RHI overspend far greater than first feared, department tells court

The already vast scale of the overspend on the RHI scheme is much worse than first feared, the Stormont department responsible for the debacle has told the High Court.

On the fourth day of a judicial review case which RHI claimants have taken against the Department for the Economy, the department’s lawyer today told Mr Justice Colton that the potential overspend had soared from £500 million to about £700 million.

Tony McGleenan QC said that what had once been referred to by the department as a likely £490 million overspend is now potentially a £700 million figure which will have to be found from Stormont’s budget between now and 2036.

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Mr McGleenan said that the department’s projections now put the total cost of the non domestic RHI scheme in Northern Ireland at £1.4 billion. With £700 million coming directly from the Treasury, that leaves a shortfall of £700 million which the department says has to come out of the Northern Ireland block grant - the budget from which health, education, roads and all other Stormont expenditure is funded.

He emphasised that this was a “worst case projection” and that because of the length of time involved and other variables such as the life expectancy of boilers it was necessarily an estimate.

All of the figures for the overspend are based on the situation which existed at the start of this year.

In a somewhat unusual strategy, the department appears to be attempting to convince the court that the scale of the problems caused by its incompetence were so much worse than even what has been publicly known until now and that for that reason it was justified in asking the Assembly to pass the unorthodox retrospective legislation.

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Days before Stormont fell in January, the Assembly – although only DUP MLAs supported the law – voted through an unorthodox retrospective change to the terms of RHI owners’ agreements with Stormont which slashed their payments.

Those temporary retrospective regulations will cut the overspend to just £3 million for this calendar year but it is not yet clear what the department will put in their place as a permanent solution.

Earlier in the case, the RHI claimants – who have taken the judicial review case in an attempt to overturn the January changes – argued that the overspend is actually far lower and could be as little as either £160 million or even £60 million.

However, Mr McGleenan said that there were multiple flaws in the assumptions behind how that figure had been calculated.

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He said that the claimants had commissioned experts to examine the figures and they had made several key assumptions which were wrong.

He said that they excluded inflation from the figure, something he said “has to be wrong” because the RHI regulations say the tariff has to be changed every year with inflation.

The lawyer said that they were wrong to say that 80 pending applications should all be discounted, something he said was presumptuous.

He also rejected the argument that if boilers were being heavily used then some would break and be excluded from the scheme because the payment is attached to a specific boiler with a serial number.

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Mr McGleenan said that because the boilers were “income generating mechanisms” the would be carefully looked after and repaired by the owners.

And he rejected the argument that the cost for Combined Heat and Power (CHP) plants - thought to be set to attract in the region of £100-£160m of RHI subsidies - should be excluded based on the fact that a departmental gaffe meant that part of the RHI scheme had never been sent to Brussels for approval and the plants had therefore been rejected.

Referring to looming litigation about at least one of those plants, he said that, as with any court case, the department could not be sure of the outcome and therefore was not discounting that aspect of RHI at this point.

Mr McGleenan said that the subsidy had been intended to largely cover the capital cost of buying the boiler and installing it rather than the ongoing fuel costs. On top of those costs, the department intended applicants to receive a 12% return on their investment.

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But Mr McGleenan argued that many applicants had either already received, or soon would receive, a subsidy equivalent to the cost of their boiler and the 12% return, despite only being a few years into the 20-year scheme.

Mr McGleenan said that “inherent flaws in the assumptions” of the department which he is representing meant that the tariff was set at too high a level, something which “exposed the risk of excess payments and over-compensation”.

He said that a report which the department commissioned from consultants Cambridge Economic Policy Associates (CEPA) as it set up the scheme based its assumptions on a £58kwh boiler which was run for 17% of the year and cost £38,000.

In reality, the QC said, more than 70% of boilers were 99kwh – the maximum capacity for the most lucrative subsidy – and, based on claimants’ own figures submitted to the department the average cost of the boilers was £37,000.

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That meant, he said, that the entire basis of the scheme – even aside from whether there were cost controls – was “way off the mark”.

And, to further tear up the department’s calculations, the boilers were on average being run for 41% of the hours in a year, “far in excess” of the assumed 17% figure. Some installations, he said, were running for 90% of the year.

When the court was told that consultants PWC had last August described some of the expenditure as “ineligible”, the judge asked whether the department could recoup the money.

The QC said that it “wasn’t a closed issue”.

In an incredulous tone, the judge responded that it had been more than a year since that report and asked: “Has anything been done about it?”

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The QC admitted that there had been delays but that work was ongoing.

Mr McGleenan also said that by March 2015 – about eight months before the DUP-controlled department implemented cost controls – internal departmental financial forecasts “began to become alarming” and the department knew that it was in excess of its budget and there would be a “strain” on the wider Northern Ireland budget as a result.

Farmer’s £111k outlay had him in line for £2.5m: QC

One of the boiler owners in whose name the case against the department is being taken was in line for £2.5 million over 20 years based on an initial investment of £111,000, the High Court was told.

The department’s QC, Tony McGleenan, said that the poultry farmer, who was only referred to in court by his surname, was being paid more than his total investment every years and had already been paid £226,500.

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He said that the man had been on course to receive £2.5 million over the 20 years of the scheme.

Those figures do not involve his fuel costs – something which the claimants say should be taken into consideration but which the department argues was never intended to be covered by the subsidy tariffs which it had set and which it primarily intended to offset the costs of buying and installing the boiler.

Mr McGleenan said that the man’s own forms which he returned to the department stated that he had made an investment of £111,000 and that he had financed it himself.

However, he said that in papers put before the court by the applicants it was stated that the man had invested £260,000 and that he had borrowed heavily from the Ulster Bank in order to do so.

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He said that bank documents showed that he had secured a loan of around £300,000 – but that this explicitly stated that it was for both a poultry shed and a boiler.

The lawyer said that sheds had never been eligible for RHI subsidy and that if the man had an oil boiler he would still have required a poultry shed for his business.

The QC added that the applicants should have read the department’s guidelines and “should have known what the tariffs were meant to address”.

Mr McGleenan said that some of the poultry farmers on the scheme were being overcompensated by £25,000 a year for the life of the scheme for each boiler that they own, beyond what the department had planned for them to be paid but as a result of the department’s errors.