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CHAPTER 4

TWO FATAL ERRORS

When Fiona Hepper’s June 2011 submission went to Arlene Foster, it contained three letters which would have meant nothing to most people – but to some within Stormont it made their eyes light up. The letters were AME, and to some politicians and civil servants they signalled that the funding was effectively ‘free money’.

As with all ministerial submissions, the document followed an established format whereby Hepper and her team filled in answers to a series of questions, one of which was on the nature of the funding. In that section, Hepper simply said it was ‘AME’ – the acronym for Annually Managed Expenditure, which mandarins and politicians pronounced ‘Amy’.

What Hepper had sent to Foster was a significantly inaccurate simplification of the true nature of how the scheme was to be paid for and one which years into the future would haunt Foster and her spad, Andrew Crawford. Two months earlier one of Hepper’s subordinates, Alison Clydesdale, had established that this was far from the full story and there was a major risk to the department if it spent beyond what the Treasury had allocated. Clydesdale had sought to clarify how the funding arrangements would work and had been told that the money would be coming directly to Stormont under AME arrangements. That is the form of spending used for government schemes where a budget is difficult or impossible to predict, such as for welfare claims.

Most devolved government spending is very different and involves the block grant – the annual lump sum the Treasury sends to Stormont – being divided up into multiple finite budgets, department by department, project by project. Each department is headed by a permanent secretary whose formal title of ‘accounting officer’ alludes to the significance of accounting for the department’s spending. It is a major crisis if a department spends beyond the budget democratically authorised for it by Parliament or the Assembly. But the amount required for demand-led expenditure, such as pensions, student loans or unemployment benefits, is difficult to predict, and there is a principle that the money should be paid if the individual meets the criteria set by Parliament. Therefore the funding is ‘managed’ and predictions are made as to the likely demand, but no budget is set.

Where RHI would break with long-established public sector accounting principles was that it would be described as AME – that is, demand-led and without a budget – but it would also have a budget. It would be on that rock of confusion – allied with the cynicism of some senior figures who saw the chance to squeeze more money out of the Treasury – that Stormont would perish.

In April 2011, Clydesdale spoke by phone to Jon Parker, the joint head of the Treasury’s energy branch. She followed that up with an email in which she asked him to set out in writing how the department could commit to 20-year payments based on funding, which was only for four years, as well as a request to set out the practicalities around how the money would come to DETI. Parker made clear that any commitments entered into during the initial years of the scheme would be honoured over a 20-year period and that Stormont’s funding would be based on a share – roughly proportionate to Northern Ireland’s size – of the GB scheme, with 2.98% of the GB RHI budget being made available to Stormont. He then went on to set out a critical warning, which ought to have disabused anyone in Stormont who read it, of the notion that RHI was a bottomless cash pit. Parker said:

The other key point it is necessary to let you know about is that the [Whitehall department] DECC RHI spending is not being treated as standard AME, where the Exchequer takes on all risks of overspend. Instead, there is a risk-sharing arrangement whereby should RHI spending in one year exceed the SR [spending review] profile, then DECC would need to repay this in future years.

Parker went on to say that not only would any overspend have to be recouped in future years – something which assumed the overspend was small enough to be recovered from the budget remaining for future years – but that on top of that there would be a penalty ‘likely to be of the order of 5%’ taken out of the department’s budget if it overspent. He said that ‘again, these rules would be applied in equivalent fashion to NI’.

The following month, Clydesdale received a second email warning in clear terms that the funding was not unlimited. Bernie Brankin, an experienced official in DETI’s finance division, told her that she had spoken to Stormont’s Department of Finance and ‘RHI spending is not being treated as standard AME’. Instead, she said, it was being treated as if it was allocated to the department out of the block grant, with a strict budget. She explained: ‘If you underspend in any year, that part of your budget is lost to the department and, if you overspend in any year, DETI’s budget will be reduced by the amount of overspend in future years.’ The email – which referred to a verbal discussion between the two officials – went on to say: ‘You will need to take this treatment of AME into consideration when drawing up your proposals on how you will spend this allocation …’ Crucially, the email was copied to Hepper.

Hepper was copied into another email later that day from Clydesdale in which she said to another DETI official that she had spoken ‘at length’ to Brankin about the situation and that it ‘presents a significant challenge’. Stormont’s finance department would require evidence of DETI’s ability to control the number of RHI applications. Perhaps influenced by the problems with the recent Reconnect grant scheme, she said that grants would be ‘the riskiest route financially as it is hard to control the number of applications especially at the end of the programme’. Clydesdale went on to say that CEPA would have to be asked ‘to factor this in as a risk factor’ because ‘I didn’t see any evidence of this in the draft that we have already received … it will need to be fully addressed’.

Almost seven years later, Clydesdale told the public inquiry that in May 2011 ‘I recognised the need for cost controls to control over/under spending and the associated risk’. That claim is supported by her emails from the time. Yet almost immediately after her engagement with Parker, Clydesdale was moved to another role as part of the constant churn of civil servants moving around the system.

The following month, just days before Hepper’s crucial June meeting with Foster, another Whitehall civil servant, Akhil Patel in DECC, the department running the GB scheme, gave DETI another warning about overspending. Patel emailed Peter Hutchinson – the main individual under Hepper who was working on designing RHI – and told him explicitly that if they overspent, the money had to come out of DETI’s budget. If that wasn’t sufficiently explicit, Patel added: ‘Clearly, this represents a large financial risk on the department so the policy team is currently looking to develop a system of tariff degressions [further cost controls] … to ensure (among other things) that we manage the risk of overspending against our budget.’ Essentially, Patel was telling DETI that although the GB scheme had been set up with a basic cost control of tiering, that was not enough, and so it was looking to add an additional cost control of degression.

Tiering was a simple mechanism whereby there were two tariffs which every boiler owner could claim. The first high tariff was only available for 1,314 hours each year – allowing high payments for 15% of the year. After that, the second-tier tariff was all that could be claimed and it was far less lucrative. The intention was to encourage energy efficiency, discourage fraud and shield taxpayers from having to pay huge sums to those who legitimately needed to run their boilers for most of the year.

Patel’s message did nothing to prompt a sudden change of course within DETI. Days later, Hepper, who was aware of the nature of the funding, gave Foster the first of many submissions which simply described the funding as being AME. Hepper later told the inquiry that she was ‘pretty sure’ she had verbally explained to Foster that the funding could threaten the department’s budget if it overspent. Whatever was said in conversation between Hepper and Foster, the civil servants would go on to continually misrepresent the funding as simply ‘AME’ for years, with one civil servant suggesting that the inaccurate information was simply copied and pasted from one ministerial submission to the next.

Foster herself would tell the inquiry that her belief that the bill was being paid by London influenced how she viewed the issue of cost controls. David Scoffield QC for the inquiry put it to her that in a later 2013 submission to her from Hepper there was ‘a pretty stark warning’, because it referred to a ‘finite budget’ which ‘can’t be breached’, and explained that therefore ‘we must have this facility [an emergency brake of cost controls] available to us.’ Tellingly, Foster replied: ‘Yes, but I was also aware that the AME budget [meaning the Treasury would pay the bill, rather than Stormont] was there [in the submission].’

At the inquiry, Hepper played down the significance of the point, arguing that the department never intended to overspend anyway and would ‘try our best to make sure that that did not happen’. Although she knew that limits on the scheme were necessary to prevent overspending, she thought that ‘we’d plenty of time to do [cost controls]’.

Sam Connolly, the DETI economist assigned to assist energy division, accepted at the inquiry that Foster had made her decision based on ‘untrue’ information in the submission from Hepper. Connolly would himself admit to the inquiry that he had failed to follow the rules for public sector economists and argued that RHI was a policy ‘involving concepts and sums of money that were beyond me’.

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Days before Foster had even formally decided that there should be an RHI scheme and before the final CEPA report had been received, Hepper took a decision of her own which indicated that she was confident the minister would back that option. Hepper authorised the spending of public money on an outside law firm, Arthur Cox, to write the legislation that would set up RHI. It was a remarkably bold act which further suggested Hepper was convinced that she knew the minister’s mind. But what was to follow was more baffling.

Alan Bissett, a partner at Arthur Cox, was a specialist energy lawyer whose services did not come cheaply. When DETI asked him to work on drafting the RHI legislation, he expected a substantive assignment. But it gradually became clear that something else was going on. Bissett was ultimately paid to largely copy and paste the Westminster legislation, and in doing so he replicated the GB scheme’s system of tiered tariffs. But that was stripped out by DETI officials – not once, but on multiple occasions. Having hired lawyers to draft the regulations, civil servants now disregarded Bissett’s work and produced their own draft of the regulations.

Speaking of the bulk of the work, which he was asked to undertake, Bissett told the inquiry: ‘It didn’t seem clear to me why it couldn’t have been done by the Departmental Solicitor’s Office. We weren’t advising anything to do with policy; we were just drafting and were changing references and correcting terminology from GB to NI terminology.’ One DETI official suggested Bisset capitalise some letters and queried his use of semicolons. Meanwhile, cost controls were being stripped out without alarm. Ultimately, it became clear to Bissett that his company was one of three sets of lawyers involved in drafting the legislation, with Stormont’s own lawyers and those from Ofgem also contributing. ‘Objectively it seems odd,’ he told the inquiry.

Bissett also told how DETI later commissioned his firm to advise it on what ought to have been a basic function of the civil service – asking their Whitehall counterparts what they were planning to do in future with their RHI scheme. Inquiry counsel David Scoffield QC asked him: ‘Why on earth were lawyers being paid to do that?’ Bissett replied:

That did seem odd … I had assumed that relationships between DECC and DETI were not good and we were being asked to do that … I would have felt that DETI would have been in a better position to tell me what DECC was doing. We had no contact with DECC – they wouldn’t speak to us. One of my colleagues tried to find out timelines and what was happening and they wouldn’t speak to us.

But while Bissett wasn’t kept in the loop, Hepper and her team believed they had good reason to disregard the regulations drafted by him and instead draw up their own legislation without tiering.

The explanation lay with CEPA. In its report, the consultancy had set out proposed tariffs for a host of green technologies – from ground source heat pumps to solar thermal units. It drew attention to the fact that the subsidies proposed included two tiers for some technologies, in line with the situation in GB. The consultants explained how tiering operated and went on to say: ‘However, when setting the NI recommended levels for this report, the incremental fuel cost was higher than the subsidy rates in all cases. Therefore no tiering is provided in the rates in this report.’ With that decision, the consultants were taking an enormous risk. If the cost of fuel was ever less than the rate of subsidy, the scheme would be fundamentally flawed. Even at that point, it should have been obvious that the cost of fuel was constantly fluctuating while the proposal was for the tariffs to remain set in stone for 20 years, with guaranteed inflationary increases.

But the problem was to get much worse. DETI launched a public consultation on its proposals and received responses which complained that the tariffs proposed for Northern Ireland were lower than for GB. At a glance, the Northern Ireland scheme did indeed seem far less generous. Not only were the initial tariffs for the smallest biomass boilers lower – 4.5 p/kWh in Northern Ireland as opposed to 7.9p in GB – but the most lucrative GB tariff was available for far larger boilers. In GB, it was possible to install a 199 kW boiler, capable of pumping out more than four times the heat of the 45 kW boilers which were to get Stormont’s top subsidy.

But the small print showed that unlike the situation in GB, where tiering meant that after running the most lucrative boiler for 1,314 hours in the year the subsidy dropped to 2p, Stormont proposed to pay the top rate for the entire year – with no heat limit.

Although it is hard to pin down who precisely decided not to include tiering, it is clear that its absence was the result of a conscious decision. In early April 2011, the issue was explicitly raised by Connolly, the DETI economist. Having read CEPA’s first draft report, he asked Hutchinson why the scheme was more generous than GB’s. Connolly asked specifically: ‘Why has tiering not been used as per the GB RHI?’

DECC had the previous year – in publicly available documentation which DETI might have been expected to be studying – recognised that the biomass tariffs could lead to a ‘perverse incentive to over generate heat’. That was, it explained, because the subsidy was higher than the cost of fuel. It said that ‘this perverse incentive is expected to be significant for non-domestic biomass space heating installations that are less than 1MWth’ – that is, every type of biomass boiler eligible under the Stormont scheme. DECC went on to explain in simple language why, as a result of this obvious danger, it was implementing tiered tariffs. At the rates being proposed for Stormont’s scheme, the problem might have been modest, but it was about to be amplified.

In response to the consultation, the department asked CEPA to carry out a second piece of work – what would become known as the CEPA addendum report – to consider some of the responses and make final recommendations before the scheme was launched. Throughout this entire period, the evidence points to DETI repeatedly attempting to make RHI more generous and more widely available. On one such occasion, Hutchinson, after seeing a draft of the addendum, wrote in the margin to query why the consultants were not proposing to allow claims for large industrial biomass installations. CEPA had already made clear to the department that the reason for doing so was that there was no need to subsidise such large biomass heating systems – they were already economical without any subsidy. But Hutchinson told CEPA he was ‘still concerned about not having a tariff for this sector given [the] possible disadvantage in comparison to GB market [which was subsidising such boilers] … some calculation attached for your consideration’.

Hutchinson, a young civil servant being asked to deal with a complex area in which he had little expertise, was under considerable pressure. The softly spoken official was working so hard that he was recommended for bonuses by his superiors in this period, with the citations referring to him having ‘performed exceptionally well’ and having ‘worked largely on his own’ managing CEPA.

The final 47-page CEPA report was delivered in February 2012 and agreed to hike the level of tariffs for every one of the technologies being subsidised. Even an outsider could have seen that the obvious effect was that Stormont was going to draw down more of the Treasury money than if the tariffs were less generous – higher rates were more likely to encourage people to join the scheme, so there would be more participants, and each of them would also receive more.

CEPA now recommended more than doubling the size of biomass boilers getting the most lucrative subsidy from 45 kW to 99 kW. And the tariff for that boiler was also increased by 31%, rising from 4.5 p/kWh to 5.9 p/kWh. Aside from the growing overall cost, there was a clear problem: the same report gave the price of biomass fuel as being massively lower. Research for the report had found that biomass fuel in Northern Ireland could be as cheap as 2.85 p/kWh for those buying wood chip in bulk – one of several places in the report where it was clear to a casual reader that there was now a big gap between the cost of running a boiler and the subsidy rate. On CEPA’s own figures, that meant that the subsidy was more than double the cost of fuel. But the consultants, whose main report had said there was no need for tiering, did not point out the obvious difficulty.

At the inquiry, Hepper was grilled as to how she and her colleagues could not have spotted the problem. Audibly exasperated, chairman Sir Patrick Coghlin put it to her that ‘you didn’t need to be an expert to see this differential … you wouldn’t need to be an expert in economics or, indeed, energy to see that if you have a tariff that is paying you more than the [cost of] fuel you’re using to burn and to achieve that tariff, there’s a problem.’ Setting out a complicated logic for how she and her team had justified the situation to themselves, Hepper replied that ‘in our thinking about how that came to be, we took the price of the fuel, we took it …’ Sir Patrick interjected to say that ‘any common-sense person would’ve seen that difference, and if they didn’t appreciate the significance of it, they would’ve asked’. Hepper said she ‘had a narrative in my head’, which rationalised the apparently illogical proposal. She suggested that because RHI was meant to include payments for the ‘hassle costs’ of installing green technology as well as a rate of return to cover borrowings, there was an explanation for the gap. There were other costs involved with biomass boilers, such as increased electricity costs, which slightly complicated the calculation.

The picture which emerged from the inquiry was that Hepper – and the multiple civil servants who saw the proposal – had been bamboozled by the ‘experts’, leading them to miss a basic fact staring them in the face. Although the biomass tariff was the most glaring mistake in CEPA’s work, the consultants had been responsible for a series of other basic errors with numbers in tables which did not add up. The inquiry’s technical assessor, energy expert Dr Keith MacLean, put it to Hepper that ‘if you looked at almost any of the numbers in the tables in that report, they would not allow you to calculate any of the tariffs … it seems to me nobody actually just got a calculator out and checked, “does this make sense?”’ Hepper said she ‘assumed’ that her colleagues had done some checks, ‘but I also would’ve assumed that the expertise that we were buying in would’ve checked their basic figure work, too’. The blind were now leading the blind, with each believing that the other could see.

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More than four years later, as CEPA prepared to come before the Assembly’s Public Accounts Committee – the precursor to Coghlin’s later public inquiry – its top brass attempted to understand how things had gone so disastrously wrong.

Internal emails, which the public inquiry compelled them to release, show that senior figures in the company – which has worked for governments all over the world – knew that it was responsible for a huge error.

In November 2016, CEPA director Kirby Owen emailed fellow director Ian Alexander to inform him that it ‘turns out that the first report in 2011 wasn’t all that bad at all but whomever did the redo in 2012 [addendum] … missed completely (or skated over) the fact that in the 2012 recommendations the subsidy value per kwh was greater than the fuel cost per kwh.’ He went on: ‘The result … people were heating empty barns because you could make a financial profit on the whole thing even if you just vented all the heat … it’s a true problem, a truly bad recommendation on subsidy design … ouch’. Speaking frankly in the expectation that his email would never emerge publicly, Owen went on to say: ‘Happily, the 2011 report says a lot of words about “monitoring is necessary”, although I don’t think it meant watching out to correct the mistakes we made is necessary and the tariff design error … was indeed an error. But we won’t call it that.’

Owen commissioned an internal analysis of how RHI operated. One graph showed that if boilers were run for about 55% of the year, ‘the whole thing turns into a money-making machine’ – even if there was no use for the heat. In the event, it was clear that most of those using RHI had a use for the heat and would have had to otherwise pay for it themselves, so it was even more lucrative for them than for those who may have been just generating heat to receive the payments. And in some cases boilers were running for far longer than 55%, with nearly round-the-clock usage. CEPA had based all of its calculations on the assumption that boilers would run for an average of just 17% of the time.

In another candid internal email, Owen – who was not involved in the scheme’s design – marvelled at the ‘super profits’ available to those running boilers for long periods. In one email, he concluded by saying: ‘So the folks who heated empty barns were evil villains indeed, but they needed a poor tariff design to abet them … Sure, we’re not on the hook for fraud. But – assuming I’m right – our tariff design … encouraged it.’

There was another problem with the proposed tariffs – the huge gulf between the various bands encouraged any savvy businessman to install multiple 99 kW boilers, which would earn 5.9p for every unit of heat produced. But if he installed a 100 kW boiler – or any other boiler up to 1,000 kW – the rate did not fall slightly, but collapsed to a paltry 1.5p.

Some legitimate scheme participants would later feel aggrieved that there were accused of ‘exploitation’ for doing what was lawful and what they believed the designers of the scheme must have realised when they set the tariff bands as they did. It is to the credit of some businesses – including several Sainsbury’s supermarkets in Northern Ireland – that they installed a single large boiler and received a relatively modest payment by contrast to what was on offer.

There was a particular contradiction in setting up a Northern Ireland RHI, which was more lucrative than its GB counterpart. The whole justification for Stormont departing from what was happening in the rest of the UK was that the GB scheme was too generous for Northern Ireland. In GB, the tariffs were based on the assumption that they were incentivising people to move from gas. But in Northern Ireland, where piped natural gas was still only being established, the assumption was that people would be moving from oil. With oil more expensive than gas, it required less incentive to switch to renewables. And yet, having said that Northern Ireland required less incentive than GB, what DETI ultimately did was create a scheme which was more generous.

But there is an intriguing footnote to this. In December 2016, as the political scandal raged, Mark Anderson, an academic expert in biomass, wrote an article for the Slugger O’Toole political blog. Anderson, who was a close friend of Crawford’s, appeared to hint at that argument around oil being almost a cover story for why Northern Ireland was setting up its own scheme. Writing at a point where it was not publicly known that he was linked to Crawford, he set out the argument about Northern Ireland having a greater dependence on oil heating. However, he went on: ‘The real reason to provide a different structure was that the GB scheme was significantly under-subscribed. The economic consultants, CEPA and AEA Technology, from the beginning, proposed a non-tiered tariff to achieve the required interest in the incentive.’ Was that purely supposition on Anderson’s part or did he have some inside insight into what had really gone on in 2012?

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As DETI moved ahead to launch RHI, the scheme was being set up in a way which would see it shovel taxpayers’ money to those lucky enough – or well-connected enough – to get in at the right time.

Two huge errors had been made. One – the misdescription of the funding – was unquestionably an error. There was no conceivable reason for the civil servants to describe the funding as pure Treasury cash other than due to sloppiness or a culture whereby they thought that such small but fundamental clarifications were unimportant.

But while the second disastrous decision – to strip out the limited cost controls present in the GB scheme – may also have been accidental, it is possible that it was not a mistake and was a conscious reaction to the first error. If there was a belief that consequence-free spending was possible, and if the political philosophy was to maximise the Treasury funding for Northern Ireland, it would be quite logical to remove any impediments to making the scheme as expensive as possible.

Foster accepted at the inquiry that ‘the last thing a Northern Ireland Executive wants to do … is to hand money back to the Treasury’ and said that ‘there would have been pressure to spend that money’. She said that the ‘pressure would have been on to find a scheme to spend that money … there would be an awareness that if money is coming in … then we have to make sure we find a way of spending it’. But she denied that the logic of that position was that the more expensive the scheme the better.

No piece of paper has ever turned up to show that there was a deliberate decision to exploit the funding and all of those who were involved have said that it was a genuine mistake. But Foster, Crawford and the civil servants are here hoist by their own petard of not recording many of their key meetings and decisions.

It is true that when a government records what it is doing, it can lead to embarrassing leaks. But a written record is also a protection for those in power – if a decision is not recorded as having been taken, then there is a strong argument that there was no such decision. By not having such a culture of recording what was going on, those in DETI at the time were later shorn of the protection that it would offer. The mere absence of a record is not in itself proof that something did not happen. And, aside from a general culture of oral government, if the motivation here was to consciously and wrongly exploit the Treasury, there is a specific reason why that thinking would not have been recorded.

But despite the fact that the scheme was now heading towards its launch with fatal shortcomings, all was not yet lost. A forceful warning was just around the corner, one which would mean that Foster’s department was going into the disaster with its eyes open. That message would heighten the suspicions of those who would later look back and wonder if someone had consciously chosen to create a scheme which would enrich claimants – and at least one major multinational corporation.