Around this time last month, Ofgem advised on its homepage that the Renewable Heat Incentive (RHI) scheme was going to be delayed as the European Commission has expressed reservations over the over the large biomass tariff. (It was supposed to be open by the end of September.) This morning, I received an email notification from Ofgem that the scheme will ‘finally’ be open for applications by the end of November 2011, subject to state aid approval by the parliament. Even so, a parliamentary approval does not necessarily mean a comfortable road ahead for Ofgem.
RHI is the world’s first nationwide financial incentive for generating renewable heat means its implementation will be complicated and challenging. Ofgem will have to balance control and facilitation in order to avoid any consequences contradictory to the policy objectives and the rationale of the Administration.[1] In implementing the RHI, Ofgem needs to face at least three key challenges, namely operational, technical and fraud prevention.
Operational challenges
Ofgem will administer the scheme for millions of commercial users and household users in an efficient, customer-orientated manner. As there are 27 million households or businesses eligible for the payments, the number of applications received by Ofgem will increase exponentially when the application period starts on 30 November 2011.
Manpower constraints
Generally, any government department like Ofgem which runs a funding scheme will face pressure in staffing when the increase of case load is much faster than that of manpower at the initial stage. Ambiguity, inaccuracy and incompleteness of information submitted by the public are always a major problem, leading to large number of deferrals and indeed wastage of working hours and indeed slippage in approval process. If Ofgem has to make a decision on an application in 20-30 working days as pledged, issuing a clear, easy-to-understand application guideline or checklist with effective manpower planning is essential.
Possibility of processing errors and corruption
Processing officers should find it difficult to ensure every piece of related document to an application be error-free, especially when large volume of applications are received every day. A one-tier processing team may also run the risk of unfair prejudice or even be susceptible to corruption. Therefore, it is recommended a two-tier or multi-tier system be set up and every application must go through two or even three officers of different ranks before approval is granted.
Limited experience in managing payment system
Ofgem has limited experience in managing a billing and payment system at this scale although it also administers the Renewable Obligation for small-scale generators. It is vital that the registration and payments process is robust, accurate, cost-effective but simple for applicants. As Ofgem could not afford the damage caused to its credibility when the system goes wrong, it is suggested to outsource the design and operation of the payment system to an appropriately experienced organisation before Phase 2 begins.
High administration costs
While Ofgem has to monitor the scheme’s implementation, it needs to minimise the administration costs to both the department and applicants in order to avoid offsetting the energy savings achieved. For example, the guidance consultation document proposes independent report be required of “complex” installations. Certain systems classified as “complex” may actually be relatively small such as a centralised boiler serving a number of barn conversions where requiring independent report may be prohibitive. A schematic diagram should be sufficient for demonstrating compliance with the regulations unless the installation has a great capacity.[2]
Technical challenges
As most of the officers in Ofgem may not be engineering professionals, it may encounter difficulties in determining the eligibility of ever-changing technologies or measurement of heat output.[3] As a result, the administration of the scheme may be detrimental to the policy or even provide disincentive to potential developers and funders of renewable heating projects.
For example, the guidance consultation document proposes that the biomass element of commercial and industrial waste be ineligible for the RHI. Actually, wastes from these sources tend to be more consistent composition and can therefore be treated more efficiently and output thus maximised. Such “knowledge gap” could also be seen in the limit placed on biogas generation, because of which the industry would miss the opportunity to develop large-scale facilities where heat would be utilised on site.[4]
The processing team in Ofgem may be laymen in the technical side of heat generation. To ensure the application guidelines and instructions to staff are up-to-date, a “liaison group” should be set up to maintain close and regular dialogues with the industry for their expertise in this aspect. This liaison group should consist of opinion leaders or representatives in the renewable energy sector. These informal consultations also help Ofgem build up a rapport with the industry to smoothen the scheme’s administration.
Fraud prevention
As the administrator of a publicly-funded scheme, considerations are given to ensuring the money was spent to targeted persons/technologies in the interest of taxpayers. Loopholes have to be identified and a system devised to prevent fraud or abuse of the scheme. Those specific to RHI includes the fraudulent use of fossil fuels in heating equipment and dishonest reporting of meter readings for extra payments, etc. The draft guidance document has outlined measures that ensure ongoing compliance with RHI’s requirements such as unannounced site audits/inspections and fuel sampling, but more could be considered.
For instance, issues can arise from the assessment of “significant” heat loss as part of the metering requirements. An effective method of assessment could be declaring the percentage of eligible heat use rather than the percentage of nominal boiler rating.[5] Its advantage is that fraud would become obvious in subsequent heat meter returns, and therefore, engineers and owners would have to be completely honest at application stage.
However, there should always be a balance between control and facilitation in order not to deter potential applicants. In the same example of independent metering report requirement (mentioned under administration costs), although it is devised to prevent accidental or intentional fraud, the requirement has little value but high cost. The little value is due to the easy post-inspection manipulation of heat meters and high cost shortage of assessors and administration of reports. Both the RHI beneficiary (client) and the installer are less likely to commit fraud under the threat of losing accreditation and future business.
To balance between control and facilitation, the metering could, instead, be signed off by a professional architect or engineer within the project team who are usually obligated under the membership of their respective institutions to maintain high standards.[6] With no ambiguity about what should be on site, this suggestion makes random audits a more powerful method of control and fraud prevention.
[1] The rationale of RHI and the other two landmark policies is to promote a sustainable Britain and open up the financing market for energy efficiency and renewable energy projects. Ofgem should demonstrate the values of sustainability throughout the course of administration. For instance, the stipulation regarding “new equipment only” is counter-intuitive to the sustainability argument. While it is administratively convenient, perfectly good, virtually new, biomass boiler could be scrapped for no reason other than it fails to qualify for RHI that disallows moving of equipment. Also, prohibiting the movement of equipment represents an increased risk on energy service companies (ESCO) that help finance the upfront costs of equipment for customers. To prevent gaming within the RHI but achieve a balance, it would be more appropriate to require plant to be new at first accreditation and any movement of the plant would require re-accreditation and the same ownership before payments resume.
[2] Another example is fuel sampling criteria and biomass sustainability reporting proposed in Volume 2. To reduce the cost incurred to the industry, they should be consistent with requirements in the RO so that CHP operators can produce one report satisfying the requirements of both financial incentives.
[3] Unlike electricity, heat output is difficult to measure precisely. Therefore, payments for smaller systems will be based on what the installer estimates (“deems”) the annual output of the system will be. A robust way to establish the “deemed” output must be developed, which is not easy.
[4] Every year, the Whisky industry produces massive amount of draff by-product, which is ideal for anaerobic digestion. With this technology, distilleries would have been able to utilise biogas to meet their process heat requirements. Owing to the rural location of most of the distilleries, the carbon saving benefit of utilising this technology would be even greater as a large proportion of these facilities have no access to mains gas. Thus, it is recommended that 200kW biogas limit be removed.
[5] For example, a system delivering 300,000 KWh of eligible heat a year would be allowed to have an ineligible heat loss of 5%, which would be 15,000 KWh, before becoming significant.
[6] Professional institutions like RIBA, RICS, IMechE, CIBSE and IET, etc. would take a fraudulently signed off metering scheme seriously, which indirectly help Ofgem as a gatekeeper.
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