Burned
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Although Elliott was quick to see how attractively open-ended the subsidy was for claimants, he was not the first to do so. Just weeks after the scheme launched in November 2012, Brian Hood of BSH Holdings was openly marketing the scheme as one from which a handsome profit could be made – and marketing it in those terms to Stormont itself. RHI had been open for just over three weeks when Hood wrote to Stormont’s Department of Justice to propose that it use RHI boilers to heat a new police and fire service training facility outside Cookstown.
At that point, the design of the college proposed using two huge one-megawatt boilers to heat the entire site. Hood suggested that instead he could install multiple 99 kW boilers – the maximum size permissible for the most lucrative RHI tariff. As well as the massive financial incentive from RHI, he believed there were valid engineering reasons why multiple boilers would be more efficient, such as reducing the amount of heat lost in underground pipework travelling from two central boilers to multiple buildings around the large site. He told the Department of Justice that the running costs of the heating ‘could be turned into a profit rather than cost’ and calculated that the ‘profit’ would be £44,740 a year. In contrast to the normal heating costs proposed for the training centre, a 20-year heating bill of £2.3 million would be turned into a profit of almost £900,000. The figures were eye-watering.
Hood later said that he had simply read the RHI regulations and then double-checked his interpretation of them with DETI officials who had confirmed that he could do what he thought the law permitted. But those planning the college were sceptical, questioning whether multiple boilers could be installed and qualify for RHI when the heat demand was so great that the planned pair of 1MW boilers would have been too large to qualify. But even if that was technically possible under the RHI regulations, they wrote back to Hood and questioned whether it was ‘appropriate for a Government-funded facility to attempt to exploit possible loopholes in the RHI and recover the benefit’. Hood double-checked with DETI, who said it was fine, but the team responsible for the college came back to again reject his proposal, describing it as ‘manipulation’. Shortly after, one of Hood’s colleagues emailed DUP Finance Minister Sammy Wilson to set out RHI’s benefits and suggest that it could be used in government buildings and schools. In his own hand, Wilson scrawled on the correspondence a message to his officials: ‘Double dutch [sic] to me, but has DoJ [Department of Justice] checked this out. They are notorious for choosing expensive options.’
Hood had difficulty convincing prospective clients that the scheme was as good as his marketing brochures claimed. He recalled that people would say to him: ‘The Government doesn’t pay you to heat buildings … why would they be doing this?’ Hood put his money where his mouth was, becoming the first person to be accredited on the scheme. That milestone would see him stand beside a beaming Arlene Foster while she did something which until the RHI scandal would be most associated with her ministerial career – posing for a public relations photo. In an accompanying press release, Foster said: ‘I hope this installation is the first of many.’ It certainly would be.
Rapidly BS Holdings developed a marketing slogan: ‘20 years of free heat’. Far from being hidden away, the slogan was on all its literature, on its website, across social media and emblazoned on the side of its fleet of vehicles. Based on Hood’s calculations at that point, if a 99 kW boiler ran 24 hours a day, seven days a week, 365 days per year, the owner would need to pay about £35,000 for fuel – but would receive RHI funding of about £51,000, leaving a profit of more than £16,000 on top of the free heat. That crude calculation did not include payments for electricity to the boiler or servicing – but even with those costs built in, it was a lucrative proposition.
Hood’s earliest marketing material – sent out en masse across Northern Ireland to any business he thought might have a significant heat need – included a heading called ‘profit’ and said: ‘The more efficient we can make the plant the greater the opportunity for you to obtain profit on the heating you use. Theoretical profit could be 157% of the fuel cost – but inevitable losses in the system have an affect [sic] on that.’ In layman’s terms, for every £1 of fuel, Hood’s crude calculation was that claimants at that point could make £1.57. In reality, the figure would have been somewhat lower, given the additional costs associated with biomass boilers – particularly electricity and maintenance of a boiler which was working hard. But as the scheme went on, the profits would rise considerably because not only did the cost of fuel fall but the tariff increased significantly for people entering it in subsequent years.
And Hood’s figures were based on those using wood pellets. Claimants using wood chip, which was far cheaper, were in some cases receiving more than £2 for every £1 of fuel before electricity and others costs were taken into consideration.
Hood said that it was quickly clear to him that abuse was possible on the simple basis that ‘you’d open the windows but don’t turn the heating off’. However, he said that his clients were reputable companies who would not do such a thing. There was, though, an underlying assumption that the scheme was wildly generous because that was how the government wanted it to be, the middle-aged businessman told the inquiry. ‘They’d set the tariff, they’d done their due diligence and who are we, as a mere company, to question the Government? They’d got it right, as far I was concerned.’ Hood expected the tariff to start off high to stimulate interest and then gradually be cut – perhaps to as little as 2p. In fact, the opposite happened. ‘The problem is they didn’t turn the tap off. They turned the bath tap on and left it running.’ But even at this point, the only way that the bath could overflow would be if no one ever came back to check on it. With hundreds of millions of pounds of taxpayers’ money being committed for two decades into the future, it was reasonable to assume that the scheme was not being left unattended.
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The widespread concern that RHI was too good to be true meant that just two months into the scheme Foster decided to write to Northern Ireland’s main banks. In what was a personal, cast-iron guarantee to stand over the scheme, which Foster would later abandon, she urged them to look favourably on those wanting to borrow in order to buy equipment to get on to RHI. The two-page letter could have hardly been more reassuring. In language of sparkling certitude, it set out a commitment which must have brought smiles to the faces of the bank executives who could now lend – and profit – because of RHI. The letter, which was drafted by Hepper, said that the unalterable level of payments over 20 years provided ‘certainty for investors by setting a guaranteed support level for projects for their lifetime in a scheme, regardless of future reviews’.
Then, in a key section, which provided a seemingly unbreakable promise that subsidy rates would be locked in for 20 years, Foster said: ‘Tariffs are “grandfathered” providing certainty for investors by setting a guaranteed support level for projects for their lifetime in a scheme, regardless of future reviews.’ Foster said that her department believed that RHI was ‘a real opportunity’ for investors and concluded: ‘I am therefore writing to encourage you to look favourably on approaches from businesses that are seeking finance to install renewable technologies. The government support on offer through the incentive schemes is reliable, long-term and offers a good return on investment.’
The letters had actually been conceived some four months earlier at a meeting of a cross-departmental group promoting sustainable energy, which Foster chaired. At a meeting in September 2012, Foster’s spad, Andrew Crawford, had raised a query about how RHI would interact with a different biomass subsidy aimed at farmers. In response, a civil servant said that there were problems persuading banks to lend for renewable energy equipment. The minutes of the meeting show that Foster then ‘advised that she would write to the main banks to explain how the incentive mechanisms operate’. For four years, copies of her letter lay largely unknown in filing cabinets at DETI and in the plush offices of bank chief executives
in Belfast. Then, at the height of the RHI scandal in December 2016, the letter suddenly re-emerged – and in a way which caused backbiting among senior DUP figures.
The Sunday World newspaper had reported on the existence of the letter after seeing reference to it in emails from a DETI official. But DETI refused to release the letter itself, so the contents were unclear. At the time, Foster was seeking to distance herself from the scandal and was heaping blame on both her civil servants and her successor as minister, Jonathan Bell. Belfast News Letter reporter Adam Kula asked the DUP for a copy of the letter and was surprised when within a few hours it was emailed to him by DUP Press Officer Clive McFarland. McFarland, a former DUP councillor from Omagh, was respected by the media for his honesty and lack of guile. One veteran Belfast journalist described him as ‘a proper human being’ whose conduct was in contrast to that of some other party figures who were regarded as slippery. But McFarland’s actions that night did not impress some of the DUP top brass.
The story of how Foster had personally given the banks a cast-iron guarantee about the generous RHI funding was published online that night and immediately picked up by other media outlets.
That evening John Robinson, the DUP spad to Simon Hamilton – the minister who had succeeded Jonathan Bell – sent a text message to fellow DUP spad Richard Bullick: ‘Did you know that Clive sent all the bank letters to Sam McBride [sic] earlier? All over Twitter. Unbelievable.’ Bullick replied that the key issue for the DUP had been to highlight one line from the letter – that the rate of return which Foster quoted was the relatively modest 12%. That, Bullick argued, showed that Foster had been unaware of how wildly over-generous the scheme had been, and that it was ‘not a licence to print money’. Robinson replied: ‘Exactly but just bucked out without any briefing. Mad.’ Hamilton then texted to say: ‘Just seeing this all now. What on earth did he do that for?’ Robinson responded: ‘Never mind that, he assumed every letter was the same and hadn’t read them all to see if there was anything nasty in any of them. Must have been on the drink.’
As DUP director of communications – the party’s chief spin doctor – before becoming a spad, Robinson had for years been McFarland’s boss and within months would be back in the role. The exchanges – only brought to light by the public inquiry’s sweeping powers of compulsion which gathered up DUP text messages – were an example of the tensions at the top of an outwardly united party and evidence of how decisions made in 2012 would come back to haunt the DUP.
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Just two months into the scheme, a letter landed on the desk of Stormont’s SDLP Environment Minister, Alex Attwood. The correspondence, from a firm called Renewable Energy Manufacturing (REM) Ltd, set out how it had a technology which turned poultry manure into fuel. That would have caused ears to prick up in Stormont for multiple reasons. Northern Ireland’s biggest employer was the poultry-processing giant Moy Park. Stormont policy was to facilitate its expansion but this intensive agriculture created huge quantities of nitrate-rich manure which was difficult to dispose of without damaging the environment.
The firm set out how ‘the current Northern Ireland RHI tariffs act as a deterrent for farmers to employ our Poultry Manure to Energy [product]’. The letter argued that Northern Ireland’s RHI meant that a farmer who installed two 99 kW biomass boilers would receive nearly four times more in incentives than a farmer who installed one 200 kW heat from poultry waste system – even though both systems produced almost identical heat. It went on: ‘The result is a “perverse incentive” for farmers needing more heat than a 198kw unit will produce to install a number of small wood chip boilers rather than one larger [poultry manure to energy] system.’ Attwood forwarded the letter to Foster, his ministerial colleague. The letter went to energy division where Peter Hutchinson and Joanne McCutheon drafted a response to be issued by Foster’s private secretary on behalf of the minister. It dismissively told the company that whereas it had claimed that two smaller boilers could be used to ‘game’ the system by attracting a higher subsidy than a single larger boiler, ‘I can assure you that this is not the case’.
In fact, it very much was the case. The warning was to be the first of many, which might have been a prompt for civil servants to read the regulations and investigate whether what they were being told was happening was in fact possible. Instead, the consistent response was an implicitly arrogant dismissal based on the premise that the department knew best.
The accompanying submission to Foster was even more strident. It said that the firm’s concerns ‘relate to a perceived flaw in the RHI whereby installers are incentivised to install multiple smaller boilers instead of a single large boiler – this is not the case’. Intriguingly, Andrew Crawford again took an interest in a specific detail of the scheme at this point. After reading the submission, he sent a query back to energy division to ask: ‘If two boilers are installed at different times will they not attract greater support than a single boiler?’
It had taken the industry weeks to work out something officials would never work out for themselves. It was not until after the scheme had closed that civil servants realised – after it was pointed out to them by the Audit Office – that an uncapped scheme where the subsidy is higher than the cost of the fuel was a perverse incentive for claimants to run their boilers as long as possible. Although focus would later turn to the fact that the tariff was set higher than the cost of the fuel, that in itself was not the problem. The intent was to pay off the cost of buying and installing the boiler – in the region of £45,000 – the fact the tariff was above the cost of fuel was a means of doing that.
The core problem was the lack of either tiering, to cut rates as the boiler ran for longer periods, or a simple cap on how much could be paid in subsidy for each piece of equipment. The combination of the fuel being cheaper than the subsidy and the absence of a cap meant that if someone had already splashed out on the costs of installing a boiler they were being financially incentivised to recoup those costs as quickly as possible – and then make pure profit – by running it for long periods. The fact that many boiler owners ran their boilers for long periods was not in itself proof of fraudulent intent. Some, such as poultry farmers, had huge heat requirements and it just so happened that RHI turned that otherwise expensive outlay into a profitable activity of its own. But there have been far too many stories of calculated abuse of the scheme – boilers running for long periods with windows open or in areas which were barely insulated – to believe that everyone who made huge claims did so in good faith.
Though a depressing example of flawed human nature, it is hardly surprising that if a scheme is set up so that it is easy to fraudulently claim – and very difficult to get caught – then some people are going to exploit it. In doing so, not only were they stealing money, which could have been spent on worthwhile causes such as hospitals or schools, but they were corrupting the very essence of the scheme. Having intended to improve the environment by moving people from finite and heavily polluting fossil fuels to sustainable and cleaner sources of energy, RHI led to the opposite: public money was incentivising the public to damage the environment.
In April 2013 – some five months into Stormont’s scheme – Westminster legislation was passed to give greater powers to DECC, the Whitehall department running the GB scheme, to ensure that its budget was not exceeded. Although at that point there was no immediate budgetary concern, the department publicly explained that it thought it was prudent to put in place measures which would allow it to quickly step in if there was a sudden increase in demand. It was a recognition of the unpredictable nature of RHI. Unlike most government grants, which involve getting approval from officials before making an investment, RHI involved people installing boilers themselves and then applying to enter the scheme. So long as they met the criteria for the scheme, there was no legal means whereby they could be rejected at that point. That meant that the department could never be sure how many people had installed boilers and w
ere just about to apply to enter the scheme – a fundamental weakness in being able to predict the required budget.
The GB ‘degression’ changes allowed DECC to ‘degress’ the tariffs according to how much of its budget had been committed. It meant that the more people who applied to the scheme, the less lucrative it became for those who joined after them. The ability for DECC to reduce its tariffs had only been on the statute book for a month when it was used for the first time. DECC minister Greg Barker wrote to Foster to say that the uptake for small and medium-sized biomass boilers was ‘a real success, even beyond our initial expectations’. But that meant, he said, that DECC had considered the likely cost to taxpayers of that success. As a result, Barker said that it had decided to cut the most popular biomass tariff. It was an indication that the level of tariffs in GB were now judged unsustainable and was in line with how many green energy schemes had operated in the past. With new technologies, subsidies often started high, but as it either became apparent that they were too generous or as the cost of the technology dropped, then the subsidy was reduced.
On the same day that Barker’s letter went to Foster, DECC issued a press release setting out how the tariff was being reduced. DETI officials certainly saw the press release and judged it relevant to their work because that day they saved it into the Northern Ireland Civil Service’s TRIM data management system.