Northern Ireland Affairs Committee 

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

Wednesday 8 May 2019

Ordered by the House of Commons to be published on 8 May 2019

Watch the meeting 

Members present: Dr Andrew Murrison (Chair); Mr Gregory Campbell; Maria Caulfield; Lady Hermon; Kate Hoey; Nigel Mills; Ian Paisley; Jim Shannon; Sir Desmond Swayne.

Questions 346 - 500

Witnesses

I: Noel Lavery, Permanent Secretary, Department for the Economy; Richard Rodgers, Head of Energy, Department for the Economy; Jamie Warnock, Renewable Heat Incentive Task Force, Department for the Economy.

Examination of Witnesses

Witnesses: Noel Lavery, Richard Rodgers and Jamie Warnock.

Q346       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.

Q347       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.

Q348       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.

Q349       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.

Q350       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.

Q351       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.

Q352       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.

Q353       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%.

Q354       Chair: The 19% was in 2017, was it not?

Noel Lavery: Yes.

Q355       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.

Q356       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.

Q357       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.

Q358       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.

Q359       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—

Q360       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.

Q361       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.

Q362       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.

Q363       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.

Q364       Lady Hermon: Would the Department respond to that?

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

Q365       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%.

Q366       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.

Q367       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.

Q368       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.

Q369       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.

Q370       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.

Q371       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.

Q372       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.

Q373       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.

Q374       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.

Q375       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.

Q376       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.

Q377       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.

Q378       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.

Q379       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.

Q380       Kate Hoey: You have no idea when the inquiry is coming out.

Noel Lavery: That is a matter for Sir Patrick.

Q381       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.

Q382       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.

Q383       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.

Q384       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—

Q385       Kate Hoey: In the Northern Ireland Office?

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

Q386       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.

Q387       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.

Q388       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.

Q389       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.

Q390       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.

Q391       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.

Q392       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.

Q393       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.

Q394       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.

Q395       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.

Q396       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.

Q397       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.

Q398       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.

Q399       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.

Q400       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.

Q401       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.

Q402       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.

Q403       Chair: You do not just pop in to buy a boiler of this sort.

Richard Rodgers: It can be sourced.

Q404       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.

Q405       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.

Q406       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.

Q407       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.

Q408       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?

Q409       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.

Q410       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.

Q411       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.

Q412       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.

Q413       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.

Q414       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.

Q415       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.

Q416       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.

Q417       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.

Q418       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.

Q419       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.

Q420       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.

Q421       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.

Q422       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.

Q423       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.

Q424       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.

Q425       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.

Q426       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.

Q427       Ian Paisley: What are you saying?

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

Q428       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.

Q429       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.

Q430       Ian Paisley: But there is a rate of return.

Richard Rodgers: The point is that ROCs is a different regime. 

Q431       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.

Q432       Ian Paisley: Richard, what is the rate of return? You know it is between 20% and 50%. Am I right?

Richard Rodgers: No.

Q433       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.

Q434       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.

Q435       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.

Q436       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.

Q437       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.

Q438       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.

Q439       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.

Q440       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.

Q441       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.

Q442       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.

Q443       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.

Q444       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.

Q445       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.

Q446       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.

Q447       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.

Q448       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.

Q449       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.

Q450       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. 

Q451       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.

Q452       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.

Q453       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.

Q454       Lady Hermon: In theory, you have a commitment to setting up this hardship unit.

Noel Lavery: We have committed to do it.

Q455       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.

Q456       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.

Q457       Lady Hermon: When does the summer end?

Noel Lavery: It is certainly not today.

Q458       Lady Hermon: No, exactly, but before the end of the summer. Is there any sense of urgency?

Noel Lavery: Yes, there is.

Q459       Lady Hermon: I think I am looking for a bit of compassion.

Noel Lavery: I said to you I was concerned, absolutely concerned.

Q460       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.

Q461       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.

Q462       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.

Q463       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.

Q464       Lady Hermon: When we send them with you, with the consent of those who want to share their data and their personal accounts, what becomes of them? They go into the Department. We are sitting now at the beginning of May. Those people will have a bit of advice between now and the panel for hardship cases sitting before the end of the summer. Is that it?

Noel Lavery: We need to determine what we need from you as evidence and make it consistent. We will do a short, focused consultation —I am going to use the word, but I do not mean a formal consultation—to gather the issues and tell you what we need from you as evidence. That is the next step.

Q465       Lady Hermon: What is your advice to Committee members, who have these emails from those who are directly impacted? Do we send them to the Department, where they are going to sit on a shelf until this hardship unit is set up?

Noel Lavery: The Department will be writing out to participants in the scheme with the next step of the evidence-gathering process. We will do that in the next few weeks. You can say that.

Q466       Lady Hermon: Would you give a sense of urgency to that and kindly share with the Committee copies of the correspondence that you are sending out?

Noel Lavery: Yes. 

Q467       Lady Hermon: Thank you. Can I move finally to the role of Ofgem? We have heard mention of Ricardo independent experts, an international company. Originally, under the European Commission approval for the scheme, the assumption was that Ofgem would monitor the scheme. Was there any monitoring of the original scheme by Ofgem at all?

Noel Lavery: The role of Ofgem and what has happened in the past is a matter for the inquiry. I just caution my colleagues about what we are going to say, because we can only talk about where we are.

Q468       Lady Hermon: The inquiry is closed.

Richard Rodgers: The inquiry will report on the role of Ofgem and how we got here.  

Q469       Lady Hermon: Tell us about Ricardo.

Richard Rodgers: Starting with Ofgem, in November 2018, we signed new arrangements with Ofgem, which govern the way that it will administer the scheme for us, over the next 15 years.

Q470       Lady Hermon: Right, so it is still involved with the scheme.

Richard Rodgers: It is. Under the Sustainable Energy Act 2003, it has delegated authority to administer the scheme on behalf of the Department. In the Department, we have set up a significant amount of resource, and people have come in to take ownership of the work and manage Ofgem, as one of the aspects, in its delivery and performance on its delivery of the scheme.

Q471       Lady Hermon: Excellent, so how many full-time Ofgem staff are based in Northern Ireland?

Richard Rodgers: None, because Ofgem is based in either Canary Wharf or Glasgow.

Lady Hermon: The Department still relies upon Ofgem.

Richard Rodgers: Managing it is hard. While there were some issues around the inspection regime at one point, in terms of gathering meter reads and making payments, it is not broken. It works very well. People get paid on time and their meter readings get done. It is good at that sort of thing.

Q472       Lady Hermon: Who physically does the meter readings in Northern Ireland, if Ofgem does not?

Richard Rodgers: Meter readings are provided by the participants, and are scrutinised and checked. Subsequently, the payments are made. We provide the money to Ofgem to make the payments.

Q473       Lady Hermon: Do any Ofgem staff ever actually visit?

Richard Rodgers: Yes.

Q474       Lady Hermon: Is that a spot inspection?

Richard Rodgers: Something that I personally instigated back in July 2017 when I arrived was to rebuild the relationship with Ofgem. For example, the Department sits on the governing board of this part of Ofgem, E-Serve, which looks at this scheme. We have significant two-way communication relating to the governance of both the RHI and NIRO, which will run for the best part of another 15 years as well.

Q475       Lady Hermon: Are you happy and content with this new arrangement with Ofgem? Do you feel that you have confidence in the supervisory and monitoring role?

Richard Rodgers: Yes, there have been significant changes, for the better.

Q476       Lady Hermon: The Department is confident that the processes and procedures are in place, and we have eliminated any possibility of fraud in this scheme.

Richard Rodgers: Now you get to individual levels, and schemes of this nature are always at risk of individual cases of fraud, but any individual cases are explored at the detailed level. That is carried out by Ofgem, with the Department providing governance. Ultimately, fraud cases will be referred to the authorities if there is a case to answer. It becomes a criminal matter then.

Noel Lavery: Is it worthwhile giving Lady Hermon an assurance on our process in relation to fraud and the issue of over‑generation of heat?

Richard Rodgers: There are two aspects to this. Whistleblowing and suspected fraud are dealt with by the fraud unit in Ofgem. That ultimately is a matter that could end up in criminal proceedings. On the softer side is the issue of the potential breach of the regulation 34(p) that says you should not generate heat for the purposes of generating income from incentive payments. As part of our inspections and compliance regime, we have taken more ownership inside the Department over the past couple of years. We are doing the 100% inspections that Minister Hamilton asked for.

Q477       Lady Hermon: The Department itself carries out physical inspections.

Richard Rodgers: Yes. As of the end of next month, under the new regime, we will have inspected 250 sites, which amounts to around 750 boiler installations. The pre‑work is done by the Department. We write out to the participants and ask for information—this is the evidence I talked about earlier—such as capital costs, fuel costs and so on. We then do our analysis in the Department and provide an inspection pack. That inspection has now become a technical inspection, which is done by people we have procured locally, a local technical inspector. Once the inspection is done, it is looked at by our resources in the Department and issues of non-compliance are identified.

Q478       Lady Hermon: Such as?

Richard Rodgers: They might not have the planning permission or building regulations required. They might not meet water regulations or the meter might not be installed properly. Most important is the overproduction of heat. They are provided as individual compliance cases to Ofgem to administer the compliance. We monitor that. It is an active process now.

Q479       Lady Hermon: Is that new?

Richard Rodgers: Yes, that is new. We have a senior civil servant in the task force team, who manages that on a day‑by‑day basis. They have weekly calls with Ofgem and monthly service board meetings. All that is a significant improvement from where we were in our management of the service provider, which is Ofgem.

Q480       Lady Hermon: That is going to continue for the life of the scheme.

Richard Rodgers: Yes, we will have a two-way flow between Glasgow and Belfast, and Belfast and Canary Wharf.

Lady Hermon: That is very interesting. Thank you.

Q481       Chair: Can I press you on this hardship scheme? We have been expecting to make some recommendations on it following Lord Duncan’s comments in the House of Lords. I am a little disappointed we are not further along this particular road, if I am honest. I am wondering about the criteria for hardship. By now, I would have expected the Department to have established criteria by which the panel will operate. Are you expecting the panel to design those criteria before assessing people against them?

Noel Lavery: There are a couple of things. First, the Department needs to design the criteria in draft, present them to the panel and take the panel’s views. That is my view, and that will be our approach. Can I take you back? It is a unit to look at hardship. You again referenced “scheme”. I am not sitting here with a scheme. I am sitting here with a unit to look at individual cases to see what options there are for those individual cases. We need to look at the support that is already available within Government and if it is applicable. I carefully used the phrase as to what Government could or should do for individual cases. Any new scheme would be a matter for a Minister. That is my position.

Q482       Chair: A Minister can mean in Stormont—I hope so—but also a Minister in Westminster. You should not be retarding progress simply because of the absence of a Minister. That would be wrong.

Noel Lavery: I used a phrase and, again, I used it carefully. We need to look at what is legally viable and operably reasonable within the barriers of state aid and value for money. Those are the criteria by which we look at all these issues.

Chair: Sir Desmond has a burning question.

Q483       Sir Desmond Swayne: In exactly those terms, having defined those criteria, surely you have something in mind that fits or does not fit those criteria. The difficulty you will have and my fear is that, by merely opening up the possibility of a scheme or, indeed, a group to look at it, to some extent you are holding out a false hope. Whatever hardship they are experiencing, if it arises from not getting the money they would otherwise have got had the scheme complied with the criteria for state aid, you cannot give the money to them without breaching the state aid rules.

Noel Lavery: There are state aid limitations; you are absolutely right. Again, we need to be careful about matters before the courts and previous commitments by Government. I do just need to be careful. We need to look at the terms of the voluntary buyout. Jamie has already referenced that almost half the participants could, in our view, end up with a net cash payment from the voluntary buyout. Is that a viable option? If you are coming forward, Sir Desmond, and saying, “I am concerned about my position. I have borrowed against this and had significant compensation”, maybe the best answer for you is the voluntary buyout. It is for us to proactively look at what flexibilities we have.

I worry about your comment about false expectation. We committed to have a unit look at this. That is the commitment we have made and what we will deliver. I was just tempering your point, Chair, about a scheme, as if it was sitting there readily available.

Q484       Chair: I was not suggesting that at all. My comments about criteria implied that there was no scheme. I share Sir Desmond’s concern that, in setting up a scheme or panel—it is not a criticism of you—we are suggesting to operators that they may be in the frame for some money. State aid rules suggest, and we took evidence on this yesterday from George Peretz QC, that that is not achievable.

Noel Lavery: That would be in terms of new aid, yes.

Q485       Chair: Can I suggest a case in which a poultry producer has invested in RHI using the copper-bottomed guarantee it thought Government were giving for this? He has based his future decisions on the fact, as he saw it, of a guaranteed rate of return, copper-bottomed because Government have signed it off, only to find that that rug has been pulled from under him. On several occasions during this evidence session, you have suggested or implied—you may wish to correct it—that these producers should be grateful because their rate of return was very high, as if that made it okay.

It would do, except business decisions are not made on that basis. They are made on the basis of rates of return that could reasonably have been assumed, going forward. That assumption has been blown out of the water. I would anticipate those cases qualifying as hardship cases, because those businesses will potentially go to the wall, will they not? Given what we have heard before and what I think you are saying, it would be wrong to suggest to those people that they could be in for a cash sum to offset the hardship that they have sustained. Would that be accurate?

Noel Lavery: There are a number of issues I will pick up with you. As of today, I am not in a position to provide additional finance. That is exactly where we are today. We are scoping all the issues here. I have to say that you used the word “grateful”, Chair. That was not a phrase that I meant or how I meant to come across. I was just making the point that there has been significant compensation in the past.

The purpose of meeting with the banks was to encourage them to be flexible with cases such as you have described, in the fact that there is a guaranteed income out there. This is a viable business. I would have thought that banks would want to continue support it, and I am happy to meet the banks and producers again. It may be or it may not be that, in the case you are talking about, a voluntary buyout makes sense. Are they using the fuel and the boiler well? Can we help them reduce their costs?

I go back to whether Government could or should. You raise an important principle, if I can articulate it properly, that the Government have promised X in pound terms, and X is now a lot lower. It is probably a quarter of X. Do Government then have an obligation to meet that? Is that a fair articulation? That is also a matter before the courts. We are looking at what we can do, within our ambit, to support businesses. That is the right thing for us to do. We will scope all the available options for us; I can give you that assurance. My colleague wants to come in.

Richard Rodgers: We also met the chief executive of Moy Park and the gentleman who gave evidence last week. There has been evidence provided to the inquiry and Committee by Moy Park. Actually, the poultry industry is in a unique part of this; it is 800 out of the 2,000 and there are wider issues, such as the contractual relationship with Moy Park. The loan may have been raised to invest in the wider business, but that is a matter between the farmer and Moy Park. Moy Park makes payments, for example for new poultry houses, over a 10‑year period.

Ultimately, the bigger picture says that the plan for growth that Moy Park provided in evidence, which it started back in 2014-15, was about getting to 5 million poultry a week. Part of that was growing the base in Northern Ireland and that is what happened. Ultimately, it is in the interests of Northern Ireland, the Department for the Economy and Moy Park that that base is sustainable. It is sustainable if the price for chicken in the market is available to manage costs. We know that, at the end of the day, the only positive out of this is that the people who have the boilers now have the lowest-cost fuel in the market. As Noel said, part of this process of looking at individual cases is to say what we can do to make sure that they have all the facts, are getting support in how to use the system properly and that it plays through to the supply contract they have with their client.

Q486       Mr Campbell: To come back to an answer you gave to an earlier question, Mr Lavery, you talked about the overspend on the original scheme and used a figure of £700 million. We have all seen a range of figures, so it is difficult to be precise, but you used the term “overspend” as opposed to “potential overspend” over the lifetime of the scheme. Which would be more accurate?

Noel Lavery: At that stage, and again you are taking me back, the forecast overspend was £700 million. Jamie will keep me right, but that figure was debated in court.

Jamie Warnock: This was in the challenge against the 2017 regulations on this matter as to what the impact would be, if we had not acted on the 2012 tariffs. The Department put forward the £700 million estimate and the Department was successful in defending that challenge. The judge found that the £700 million figure was a reasonable assumption.

Q487       Mr Campbell: I understand that, but that is not my concern. My concern, and you may have forgotten, is that one or two commentators confused the issue in a blatant way, indicating that the overspend had actually occurred rather than potentially would occur. It would have been a potential overspend, had the scheme run unchecked for its entire lifetime. Is that not right?

Noel Lavery: The actual overspend, due to the actions that have been taken, is £33.8 million.

Q488       Mr Campbell: That is the point I wanted to make because, at the time, there was inflammatory use of language—not to use a pun, in the grand scheme of things—by one or two commentators who indicated that this overspend had already occurred. Some of us had to correct them. I am glad you have again corrected them today.

On the issue of potential hardship, all of us have heard from a number of poultry farmers and have asked them for permission. I am not going to elaborate, but will keep it succinct and give you two examples. These go back to two months ago, when the legislation was going through the House of Commons. “If you want to use this, please feel free, Mr Campbell. We borrowed £300,000 to install biomass boilers and equipment into our broiler houses. The bank has made us pay back over a period of five years. If this legislation comes in, we cannot possibly pay off this debt”.

A separate caller from a different part of Northern Ireland said, “I have been and am currently trying to sell assets to make my payments”. Those are payments for the loan. This was written on 4 March this year. “If the new tariff is introduced, I will not”, in capital letters, “be able to make my monthly payments. My income will be down”; then he specifies an amount of money. “This would make my business unprofitable and would enforce bankruptcy”. Those are two representatives. I am sure we have other similar emails. Is that the type of case study that the panel will investigate?

Noel Lavery: Clearly, it is. That is what we are looking for in our call for evidence. Somebody investing £300,000—the expert on my left will keep me right—will have eight boilers. That is a very significant expansion, I have to say, on the basis of this scheme, but the call for evidence will look at these issues. It causes me significant concern. As I have said, that is the process we will go through.

Q489       Mr Campbell: I have one final question, Chairman. The public mood has been very significantly coloured by the original scheme and we will leave that to the inquiry report. Looking at where to go now, in 2019, into 2020 and beyond, given the relatively small number of people, I assume, you will be able to identify in the category of being punitively open to the new tariff, as opposed to those who have benefited significantly from the original tariff, is it possible to establish the distinction between major beneficiaries and those who are suffering as a result of the new tariff?

Noel Lavery: I welcome the views of my colleagues. I think I understand your use of the word “punitive”. Those on the 199 kilowatt boilers came into the scheme later, and you had a witness here, who I met with, who made similar points. If we are talking about 199 kilowatt boilers, they have a 3.6-year payback. In whatever form of investment you are looking at, that is a good payback. My point is that this is all relative. We are happy to look at all cases, but this sort of scheme has a 12% rate of return. That is one of the reasons that we introduced a buyout, which would look at individual cases. I do not know if anybody else has any other comments on that.

Jamie Warnock: That is exactly right. In terms of looking at those cases of hardship or where people have had a greater or lesser impact than others, we are acutely aware of a small number of people who have done exceptionally well. Around 30 people on the scheme, who have had multiple installations and things, have had over £500,000 of incentive payments alone, before accounting for the fuel savings they have made. We have to be mindful of that, too.

Q490       Mr Campbell: The problem in the public mind is that they are confused that a small number of people have done very well out of it, while hundreds of others have done far from very well and are now suffering.

Noel Lavery: There are two things. I want to make sure I quote my numbers right. You are right, Jamie, that just below 30 have had that level of return. Some 80% of installations will get a return greater than 22%. Some 90% will get greater than 12%. These things are relative. Another thing I will say to you is that you implied abuse of the scheme. There are two issues here. There is the degree of overcompensation of the past and there is the overproduction of heat. Overproduction of heat is abuse of the scheme and a breach of the regulations. We were talking to Lady Hermon about that. The overproduction of heat is a different issue.

Q491       Lady Hermon: Briefly, two points have come up that I will just touch on. Presumably the Department, or if not the Department then the European Commission, has quantified how much the overcompensation was in the past. Do you have a figure?

Noel Lavery: It was going to be £700 million in terms of the budget. I do not keep that number in my head, because I tend to think in percentages. I will say to you that the scheme will end up giving a return of 59%, as opposed to 12%. That is the level of the rate of return.

Q492       Lady Hermon: I am interested because the option given by the European Commission, from your evidence earlier, was that it was keen that the overcompensation would be clawed back.

Jamie Warnock: I do not have an exact figure of the overcompensation.

Lady Hermon: The European Commission must have had some idea when it asked the Department to consider it.

Jamie Warnock: It may be easier to talk in terms of rates of return. On the original 2012 tariff, the internal rate of return being delivered was 100% per annum. The scheme did not really take off in Northern Ireland until 2015, as Richard said earlier. Those tariffs were in place in 2014, 2015, 2016 and 2017, untouched, until the first tariff changes in 2017 that extended to everyone.

Q493       Lady Hermon: What I am asking is whether you have a figure within the Department for the overcompensation that the European Commission would have wanted back.

Noel Lavery: We will write to the Committee with that, but yes.

Lady Hermon: The Department has that figure.

Noel Lavery: Yes, we have those numbers.

Q494       Lady Hermon: The other thing you have mentioned a number of times, and in response to my colleague Mr Campbell as well, is this voluntary buyout scheme. Yes, a voluntary buyout scheme was in the legislation that went through. You have placed considerable emphasis on repeating that. What would make that an attractive option?

Noel Lavery: There are a couple of things, and I will bring in my voluntary buyout expert in a second. Some people just want out of the scheme.

Q495       Lady Hermon: Is that because they are just fed up with it?

Noel Lavery: There is that. Mr Campbell referenced this earlier. If someone has borrowed and would prefer to have the cash now, as opposed to waiting for the future tariff, just to use it to help pay off some of their borrowings, that would be an attractive proposition. Do you want to talk more about that?

Jamie Warnock: It may be useful for members to set the genesis of the buyout and where it originated. All the analysis of figures from the scheme shows that, under the new tariffs, looking at lifetime return, 90% of participants will receive 12% or greater, all things being equal. The genesis of the buyout is the 10% that, for whatever reason—they are atypical users who paid over the odds for their boiler or they do not use it very often, or a number of other reasons—could be getting less than 12% under any tariff. The buyout aimed to put a safety net under those people. It goes to Mr Campbell’s point that people are impacted differently by tariffs, which, by their nature, can be crude in how they impact the population. The intention behind the buyout is an individually tailored one-off payment that would deliver you the equivalent of a 12% lifetime return, in your hands, in exchange for which you receive no tariff payments from that point on, so you exit the scheme.

Lady Hermon: You literally buy yourself out, at that point in time.

Jamie Warnock: Effectively.

Q496       Lady Hermon: How many applications have you had for this scheme? It has been in place now since 1 April.

Jamie Warnock: It has not, actually. The legislation grants a permissive power to the Department to run these buyout schemes. Through parliamentary passage, we were asked to defer bringing forward the fine detail of the buyout until after the Committee had carried out its inquiry.

Lady Hermon: So you do not have fine details of the buyout scheme.

Jamie Warnock: I can talk to the broad principle and idea behind it. I am not trying to put words in parliamentarians’ mouths.

Q497       Lady Hermon: That is interesting. Your interpretation of the passage of the legislation through the House is that this Committee is going to make suggestions about the buyout scheme. I thought we were focused on the hardship cases, in response to the many emails, which were upsetting to read.

Jamie Warnock: This is my interpretation. I think it will be backed up by Hansard and the record of what was said, particularly in the House of Lords: that there was frustration at the expedited passage of the Bill, and that this Committee’s inquiry would provide a window into further scrutiny. The buyout, because of the nature of the legislation, allows us some flexibility before we bring forward that fine detail, so we were asked not to bring it forward until we could see your findings and take account of any evidence.

Q498       Lady Hermon: I am looking at Mr Lavery to confirm. Having put the emphasis on having a Minister in the Department, is this a ministerial decision?

Noel Lavery: No.

Q499       Lady Hermon: After this Committee has replied, responded and done its report, the voluntary buyout scheme can go ahead without a Minister, so we are not waiting indefinitely.

Noel Lavery: It can go ahead, yes, on the basis on which it was approved by the Department of Finance. We have outlined the principles today. There is some limited flexibility within it, and we want to hear the views of the Committee and finalise. We can get a buyout scheme running pretty quickly.

Jamie Warnock: If that commitment had not been brought forward through Parliament, I would have expected to have a buyout scheme in place now to which people could apply.

Q500       Lady Hermon: In fact, you were delaying the buyout scheme until this Committee had reported.

Jamie Warnock: Yes, that is correct.

Noel Lavery: Going back to your ministerial point, the only thing that would require a Minister is if we were seeking to produce a buyout scheme that I could not justify on value-for-money grounds or that was outside the scope of what was agreed in the legislation. The legislation was basically a permissive power to produce a buyout scheme. That is for us to do, and we will get on with it and treat it as a priority.

Lady Hermon: So it is a priority for the Committee to report, then, if you are waiting for us.

Chair: That is a good note on which to end. Gentlemen, thank you very much indeed for being with us today. You have been put through your paces, but you will understand that this is a matter of great importance to a large number of individuals in Northern Ireland. We take our duties in that respect very seriously. Thank you very much indeed for being open, honest and candid with us. What you have said will most certainly be an important part of the report we produce in the near future.