Official Report: Minutes of Evidence

The Chairperson (Mr Humphrey): I welcome, to brief the Committee on their analysis of the KPMG report, Mr Brennan, the permanent secretary and accounting officer for the Department for the Economy; Mr Richard Rodgers, head of energy group; and Mr Trevor McBriar, principal officer in renewable electricity branch. Also in attendance this afternoon are Mr Kieran Donnelly CB, Comptroller and Auditor General with the Northern Ireland Audit Office (NIAO), and Mr Stuart Stevenson, the Treasury Officer of Accounts for the Department of Finance, who is joining the meeting remotely.

Members, your packs include: witness biographies; the Northern Ireland Audit Office's 'Generating electricity from renewable energy' report; KPMG's 'An economic review of small-scale wind'; correspondence from Mike Brennan, including the analysis of the KPMG report; the Northern Ireland Audit Office's key points from the KPMG analysis; and correspondence from Mr Brennan regarding information requested during the evidence session on 18 March 2021.

Mr Brennan, welcome to the meeting. At this stage, I invite you to make an opening statement, and then members will have comments and questions.

Mr Mike Brennan (Department for the Economy): Thank you, Chair. I will make a very brief introduction. Following our last session with the Committee on 18 March, a lot of work and analysis has been undertaken. On 18 March, we discussed at length the KPMG report. Lots of analysis has been undertaken since then to try to determine how robust that report was, and the Northern Ireland renewables obligation (NIRO) assurance and risk management steering group, which comprises the Department, the Utility Regulator and Ofgem, has been looking at that in detail, and we have provided you with a summary assessment of that piece of work.

In addition to the KPMG work, you will see that the assurance and risk management steering group has been doing a benchmarking exercise. Trevor, Richard and I will hopefully take you through some of the key issues there.

The Chairperson (Mr Humphrey): OK. Mr McBriar, is there anything that you want to add before we move to questions?

Mr Trevor McBriar (Department for the Economy): No, I do not think so.

The Chairperson (Mr Humphrey): OK. Do any members wish to ask questions of Mr Brennan, Mr Rodgers or Mr McBriar?

Mr Muir: Thanks for coming along here today in person. It is useful. I note all your responses to the KPMG report, and I read over that last night. Do you not think that it highlights the very heavy reliance on the industry? There is probably too much trust in the figures that it provides. At the outset of the scheme, had there been a requirement for the industry to provide the information that you have been unable to get, that would have engendered a lot more confidence and public trust in the scheme.

Mr Brennan: It is a delicate line to tread. I know the point that you are making. It is a very valid one about seeking complete transparency to give comfort, but, at the same time, those are commercial contracts, and there is a necessity to protect the commercial viability of the companies and the contracts that they have. So, I take reassurance from the KPMG and steering group findings from the sample work that they did. Obviously, that did not get into detailed invoice scrutiny for every single turbine, but the sampling that they did gives a higher degree of assurance. I understand the point that you are making, and, in future schemes, it may be something to look at as regards the obligations that we impose on the companies regarding the data that they provide to the Utility Regulator, Ofgem and us. We should have a greater degree of transparency than we do under the current scheme. Perhaps Richard or Trevor wish to comment.

Mr Richard Rodgers (Department for the Economy): That is a fair point.

Mr Muir: I understand the commercial element. I just do not know whether I am sitting here fully assured that there is full acceptance of the need to get access to that information. This is not grant funding. It is separate, but there are many other examples of government grant funding, and there is a requirement to have access to that commercial information because there is a financial incentive to provide it. Also, it is being provided to a government body, so there is a clear basis on which the information is being given. Obviously, there are clear contractual and legal terms on the information that is to be provided. I have read through your analysis, and there is a feeling throughout it that elements of the KPMG report are reasonable. However, that is based on the fact that you have not had sight of a lot of the information. I just do not know how it is fair to make that judgement without having full sight of the information, if that makes sense.

Mr Brennan: It does make sense. All that we can do is try to increase the degrees of transparency and scrutiny that we have. Obviously, this has significant implications because it is a UK-wide scheme, and the requirements to divulge are UK-wide. Certainly, as I said earlier, I would like to think that, as we develop successor schemes, we can impose, as a condition of drawing down funding, requirements to divulge information to either Ofgem, the Utility Regulator or ourselves, which will give us greater insight.

Mr Muir: That is important. I just have one last question, Chair. On page 8, table 2 outlines the different information sources and the figures that they came up with. Those sources are KPMG; the Department of Energy and Climate Change, which is now the Department for Business, Energy and Industrial Strategy (BEIS); DETI, which is now DFE; Professor Hughes; and the Northern Ireland Audit Office. So, there are five there. On the analysis from Professor Hughes, I have been doing a bit more research, and I do not know whether I would put as much store in his figures as I would those of the other providers, because I am conscious of his views on renewable energy, and it is important that we take that into account when deciding whether that is an authoritative information source. I am interested in your views on that particular viewpoint of Professor Hughes.

Mr Brennan: You will have seen the letter from Russell Smith, the senior partner in KPMG, which addresses the way in which Professor Hughes analysed the scheme. We probably share most of those concerns. In summary, Professor Hughes was not comparing like with like when comparing Northern Ireland with GB. Our small-scale definition of a turbine was 250 kWh, whereas he was looking at a larger turbine. There is a raft of issues, so, on the whole, I would probably share some of the concerns that were flagged up in the letter from KPMG on the way in which Professor Hughes benchmarked his analysis and the fact that he delivered recommendations that probably were not based on as firm an evidence base as we would have liked. To produce criticisms of government policy based on presumptions on like-for-like comparison is concerning.

Mr Muir: Some of the information was garnered from accounts at Companies House, which, as anyone would know, does not provide a snapshot of the business.

Mr Brennan: It does not give you the degree of detail that you would need; for example, on opex and capex and things like that.

The Chairperson (Mr Humphrey): We did offer KPMG an opportunity to come in front of the Committee to clarify its position and address the concerns that were set out in the letter. That opportunity was not taken up. Sorry, Mr Muir.

Mr Muir: That is OK, Chair. It is an important point.

I have one last point. It is the role of the Public Accounts Committee to highlight these issues and seek redress on them. Your response, the KPMG report and the other data around it highlights a few wider issues. First, energy policy is extremely complex, and we all, I hope, have an understanding of that by now. Secondly, Northern Ireland is a great country, and I love it very much, but we are very small in the scheme of things, with a population of 1·8 million. So we have a very complex policy area but a very small population. Therefore, having the level of technical knowledge to implement energy policy is a challenge, as it is in so many other policy areas across Northern Ireland. Sometimes we do not fully acknowledge that. As a result, there is an over-reliance upon certain people in the industry — certain consultants — for advice. We are going to have to learn from this, and from previous issues, how to address that. We are going to conclude this inquiry, and I will not walk away from it with a great level of confidence unless we address that fundamental issue. I take comfort from the real efforts that the Department has made to try to increase the level of knowledge around a very complex area, and I thank you for it. However, the issue is over-reliance on the industry and the level of trust. It only takes one or two actions to erode that trust, and government takes the consequences for that.

I do not know whether you have anything more to say about that, but it is a fundamental issue.

Mr Brennan: I have just two, very quick, high-level observations, and then I will bring in Richard. The first one is in relation to energy strategy going forward. Obviously, the Department now has its energy strategy out for consultation, and it seems to have landed warmly with all key stakeholders. Part of the reason for that is that it is not really just a DFE energy strategy any more, it is not even just an Northern Ireland Civil Service strategy. The Departments are now more joined up than was ever the case previously with energy policy. We have external panels of experts and external stakeholders, so it is a shared energy strategy.

However, there is a concern, and you have touched on it, which is that Northern Ireland is a small place in which to construct energy policy in a devolved context. Richard has 100 or 150 staff on his team, but if you look at energy policy at a UK level, it is administered by BEIS, which has thousands taking it forward. Yet, in many ways, energy policy in Northern Ireland is much more complex, with the integration in the single electricity market, and the fact that some matters are reserved and some devolved. It is an incredibly complex policy environment to look after. Therefore, I worry, at times, that there needs to be an awareness that, as we move forward, DFE cannot own energy strategy in isolation. All the key stakeholders have to buy into it, and, even then, there has to be a recognition that, sometimes, some of the issues are just too big to be dealt with at a devolved level and they should be looked at at a reserved level.

Richard, maybe you have something to contribute?

Mr Rodgers: I agree with those remarks. We are small, and we have to learn from what is happening elsewhere, across the islands as a whole. It is also an opportunity. We have to be able to work and bring the network monopolies, whether Northern Ireland Electricity, the System Operator for Northern Ireland or the gas companies, to account. That is the job that the Utility Regulator does under the regulations and the statute.

However, it provides an opportunity. What we have achieved, in getting renewable electricity to 49%, was achieved because the electricity company is doing things that are not being done elsewhere, better than is being done across the rest of the UK. Therefore, we have the opportunity to demonstrate that we can do stuff and test it. For example, recently, we achieved the first production of green hydrogen across the island, through the electrolyser, from what otherwise would have been curtailed renewable wind power. That is an exciting step forward.

The point that you make is really well made. We are now firmly engaged with BEIS in the development of policy, and it looks to us because of the things that we are achieving. It is a good, two-way conversation.

Mr Muir: This was highlighted in another report that we produced, the 'Report on Capacity and Capability in the Northern Ireland Civil Service.' That relationship is with what you would describe, Chair, as the "Imperial Civil Service". It is about that relationship and skills, and it is an important issue to highlight.

The Chairperson (Mr Humphrey): I would describe it so, because that is what it is, Mr Muir.

Mr Harvey: What about the costs, and the insurance cost in particular. Would you say that the figure quoted has turned out to be accurate?

Mr Brennan: These are the costs quoted for the opex estimates? They seem reasonable to us. There are three sets of costs: the rates, insurance and maintenance. We have no reason to question them. Trevor, a number of sources were looked at when the benchmarking was being done.

Mr McBriar: It is difficult to verify the costs, because the stations vary in many ways, in size and where they are and so forth. The estimate that was provided to us by KPMG was based on actual costs. That was provided to them by 134 different stations. So, from that perspective, it seems like a reasonable representation of the sector.

Mr Harvey: OK. Thank you.

Mr Beggs: You say that you believe that the costs are "a reasonable representation of the sector". I do not know. Were they randomly selected? We were told that some provided figures for all their turbines, some provided some information and some provided none. How do you know whether it is reasonable? Would it not have been better had there been some mechanism for independently gathering random information?

Mr Brennan: The costs of insurance was identified as £2,900 by KPMG. For some turbines, it will be higher; for some, it will be lower. All that we can do —.

Mr Beggs: What was the average size of turbine?

Mr Brennan: I do not know what the average was.

Mr McBriar: It was 225 kW.

Mr Beggs: You tell us that the cost could be higher or lower than £3,000. Is that an average cost?

Mr Brennan: It is for the information identified as part of the sampling exercise.

Mr Beggs: Did you try to get independent confirmation of that? There are turbines on the public estate. Antrim hospital, for example, has a turbine. I do not know what size it is. Have you attempted, independently, to find out what insurance costs might be?

Mr Brennan: I am not aware that the steering group did that.

Mr Beggs: OK. If the owner of the land owned the turbine, there would be no rental cost. I know that agricultural costs are maybe £300 or £400

—

The Chairperson (Mr Humphrey): Mr Beggs, we seem to be losing you. You are dropping in and out.

Mr Beggs: — land rental costs on an annual basis.

The Chairperson (Mr Humphrey): Mr Beggs, we seem to be losing you. In fact, we have lost you. You are dropping in and out, so there is no flow to your questions. For those of us who are old enough to remember, you are doing a very good impersonation of Norman Collier. Will you re-ask the question?

Mr Beggs: I am trying to ascertain

I will come in again.

The Chairperson (Mr Humphrey): OK. That is fine. While Mr Beggs tries to re-establish the link, does any other member wish to ask a question?

Mr O'Toole: It is, in the nicest possible way, quite a muddy situation for us. We have the Audit Office saying one thing, independent consultants on behalf of the trade body saying another and you largely endorsing what the trade body is saying via its consultants. In saying that your internal analysis of the KPMG report is that you think that the assumptions in that report are broadly defensible or reasonable, are you implicitly disagreeing with some of the key findings of the Audit Office?

Mr Brennan: No. We are looking at different data sets, so we are looking at different information. Since our last session on 18 March, we have had some clarification of how the Audit Office calculated its rates of return, for example. I think — Trevor, correct me if I am wrong — that it was based on 10 turbines, but the costs of one turbine were focused on. If you look at that specific turbine, you will come up with an assessment of what the rate of return is.

The KPMG work looked at something different. It looked at a wider sample and came up with different figures, but assumptions are always made about how you calculate a rate of return. For example, if you look at the KPMG report, you will see that about 25 or 30 were excluded on the capex side because they were new turbines, so the capex cost of buying a new turbine was higher. If you build in a higher capex cost to those turbines, you start to reduce the rate of return. Adjustments were made, for example, to the KPMG calculations, in their methodology, to come up with a reasonable assessment of a rate of return. The Audit Office has done the same, but it is looking at different datasets.

That goes back to my point that, unless you have access to 100% of the data on the opex and capex side of the invoices, you will not get to the position where both of us agree on an exact number.

Mr O'Toole: Although the two major actors — I do not know whether to call them antagonists — the NIAO and KPMG are looking at different things, you are saying that you do not disagree with some of the major findings or recommendations of the Audit Office. Presumably, you do not completely stand over everything it said and the questions that it raised about the efficacy of the NIRO scheme.

Mr Brennan: I understand exactly how the Audit Office calculated its rate of return and, at the same time, I understand exactly how KPMG calculated its rate of return. All that I am saying is that the additional work that was done by the assurance and risk management steering group that I referred to earlier, which looked at that and at the benchmarking exercise, came out, broadly, in the same place as KPMG. That is not to say that the Audit Office would not be in the same place if we had given it the same data set.

Mr Rodgers: I will just add to that. That plays to recommendation 6 of the Audit Office report, which we have accepted. That was that we will assess the rate of return across the scheme. To go back to the point that was made earlier, it will be very challenging when we develop a legal right to access all the individual pieces of data and information.

Mr O'Toole: So, although you cannot endorse the exact methodology, because there is an honest disagreement over data sets and assumptions being relied upon, you do not fundamentally disagree with the recommendations in the Audit Office report?

Mr Brennan: No, because, as Richard said, we want to get to a place where we can all agree that there is complete transparency on cost data and, therefore, a clear view on what an appropriate rate of return should be.

Mr O'Toole: In a previous answer, Mike, you said that some of the issues relating to energy policy were "too big". Do you mean that it is too big for the Northern Ireland Civil Service? You — not you specifically, but the entire Northern Ireland Civil Service and specifically what was DETI and is now DFE — have been through that with the renewable heat incentive experience. Were you alluding to that experience? Are some of the questions simply too big for the Civil Service's capacity?

Mr Brennan: Yes. Looking at the energy agenda that lies ahead, with growing a green economy and decarbonisation, some of the policy initiatives that might need to be taken forward are so big and complex that I am not sure that they can be delivered efficiently at a Northern Ireland level. We are looking at the renewables obligation here. That was a UK-wide initiative, but there are probably issues that we would struggle to operate solely on the basis of the Northern Ireland Civil Service taking forward major policy interventions in the energy space, if those were complex.

Mr O'Toole: As you said, this scheme was not designed in Northern Ireland. Broadly speaking, it was a lift-and-lay scheme from Whitehall where, at particular points, decisions were made to diverge in ways that were, for better or worse, advantageous to the small-scale sector, relative to GB. The exact quantum is debated. That experience was not about not having the capacity or the data set to design a local scheme; it was about the experience of lifting and laying it, or adapting it, from Whitehall.

Mr Brennan: When decisions are taken to change the policy in London, such as through the introduction of feed-in tariffs, they have impacts on Northern Ireland, and the policy in Northern Ireland has to react to that in a way that suits whatever the industry and sector requirements are in Northern Ireland. DETI, as it was at that time, had to react to policy change developments at a UK-wide level.

Mr O'Toole: I have one final question. Correct me if I am wrong, because this is a broad statement, but one of the questions raised by the Audit Office report was basically about the fact that the cost of NIRO was largely borne by Britain, and because of that pooling exercise, as I guess it was, it did not come out of spending — it was not public money. Well, it was public money, but it was consumer money from bills. There is a question about whether that is value for money writ large, as in value for money for people who pay tax bills in Leicestershire or Angus. As accounting officer for DFE, when you are looking at value for money, do you look at the overall value for money? If the cost is spread to consumers in Britain, is that relevant to you, as an accounting officer, in the way managing public money that comes from the block grant is relevant? I do not know it that question makes sense.

Mr Brennan: It does. Any assessment of value for money will take into consideration the wider social costs and benefits that accrue. The needs in the Northern Ireland context, whether it be rural diversification or the fact that we have a greater preponderance of wind, all feature in how Northern Ireland might benefit from the spend, but the implications in the wider GB context are also a consideration in that decision-making process. The bottom line in a value-for-money context is, as Richard said, that it has got Northern Ireland to a position where 49% of our electricity generated comes from wind, and the cost to the consumer for that renewable energy is something like 1p per turbine over 20 years, which is a figure that always jumps out at me.

Mr Rodgers: A couple of important points. There are two sides to the obligation. The UK Government decided to put less of an obligation on Northern Ireland electricity suppliers to reflect the fuel poverty position relative to GB, because we have to pay more for our fuel. That was a UK-wide policy decision. The second aspect is that we have more wind in Northern Ireland than they have in the south of England, so it is natural that, relatively, we should produce more wind energy. That is the way that the UK-wide policy was designed.

The Chairperson (Mr Humphrey): OK, thank you. No other members want to ask questions and Mr Beggs has been unable to rejoin the meeting. Mr Donnelly, do you have any comments or questions?

Mr Kieran Donnelly (Northern Ireland Audit Office): I welcome a couple of the points that were made, namely that the accounting officer will have not just a Department for Economy policy but one that is Civil Service-wide and the commitment that, at the design stage of any new schemes, we will get access to the costing information, which is the key point. When you are working with limited information on costs, it is very hard to bolt the thing down, and it depends on what assumptions are made. There is certainly learning for any future schemes.

The Chairperson (Mr Humphrey): Mr Stevenson, is there any comment that you want to make?

Mr Stuart Stevenson (Department of Finance): Nothing further from my perspective, Chair. Thank you.

The Chairperson (Mr Humphrey): OK. Mr Brennan, Mr Rodgers and Mr McBriar, thank you very much for attending the Committee.

Mr O'Toole: I have one very brief question, Chair. I will be very brief.

The Chairperson (Mr Humphrey): No monologues. A brief question.

Mr O'Toole: I promise. Some of us are hoping to go to Donegal this summer. What will be the status of the biogas plant in Donegal, if we encounter it?

Mr Brennan: It is still operating and burning chicken waste from Northern Ireland.

Mr O'Toole: OK. That is all that I wanted to know.

The Chairperson (Mr Humphrey): Take a note of that history-making moment.

Mr O'Toole: What was that?

The Chairperson (Mr Humphrey): That was a history-making moment. [Laughter.]

Mr Muir: Is that part of the tourism trail?

Mr O'Toole: I might go and see it.

The Chairperson (Mr Humphrey): Thank you very much, gentlemen.