

No, that is not what I am saying.

Ian Paisley

What are you saying?

Noel Lavery

There has been a lot of talk about the competitiveness of the Northern Ireland industry.

Ian Paisley

We heard last week from people across the industry that they are now picking up how poultry production could move south. Do you know how many jobs are reliant on poultry production in Northern Ireland? That is a major threat to our industry and to our country.

Noel Lavery

It is important we emphasise, in relation to GB, what the competitive position in the market is. You have that differential of £3,000, and then the different prices of fuel and biomass. Do you want to come in on that?

Richard Rodgers

It is important to say to the Committee that the price of biomass in Northern Ireland is a penny less per kilowatt hour than in GB.

Ian Paisley

You said that to us earlier.

Richard Rodgers

The same is true of the kerosene market, and it is down to two things: additional transportation costs in GB and a more competitive market in Northern Ireland than in GB, so there is more margin in the GB market.

Ian Paisley

During your earlier comments—I cannot remember if it was Noel or Richard—you introduced wind turbines. What is the Department’s rate of return for wind turbines? Based on ROCs, it is a five‑year scheme.

Richard Rodgers

The Department does not have a rate of return on ROCs.

Ian Paisley

But there is a rate of return.

Richard Rodgers

The point is that ROCs is a different regime.

Ian Paisley

What is the rate of return, Richard? Do not avoid the question.

Richard Rodgers

The rate of return is different for every individual.

Ian Paisley

Richard, what is the rate of return? You know it is between 20% and 50%. Am I right?

Richard Rodgers

No.

Ian Paisley

What is it, then?

Richard Rodgers

To answer that question, the price for ROCs is determined by the marketplace each year. That is determined by an obligation set by BEIS on the electricity and gas suppliers in the UK, as a whole. The return for an individual wind turbine depends what you paid for the wind turbine. You may have bought a wind turbine that is brand new, but we have seen some second-hand wind turbines enter the market. The return for an individual wind turbine varies depending on the capital cost and the price that the generator can get in the market for the electricity it produces. In Northern Ireland, that depends on the price that comes through the single electricity market. The return over the lifetime of the wind turbine depends on those points.

Ian Paisley

Would you be surprised if it was more than 12%?

Richard Rodgers

I would not make a comment on it, because we do not know.

Noel Lavery

We do not know, Mr Paisley. Your implication is that it is a lot higher.

Ian Paisley

A wind turbine under 250 kilowatts gets four ROCs. In Northern Ireland, you have a two-to-five-year payback. That is between 20% and 50% of rate of return. Is that right, Richard?

Richard Rodgers

It depends on the cost of the wind turbine and what they get in the marketplace when they sell their electricity.

Noel Lavery

The average payback due to the overcompensation on this scheme was 1.9 years for a 99 kilowatt boiler and 3.6 for a 199 kilowatt boiler.

Ian Paisley

I understand that. Thank you.

Lady Hermon

Thank you very much indeed for giving your evidence. It is a very good team, if I may say so, and detailed responses with lots of pages. We will start at the top and make our way through. In your introduction, Mr Lavery, you explained that the driving force for the tariff reduction in 2017 was a “budgetary control measure”. We understand from the evidence you have given and we have understood from what the Secretary of State said when she took the legislation through that the driving force behind the cut in tariffs this year, 2019, was EU state aid rules. When did the EU state aid rules become the driving force for reducing the tariffs, if they were not relevant in 2017?

Noel Lavery

My view, having come into this, is that there is a long saga here.

Lady Hermon

We do not need the long saga.

Noel Lavery

I was not going to give you it; do not worry. As I said in my earlier evidence, in 2017 action was taken to bring the budget into control. That was the action taken. If you remember at the time, there was the issue of the £700 million overspend. That was the primary action at that time. That is why former Minister Hamilton said he would do a review of the whole scheme, because he knew they were taking action.

Lady Hermon

I am sorry to interrupt again. I am really struck by how much of the evidence is focused on state aid rules and the EU. It strikes me that, when the tariff was much more generous, it would seem logical that the EU state aid rules would have made it incompatible with EU legislation.

Noel Lavery

Yes.

Lady Hermon

Why was that not picked up at a much earlier stage?

Richard Rodgers

It is a really good question. The issue with the budget became apparent in 2015; it became clear because of the introduction of the 2015 tariff in November 2015. It immediately became clear that the budget was significantly overspent, which is why the scheme was suspended in February 2016. Minister Hamilton, when he suspended the scheme, said that the Department would carry out a full independent external review of the detail of this. That progressed and the 2017 regulations were brought in as a cost control measure for the budget because, in that year, we were heading towards £30 million on its own, adverse to the available budget. The review was being carried out and, at that time, in setting the 2017 tariff to bring the budget back into line, we engaged with the Commission.

Lady Hermon

The Department engaged with the Commission. It was not the other way round. No one had made a complaint that the scheme was incompatible. It was the Department that notified the Commission, seeking to understand whether it was compatible with state aid rules. Is that the question that the Department asked the Commission?

Richard Rodgers

Yes, and when the Department engaged with the Commission in 2017, the Commission looked back at the 2012 approval and said, “You are right to notify us about the change in tariff. We will provide you with a one-year approval, subject to the external independent review of your tariffs”. In the event, because of things like the legal challenge in court, the JR and all that we have talked about, that work was not completed in one year. Therefore, the 2017 tariff was rolled forward for one year. That led us to the April 2019 Act, which was continued engagement with the Commission through 2017 and 2018, culminating in the process that led to the letter from the Commission on 25 January 2019.

Lady Hermon

Your interpretation of that letter is that, unless the tariff is reduced to 12%, the scheme must be closed.

Richard Rodgers

It is not as simple as that.

Lady Hermon

That is why I am asking, because Mr Lavery said earlier, in talking about the unusual factors in Northern Ireland, that there was no Assembly, so it had to be taken through Westminster. You also said, Mr Lavery, that you had taken the decision that there were only two options: close the scheme or reduce the tariffs to 12%. You took that decision.

Noel Lavery

Yes.

Lady Hermon

You were driven to that by the EU correspondence. Is that true or not?

Noel Lavery

Partly.

Lady Hermon

It is partly true and partly ambiguous.

Noel Lavery

That was one of the factors. Let me just try to clarify for you—my apologies. The 12% state aid has been a limitation. You will have seen in the November 2018 correspondence from the Commission that, at that stage, the Commission was suggesting that we pursue the overcompensation and seek a future tariff. That was the Commission’s position at that time.

Lady Hermon

That was a recommendation to the Department.

Noel Lavery

It is in the pack. That is where they were. We achieved better than that. From a value-for-money perspective in looking at state aid, there are only two options we came to, given we had 12%. Either you stop now at 12%—that is it—or you reduce the tariff to be equivalent to a 12% prospective return. You basically say that everybody has reached 12% and above, so we are stopping and closing the scheme. The key issue here is whether we could be state-aid compliant going forward or compliant with the original approval. It was not the Commission closing the scheme. My recommendation was to take the scheme forward at a prospective rate of return. There is a risk there; the Commission could still do an investigation into the scheme, because of the overcompensation of the past, or close the scheme, saying, “We are way over 12% because of the overcompensation of the past. In fact, the average rate of return is 56%”. I was looking at the constraints the Commission would have on us. For closing the scheme, it would have been in relation to the total return to date and the risk of further Commission action. We have taken the view that we will not deal with the overcompensation of the past, but we will take 12% going forward, as a fair and balanced return. I need to be careful about what I say in terms of prejudicing any case but, in closing the scheme, that presents a significant legal risk to the Department as well.

Lady Hermon

Yes, I think I agree with that. I was struck that, when the Secretary of State took the legislation through the House of Commons, she said on 6 March, “The subsidies that were being paid would breach state aid rules and the scheme would be illegal and would be closed”. Is that an accurate summary of the situation?

Noel Lavery

Can you just quote what she said again? I am sorry.

Lady Hermon

She said, “The subsidies that were being paid would breach state aid rules and the scheme would be illegal and would be closed”.

Noel Lavery

To pay in excess of the 12%, we would not be consistent with the 12% state aid 2012 approval. To do so I would be authorising illegal aid.

Lady Hermon

You would be, yes.

Noel Lavery

That is the problem and that is my interpretation of what she is saying. You were there.

Jamie Warnock

The context of that statement was if we brought forward higher tariffs past 31 March 2019. There was some debate in the House and there were amendments tabled that would have continued the 2017 and 2018 tariffs. In that context, the answer is that that would be illegal aid. In my estimation, and I hope that is shared by my colleagues, given the engagement we have had with the Commission—we have presented Ricardo and been very transparent about the flaws in the scheme to date—if we had pursued higher tariffs from 1 April, I believe it would have prompted the Commission to come in fairly swiftly, in launching a formal investigation.

Lady Hermon

You say you believe that, but is there a document or a piece of evidence you can present to the Committee that shows that the Commission has indicated that, unless the tariff is reduced to 12% to be compatible with state aid rules, the scheme has to be closed?

Noel Lavery

No, in terms of the scheme being closed. I refer you back to the recovery of the overcompensation. The Commission was very, very, very clear in the meeting we had in December.

Lady Hermon

Do we have any minutes of that meeting when it was very, very, very clear—three “verys”?

Noel Lavery

Forgive me for my Northern Ireland paraphrasing, but this is how I would characterise it: “Which part of 12% do you not understand?”, eventually, when they had said that to me for the 15th time. The Commission was very clear.

Lady Hermon

It was very clear on 12%.

Noel Lavery

It was very clear on 12%. Having said about the overcompensation, our argument was that we were not going for the overcompensation of the past—again, I am getting into legal issues—and were therefore seeking the best rate possible. The Commission kept referring to the original 12% in the 2012 letter. That is where we were. From an accounting officer point of view, you cannot countenance illegal aid or acting illegally. That is where you are left. Was keeping the scheme open at a prospective 12% rate of return a better option than stopping now because we are actually at 56%? That is a lot more than 12%. In one interpretation, we are at 12% going forward, as opposed to 12% for the whole of the scheme. If we stop today, the rate of return on this scheme is 56%. That is a lot more than 12%.

Lady Hermon

It certainly is.

Noel Lavery

I just go back to the consultation response Mr Paisley referred to. The vast majority of participants wanted the scheme to continue, so that seemed consistent.

Lady Hermon

As you will know from the evidence that we have taken, because you are very assiduous in looking at it, the representative from Moy Park described the reduction of the tariff—and I hope I am quoting him correctly—as “devastating”. He said it was even more devastating for around 600 businesses and families that had installed these boilers. Do you accept that the reduction to the 12% tariff is devastating, particularly for those poultry producers?

Noel Lavery

I am Permanent Secretary of the Department for the Economy. I am concerned about the impact on businesses and I have had representations. Yes, I am concerned.

Lady Hermon

The question was if you accept it as devastating. That was the evidence we have taken from the representative from Moy Park.

Noel Lavery

As I have referenced, we need to get evidence. I know you have been collecting the evidence. I have to take you back to the fact that the payback here is 2.3 years. There has been overcompensation in the past. As an accounting officer, there are only certain flexibilities within which I operate. One thing that concerns me in relation to that takes you back to the GB/RoI comparisons and some of the numbers that have been bandied about. We need to concentrate on the real numbers and real competitiveness of the Northern Ireland operation, because we do not want to be talking Northern Ireland down, as has been some of the evidence here today. I recognise that and people have written to me. The RHI scheme itself, offering a 56% return and a 2.3-year payback, has provided very significant returns, which is why we got into trouble. The issue before us today is that the tariffs have come down and people have borrowed. Mr Shannon said they used it is a basis to borrow for broader business expansion. That is very difficult. I understand that.

Lady Hermon

You have said a number of times, Mr Lavery, that we need to find the evidence. When asked about hardship cases, your reply was that the Department is “committed to set up a unit” with an independent chair, and you quoted Lord Duncan in the House of Lords. You are committed. That hints to the fact that we do not have a unit already.

Noel Lavery

No, we do not.

Lady Hermon

Are you waiting for the Select Committee? We have also taken evidence that officials had indicated that the Department was waiting for the Select Committee to make its report, before you set up a unit. Is that correct or not?

Noel Lavery

I know the Committee is looking at terms of reference for the voluntary buyout. Am I right?

Chair

We are looking at a decision for a hardship scheme from the buyout, yes.

Noel Lavery

Just on a hardship scheme, we have committed a unit that will look at this. That is the commitment we have made.

Lady Hermon

You have committed to set up a unit.

Noel Lavery

We have committed to set up a unit.

Lady Hermon

How do you show the commitment? Have you written to Lord Duncan and said, “Thanks very much for suggesting that”?

Noel Lavery

We are in discussion with colleagues in the NIO on this. We have committed to set up a unit.

Lady Hermon

Have you committed in writing to the Northern Ireland Office to set up a unit?

Noel Lavery

No, Lord Duncan said we would in the House and we will. That is on the record today. We have said we will do that. It will be under an independent chair. I think I am quoting Lord Duncan correctly—Jamie was there—that people would have their cases heard.

Lady Hermon

Individual cases of hardship?

Noel Lavery

The important issue here is to provide the evidence, because we need to be clear. What is the evidence and how does it relate to the RHI scheme? What advice can we give and what mechanisms exist within Government to see if we could or should support individual cases? We need to look at the evidence.

Lady Hermon

In theory, you have a commitment to setting up this hardship unit.

Noel Lavery

We have committed to do it.

Lady Hermon

You have committed to do it. That is the first sentence and then the second sentence begins, “But we have to have the evidence of hardship”. There is a commitment to set up the unit, but you have not done so yet. Have we considered who is going to chair it? It has to be an independent chair. Have we made any progress in establishing an independent chair?

Jamie Warnock

Yes, we have. We appreciate as well that, given this issue and the complexities around it, we are talking about a fairly niche skillset for an independent chair: experience of energy schemes, financial accounts, the nature of financial hardship and what it might be. As opposed to just an independent chair, we are currently thinking about an independent panel, so we can have the right mix of people on there, with the right skills to assess this. I have had some discussions with colleagues and the Commissioner for Public Appointments in Northern Ireland to see how we go about this and make sure we do about this in the right way. I also talked to Department of Finance colleagues in regards to any expenditure or procurement of expertise. We are working through the process to get this thing up and running, as quickly as possible.

Lady Hermon

That is what I was going to say: “as quickly as possible”. What is the timescale for having this? We have taken evidence from farmers who have made it clear that they have absolutely no confidence whatsoever—their words, not mine—in the Government or any future Government scheme. From listening to those who are at the sharp end of this and feel under huge pressure financially, it is a huge worry for families and family-run businesses. I want to inject the seriousness with which some families feel this is absolutely devastating. We are now sitting in May. Lord Duncan’s comments were made in the House of Lords at the beginning of March, when the legislation was taken through, but we are only thinking of who the panel and chair are going to be. We have made no progress in actually setting up this hardship team.

Noel Lavery

The panel will meet before the end of the summer.

Lady Hermon

When does the summer end?

Noel Lavery

It is certainly not today.

Lady Hermon

No, exactly, but before the end of the summer. Is there any sense of urgency?

Noel Lavery

Yes, there is.

Lady Hermon

I think I am looking for a bit of compassion.

Noel Lavery

I said to you I was concerned, absolutely concerned.

Lady Hermon

I had asked you about the evidence. It was described as being “devastating” for the families and you said you were concerned. There has to be some indication of a sense of urgency about this, because people, their businesses, families and employees are being impacted, as of 1 April.

Noel Lavery

I absolutely understand that. That is why I met the banks and Moy Park. I was encouraged in the meeting with the banks. You gave the evidence; I will say it again, in terms of people extending loans. Let us remember that we have a 20-year tariff here with another 15 years to run guaranteed. People will have taken short-term loans. We do not want to make the same mistakes of the past.

Lady Hermon

That would be helpful.

Noel Lavery

You take my point.

Lady Hermon

Yes.

Noel Lavery

I have to say to you, in terms of what we have, we can offer advice. We have a voluntary buyout. There is some flexibility about what the voluntary buyout looks like. I am interested in comments people have. We need to look at anything else the Government could or should do. It has to be legally achievable, value for money and state-aid compliant.

Lady Hermon

We have taken all of those points. I just want to know what the Department is doing to help those who are in hardship.

Noel Lavery

The bottom line is that we are scoping all the options in looking at this. I have to say to you, we have certain parameters within which we have to work. We have certain schemes that are already in place. Chair, I picked up that you referenced “scheme” there. Any new scheme would require a Minister.

Lady Hermon

Yes, but setting up a unit does not. Forgive me; setting up this unit to deal with hardship does not require a ministerial decision. You have already made a commitment today, but you indicated to the Committee that the panel will be set up by the end of this summer, and I asked when that will be. That is far too late.

Noel Lavery

We need to collect evidence. We will go through a formal process to collect the evidence.

Lady Hermon

Would you like all Committee members who have received them, providing the individuals comply with data protection and all the rest of it, to share with you the very angry and upsetting emails from constituents who are giving their individual accounts of the real hardship they are feeling, on account of this reduction of tariff? I would love to. I want to know what I can do to help those people.

Noel Lavery

I understand that. I have received similar correspondence, as you and different members of the Committee have.