Official Report: Minutes of Evidence
Public Accounts Committee, meeting on Thursday, 22 April 2021
Members present for all or part of the proceedings:Mr William Humphrey (Chairperson)
Mr Roy Beggs (Deputy Chairperson)
Mr Cathal Boylan
Miss Órlaithí Flynn
Mr Harry Harvey
Mr David Hilditch
Mr Maolíosa McHugh
Mr Andrew Muir
Mr Matthew O'Toole
Witnesses:Mr Stuart Stevenson, Department of Finance
Mr Kieran Donnelly, Northern Ireland Audit Office
Mr Steven Agnew, RenewableNI
Professor Gordon Hughes, University of Edinburgh
Inquiry into Generating Electricity from Renewable Energy: Professor Gordon Hughes, University of Edinburgh
The Chairperson (Mr Humphrey): We will now hear evidence from Professor Hughes from Edinburgh University. He has written a paper on renewable energy entitled 'Small wind generation in Northern Ireland'. Welcome to the meeting, Professor Hughes. I invite you to make an opening statement. We will then open the meeting up to questions from Committee members.
Professor Gordon Hughes (University of Edinburgh): I will be brief. I will say a word about my background. I have spent nearly 30 years working on renewable energy as an academic, as a policy adviser at the World Bank and in work that I have done in various ways in the United Kingdom as well. Quite a lot of what I said in my paper is referenced back to a much bigger study that I carried out on the costs of wind generation in the United Kingdom, where I put together a large data set based on company accounts and analysed that. That includes small wind operations as well as larger wind farms, going right the way up in size to the very large offshore wind farms.
The second thing that it is important to emphasise in this context is that I have focused on the comparison in value for money terms between the subsidies that have been provided for small wind turbines — those up to 250 kilowatts — and those that are provided for larger wind farms or wind turbines, which vary from one renewables obligation certificate (ROC) to 0·9 ROCs over the period under consideration. When I suggest that the costs of the small wind turbine programme are high, that is because the same increase in renewable energy output was achievable, and was largely achieved, by the investments that took place in larger wind turbines and larger wind farms. When there is reference to the increase from roughly 3% to 49%, the majority of that increase occurred with subsidies at a much lower level than those that were offered to small wind turbines. Therefore, in thinking about value for money, we need to focus on the issue of comparison rather than talking about the larger-scale progress in renewable energy production in Northern Ireland.
With that, I will hand back to the Chairman and invite any questions.
Mr O'Toole: Thank you, Professor Hughes. What you are talking about is the relative generosity or scale of subsidy in Northern Ireland versus the rest of the UK, where a similar increase in renewable share of generation was achieved with smaller subsidy. What calculation have you made of the excess subsidy? You have said that Northern Ireland could have got there or thereabouts with much less subsidy. How much less subsidy?
Professor Hughes: The situation was that the original target was to achieve 40% generation from renewable sources by 2020. That was achieved, and that would have been achieved even if there had been no investment in small wind turbines, that is those of less than 250 kilowatts. In Northern Ireland, the support scheme for wind turbines that are greater than 250 kilowatts or for wind farms greater than that is exactly the same as was the case in the rest of the United Kingdom, at least under the renewables obligation. Under the feed-in tariffs (FIT) scheme when it was introduced, the subsidies were, at the beginning of the FIT scheme, comparable in magnitude to what was offered by ROCs, and there was no excess. However, as time went on and as the changes were made to the way that the FIT scheme worked in the rest of the United Kingdom, the consequence was that Northern Ireland was, essentially, out of line with the rest of the United Kingdom. That promoted what was, in effect, an investment boom. The big investments in small turbines occurred in the period when the subsidies were much more generous under the Northern Ireland renewables obligation (NIRO) scheme than under the FIT scheme. For those investments, I estimate that the average excess subsidy was approximately £82,000 a year a turbine, which, over all the turbines, amounts to about £43 million a year. I think that that is what you wanted to know, but, if I have not been clear, please come back.
Mr O'Toole: That is great. You have been very clear. On the question of the FIT scheme versus the NIRO scheme, it has not been entirely clearly and consistently articulated by the Department, but we have heard that one potential factor is rural development writ large, particularly in smaller scale farms. Perhaps, it is fair to say, that is the agricultural economic unit that exists in the island of Ireland but does not so much exist in Great Britain. Is that something that you are aware of, or, in your study of the relative merits of the GB approach and the Northern Ireland approach, have you come across rural development as an additional motivation to simply increasing the amount of renewables?
Professor Hughes: I have certainly heard it suggested that the scheme was retained as being as generous as it was in part because it provided certain kinds of benefits for small farmers of the kind that you have referred to. The problem is that, if it is intended as a rural support programme, surely it ought to be compared with what is achieved from other potential rural support programmes and the effectiveness and the value for money given. It has been consistently argued that the FIT scheme and the NIRO scheme were about generating low-carbon electricity, and, if you take that at face value, the calculations that I give are relevant. If we were to try to say that it was both one and the other, we would have to be a bit more explicit about the potential amount of money that the Northern Ireland Government were prepared to spend on rural development of that kind. It also has to be remembered that the majority of the costs of NIRO are not borne by the Northern Ireland population. They are borne by electricity consumers in the rest of the United Kingdom, and they might have something to say about their electricity bills being higher for the purpose of providing rural small farm support in Northern Ireland.
The Chairperson (Mr Humphrey): Professor, you just said that you "heard it suggested" in terms of small farms etc: do you believe that to be the case?
Professor Hughes: I have no basis for knowing whether that is the case. It is believed by a number of people whom I met when I have given talks in Northern Ireland, but I am reporting only their belief; I cannot say whether that belief is correct.
Mr Hilditch: Professor Hughes, do you consider derating to be an acceptable practice for maximising the environmental benefit of the scheme?
Professor Hughes: The derating of turbines is not driven by maximising the environmental benefits; it is driven by the very sharp drop in the number of ROCs and, therefore, the level of subsidy that is provided for output once you get above a rated capacity of 250 kW. The way to optimise the generation that you can obtain from a site on the basis that you will not go above 250 kW capacity is to get the biggest turbine that you can find at a reasonable price that is capable of generating more in low and medium wind conditions. Most turbines do not operate at full capacity for most of the time because the wind speeds are not high enough. Typically, wind speeds need to get to around 12 metres per second to generate at capacity. However, for a derated turbine, you can produce at the 250 kW capacity at, say, 7 or 8 metres per second. That greatly increases the amount of overall generation that you get from the turbine, subject to never going above 250 kW. The game is really about maximising the production while maintaining the maximum level of subsidy support.
Mr Hilditch: You have generated different figures for the installation and operating cost of wind turbines. Have you ever had those challenged or endorsed independently?
Professor Hughes: The capital costs of the turbines are taken from company accounts. I examined the company accounts of a large number of special purpose companies that operate one or more wind turbines in Northern Ireland and do not operate outside Northern Ireland. That gave me the capital costs for the registered turbines under the NIRO scheme. The number that I have is about double the size of the sample that KPMG analysed. The operating cost numbers come from the much bigger study to which I referred earlier, where I looked at in excess of 350 wind farms spread over Northern Ireland, Scotland, Wales and England of varying sizes from quite small to very large. I then did an analysis of the operating costs — again, extracted from company accounts — with data taken for up to 15 years. I then did two things. First, I analysed those costs as a function of the location and the size of the wind farms. There is a considerable clear relationship with location and size. The numbers that I used are based on Northern Ireland and for small turbines. Secondly, I analysed what happened over time to costs. One of the things that you may not be surprised to find is that there is quite a strong increase in operating costs over time: in other words, they are lower in their early years of operation and higher as the wind turbines age. That matters a lot to KPMG's type of calculation, because, if you take account of the costs being low to begin with but high in later years, you get a significantly increased rate of return than if you use the average over the full life of the turbines. In effect, what has happened is that the KPMG figures reflect an average that is treated as applying every year. However, what actually happens is that the costs are relatively low in years 1, 2 and 3 but much higher in years 15, 16, 17 onwards.
As for validation, those are public domain figures. You can extract the figures from the Companies House accounts that are submitted by companies that specialise in this area. They are special purpose vehicles that operate only one wind farm or, in a few cases, multiple wind farms.
Mr Beggs: Thanks for your evidence. I am just trying to summarise what I think that you said. You said that your cost estimates and capital estimates are based on actual company accounts, and the figures are those of special companies that are set up only to run a turbine. Those have not been invented; they are actual figures. Is that correct?
Professor Hughes: Yes. Those are audited accounts. For small companies, their accounts are not strictly audited, but they are prepared by accountants such as KPMG and others, so they reflect what the accountants for those companies have recorded as being the capital costs and the operating costs for either wind farms or individual wind turbines.
Mr Beggs: In your submission, you refer to a range of factors: the load factor; the average capital costs; and the operating costs. The three assumptions that you have put together seem to say that payback is after 4·8 years, so that means that there is considerable profit for a further 15 years. What is your estimate of the excess profit during that period?
Professor Hughes: May I take one step back and give a little bit of an explanation? It is my view that, in straightforward mathematical terms, KPMG has made an elementary but important mathematical error. What it has done is to treat the internal rate of return, or the payback period that is derived when you use average values for capital costs, operating costs and all the other parameters as being the same as the average payback period or internal rate of return that you calculate for each of the individual wind turbines or wind farms over a sample, be it its sample or my bigger sample. That is simply wrong. That is not the case in the circumstances that characterise this data.
There are two important features in that. One is that those distributions are very skewed. There are some very high-cost developments that have high capital costs, and that pushes up the average of the capital costs calculated by KPMG. It also has some firms that have very high operating costs because they have had major repair bills or whatever, and, again, that pushes up the average. Finally, it has taken an average load factor, which is well below the typical load factor that was achieved by the kinds of developments in the period from 2014 to 2017. That means that the figures presented by KPMG are not representative of the typical wind turbine in Northern Ireland. That is why you get this much more profitable profile from looking at the details, examining each of the wind turbines individually and calculating the payback periods, or what the same would have been if I had used the internal rates of return.
As I said in reply to Mr O'Toole, I think, the costs of the excess subsidies, or, in other words, the difference between regular wind farms and these small turbines, is of the order of £82,000 a year for a wind turbine. You should bear in mind that that is for a wind turbine that, according to either KPMG's figures or my figures, cost somewhere between £400,000 and £600,000. So, £80,000 a year is a pretty large return on that upfront capital cost.
Mr Beggs: I have a final question. I have heard that hedge funds have been backing some projects here. In examining those accounts, did you detect high interest rates as being a high-cost item? I am curious as to whether the addresses of the companies tended to be in Northern Ireland or, indeed, perhaps in London.
Professor Hughes: I did look at the addresses of the investors. There are a few standard funds that, I am very conscious, operate large numbers of turbines around the UK in general. These are typically green investment funds. A particular group, the Octopus group, has large investments in both wind and solar power spread around the UK, and it certainly has investments in a number of these special purpose vehicles. That is not typically reflected in where the companies are registered, as they are typically registered in Northern Ireland, but it comes out when you look at who the controlling shareholders are.
If you look at the balance sheets for those that report these details, the Royal Bank of Scotland and Ulster Bank and some of its vehicles appear very regularly as a lender to these kind of projects. That may be perfectly reasonable; they have a big business in Northern Ireland. However, it is quite clear that there was a period when there was a bit of what I call a "cookie-cutter" approach to those developments. In other words, you found the site, put together a package, found a grid connection and put a wind turbine up with loans provided by particular lenders. Then, perhaps, you sold the project after it was developed and registered for the NIRO scheme. You might have sold it on as a source of income generation for a pension fund, essentially, or for investors who are investing widely in green investments of various kinds.
Mr Beggs: Were excessive interest repayment costs associated with these companies?
Professor Hughes: That is extremely hard to identify in these cases. I have come across that quite frequently in the case of larger companies. The reason that it is difficult to identify in the case of the Northern Ireland companies is that most of them qualify for what is known as the micro company exemption, which enables them to file a restricted set of accounts, consisting primarily of a balance sheet rather than a full income and expenditure set of accounts.
Mr Beggs: Thank you. That has been very helpful.
The Chairperson (Mr Humphrey): Thank you very much. I think that all members who indicated that they wanted to ask questions have done so. Yes.
Mr Agnew, do you have any questions?
Mr Steven Agnew (RenewableNI): It is hard for us to respond. Is Professor Hughes content for his report to be published? He had sight of our report in advance, but we have not had that equal opportunity.
In responding to some of the things that he said, for example, in the KPMG report, the average load factor was from across every turbine in the small-scale category. That can be checked. It is a fairly simple calculation of data that is in the public domain. It is 22% for the range identified in the report of between 100 kW and 250 kW. That is just a fact. It is a basic calculation, and I do not think that it is open to challenge.
There was also a reference to 15 years of data. I did not get the exact detail, but most of the turbines in question have been operating for only five years, so you cannot get 15 years' worth of data from those five years.
It is hard to respond fully without seeing Professor Hughes's report. The KPMG report is in the public domain for anyone to check the methodology, and I would contend that it is sound. As I said, if Professor Hughes is content, we would appreciate his report being shared with us. We can then put our comments in writing to the Committee.
Mr Agnew: Yes. Without having the time to consider properly the professor's report, it is hard to be accurate, but, as I said, I stand over KPMG's findings. It was suggested that it made what was a called an "elementary" mistake. I would put my money on the reputation of KPMG.
The Chairperson (Mr Humphrey): OK. Thank you. Professor Hughes, did you hear Mr Agnew, OK? Do you want to respond to the two points that he raised? Those were publishing your report and 15 years of data compared with five years.
Professor Hughes: The simple answer is that I am more than happy for the report to be published. When we discussed the report and I prepared it, we intended and I expected that it would be published as part of the evidence that was received by the Committee. I apologise to RenewableNI. I did not realise that it had not seen it and assumed that it might be passed on to it. We have absolutely no problem with its being published, and I intended that it would be published via the web pages of the Renewable Energy Foundation, which is a charity for which I have prepared a number of reports.
The full details of the figures that I reported about the operating cost, about which Mr Agnew questioned the issue of five and 15 years' worth of data, are in a quite lengthy report on wind power economics, which can be obtained from the website of the Renewable Energy Foundation. Concretely, I explained that I had compiled a large sample of more than 350 wind farms around the United Kingdom that have been operating since 2000. There are 15 or more years of data available on the operating costs of some of those wind farms. Of course, the newest ones that you are talking about have not been operating for as long as 15 years, but, unless one believes that operating costs are fundamentally different in Northern Ireland than in other parts of the United Kingdom for the same size and nature of the wind turbines, the results are entirely transferable to the small wind turbine sector in Northern Ireland. Finally, I want to pick up on the issue of the load factor. Making the statement that the load factor for small turbines in Northern Ireland from 2010 to 2016 was 22% is not very helpful because it relates to a very small sample of wind turbines — very few were installed prior to 2016 — and it is for a particular set of sites. Quite obviously, the wind farm developers who install the new turbines have chosen better sites — those with higher wind yields — and they have gone for derated or similar turbines, which always yield a higher load factor than the original 150 kW or 250 kW turbines. There are simple statistical and mathematical considerations that mean that you would not expect what happened from 2016 to 2020 to be the same as what happened from 2010 to 2016.
My professional background is as a statistician, and that is my area of expertise. I am afraid that I do not accept that KPMG is more likely to be right than I am.
Mr O'Toole: I have a very brief question, Professor Hughes. You mentioned the Renewable Energy Foundation. Would it be fair to say that the Renewable Energy Foundation is viewed as being a fundamentally sceptical organisation when it comes to wind power in general?
Professor Hughes: I thought about commenting on that in my opening statement, and I think that it is an exercise in name-calling.
Professor Hughes: Name-calling.
Professor Hughes: The major proportion of the work that we do at the Renewable Energy Foundation is the collection and publication of statistics. If we are regarded as being a sceptical organisation, it is because I have written several papers that demonstrate that the economics of renewable energy are a wee bit more complicated than the rather oversimplified version that we get from those people who are very strongly in favour of renewable energy. To point out that everything is not always rosy is not being sceptical. Well, it is being sceptical, but it is not in any sense out of line with a proper and reasonable appraisal of the economics of a sector that receives very large amounts of subsidy.
Mr O'Toole: I have one more very brief question. Do you think that the UK Government targets, or EU targets and US Government targets, for that matter, for renewables as a share of electricity generation are reasonable? I am not talking about the specific targets but the idea of setting targets for renewable generation as part of decarbonisation.
Professor Hughes: I said at the beginning that my concern is about value for money. That is to say: is the cost of the reductions in carbon dioxide good value for money for those who have to pay for them, whether it is the taxpayer or those who have to pay their electricity bills? My preference is that setting targets is, from an economist's point of view, a less efficient way of achieving the goal of reducing carbon emissions at low cost than having a clear system of incentives and rewards that is roughly the same across types of renewable energy and other activities that are capable of reducing carbon emissions. In purely technical terms, I am strongly in favour of having carbon taxes and pricing carbon properly. Setting specific targets for renewable energy produces unintended consequences and often produces the kind of consequences that we are focusing on here: namely, having a number of policies that turn out to save carbon but at very high prices.
The Chairperson (Mr Humphrey): I want to clarify a couple of points, Professor Hughes. When will your report be placed on the Renewable Energy Foundation's website?
Professor Hughes: We felt that we ought to give first sight of it to the Committee. If we have your agreement, we will put it up tomorrow or the day after.
The Chairperson (Mr Humphrey): Absolutely. It is your academic property, so we have no difficulty with that. The Clerk has confirmed to me that she has a copy of your report. Are you content that we pass that to RenewableNI?
Professor Hughes: I am entirely happy that you do that.
The Chairperson (Mr Humphrey): Thank you very much. No other members have indicated that they want to ask a question.
Mr Donnelly, Comptroller and Auditor General, do you have any questions?
Mr Kieran Donnelly (Northern Ireland Audit Office): No.
Mr Stuart Stevenson (Department of Finance): No questions from me, Chair.