Subsidies to Renewables: Lessons from Northern Ireland’s Renewable Heat Fiasco
Students of subsidy mechanisms will learn a great deal from the Northern Ireland’s collapsing version of the Renewable Heat Incentive, which is now collapsing in a storm of political controversy.
The Northern Ireland RHI (NIRHI), was modelled on the RHI applying elsewhere in the UK, and introduced in 2012 to encourage the uptake of renewable sources of heat, for example biomass boilers. The current scandal concerns poor ministerial control of costs, which are now reckoned to be some £490m over budget, due, arguably, to a) overly generous and extended levels of support leading to exceptionally high uptake and wasteful use of energy, since the subsidy was provided per unit of heat employed, b) poor inspection schedules, and c) even some alleged fraud. (The legislation creating the RHI differs elsewhere in the UK, a budget overspend seems unlikely, and not all these faults would occur there, but the risk of fraud and perverse incentives remain.)
Doubtless there is more to the Northern Irish scandal than the issues nominally at stake, and it is fairly obviously being used as a convenient occasion for political manoeuvring. But that is normal in democratic debate, where it is rare for a problem to be addressed without an old score also being settled. One might wish it to be otherwise, but human motivation is as it is, and in fact, though not perfect, the system works reasonably well.
What is particularly notable about the NIRHI scandal is that this budgetary overspend could become a prominent political issue at all. Consider the case in London. Not only is there no apparent concern about the RHI, but under the now disbanded Department of Energy and Climate Change spending on renewable electricity subsidies spun wildly out of control, and still threatens to be greatly in excess of the Levy Control Framework instituted by the Treasury. But there has been no explosion of anger in Westminster. Part of the explanation for that complacent silence is to be found in the cross-party near-consensus that green energy is beyond criticism. But that is far from being the whole explanation. Perhaps the most important factor is that unlike other subsidies to renewables, the NIRHI, and indeed the RHI in England, Wales, and Scotland, was funded by taxpayers from central funds, rather than from a levy on consumers drawn invisibly from their energy bills, as for example is the case with the Renewables Obligation (RO), the Feed-in Tariff (FiT) and the new Feed-in Tariffs with Contracts for Difference (CfD).
The NIRHI was a rather traditional sort of measure, and this matters because it was easily overseen by the existing institutions, and faults identified. Indeed, it is a general truth that in the UK, and elsewhere, the democratic procedures designed to audit state spending are best suited for controlling government use of income derived from tax. They are less efficient as an instrument for inspecting the more novel and vastly more subtle stealth spending conducted through consumer levies. This is as much due to the historically established custom and habits of elected representatives as the formal procedures of the democratic assemblies concerned. Nevertheless it is a reality, and one where increased vigilance is long overdue.
Those who chose to fund renewable electricity subsidy in the UK through levies on bills may not have been intending to conceal that expenditure from democratic inspection, though it is inevitable that one has suspicions, but that has been the actual consequence of the policy design. Surprisingly few people, in Parliament or elsewhere, know what is going on, how much is being spent, whether that spending is under control and well directed.
Objectively, it is notable that while there is an extremely vigorous political discussion in progress in Northern Ireland about £490m, there is almost no recognition in Westminster that the UK government has allowed an excess of planning consents to renewable generators to be issued, with a potential for subsidy overspending running into billions per year for decades. There is, according to the Government’s own Renewable Energy Planning Database (REPD) sufficient capacity to overshoot the 2020 renewable electricity target by upwards of 30%, with no subsidy budget to pay for these project and little sign that government is actively trying to discourage them. In point of fact, many of these planning consents have been issued by the Scottish Government, whose electorate will not be providing the bulk of any subsidies required. That is the case because the renewable generators consented by the Scottish Government are paid for not out of Holyrood’s own budgets, but by all UK electricity consumers, and predominantly by English and Welsh billpayers since they comprise the vast majority of all consumers. In other words, because these policies are funded by levies on bills not taxes, decisions taken in Holyrood are paid for by consumers who have no electoral representation in that assembly. Now that really is a scandal.