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Ongoing Regulatory Compliance: Ofgem Audit

Operational Renewables Projects – Part 4

With the Feed-in Tariff now closed to new applicants (from 1 April 2019), and the Smart Export Guarantee still a twinkle in the government’s eye, now is an opportune moment to assess where the opportunities and challenges lie for operational renewable energy assets.

In the first three articles in this series, Roadnight Taylor and Ashfords considered how to maximise the performance of assets from a generation and financial perspective.

In this fourth and penultimate article Jonathan (Ashfords) and Richard (Roadnight Taylor) look at the Ofgem audit process, and what can be done to prepare for what can be an intimidating experience.

"Watch ye therefore: for ye know not when the master of the house cometh.”

Ofgem’s role in the context of energy subsidies is to act as guardian of the public purse, ensuring that bill-payer’s money (through levies) is correctly used. Ofgem has wide-ranging powers to undertake audits of renewable installations with the ultimate sanction being to refuse the asset owner continued participation in the subsidy scheme. Occasionally Ofgem may require subsidies to be repaid.

Over to Richard:

In recent years FiTs, RHI and ROCs have been a driving force in the roll-out of renewables across the UK and, for many projects, are fundamental to the economics of the project; it provides the core ‘pension fund investment’ type return.”

Jonathan remarks:

An adverse audit outcome from Ofgem can crush the business case of a renewables facility. We have advised asset owners where Ofgem has alleged some defect in the accreditation of the facility where Ofgem has opined that a new application for accreditation is required. With degressions in FiTs and RHI, compounded with changes to eligibility criteria, this would have a ruinous effect on the finances of the business. In these circumstances it is necessary to engage with Ofgem’s findings and, where possible, question and challenge Ofgem’s findings.

Be prepared

Bearing in mind the financial consequences of an adverse finding, it is important for facility owners to be prepared for audit and ensure that information is easily to hand and complete, helping keep the audit process on an even keel and reach a favourable outcome without inadvertently providing incorrect information which casts doubt on the facility’s eligibility for accreditation. 

Richard remarks:

It is critical that asset owners are prepared for the audit and take appropriate measures to ensure that they can convincingly answer the due diligence queries of the auditors. This requires engineering, commercial and legal due diligence by the asset owner.

Jonathan responds:

It is not unusual for clients to be unprepared for the Ofgem audit. We have known seemingly important documents - completion certificates and final ‘as built’ drawings - poorly archived with outdated, incorrect drafts. We have also heard that some documentation has not been passed from one owner to another when the asset has been sold. Our data room service securely stores all project documents and ensures that the information is to hand when it is needed. We have also provided strategic advice where it has not been possible to provide the requested information, and mitigate the risk of an adverse audit outcome.

Ofgem may also challenge the eligibility of feedstocks used, for example in AD. The classification of feedstocks for the purposes of RHI is a complex area and one where there is plenty of scope for disagreement between the facility owner and Ofgem. 

Jonathan comments:

In one case we successfully argued that Proflo Syrup was not a liquid “product”, but a solid “waste” in suspension, and therefore eligible for RHI. In another example Ofgem refused to make payments or RHI relating to biogas produced from glycerol. In that case it was necessary for us to argue that the particular glycerol being used was a liquid waste – notwithstanding its classification in waste regulations as a co-product – and therefore eligible for RHI.

Conclusion

The spectre of an Ofgem audit is a little-talked about but essential element of what it is to operate with the benefit of FiTs, RHI and other renewables benefits. Knowing that you are eligible for renewable subsidies is often different to being able to demonstrate that you are eligible for renewable subsidies. The better prepared facility owners are for audit, the sooner Ofgem will be able to satisfy itself of that facility’s eligibility without unduly raising doubts in the mind of the auditor. Where there is a risk of an adverse audit outcome, it is often better to identify these shortcomings early on so that actions can be taken to remedy or mitigate those flaws.

About the contributors:

Jonathan Croley is an Associate at Ashfords LLP. Jonathan and his colleagues advise asset owners and their funders in responding to Ofgem audit (including NIROCs, FiT and RHI).

Richard Palmer is a Senior Consultant at Roadnight Taylor, a leading independent power and energy consultancy that provides strategic energy reviews and advises on optimal deployment of generation and storage technologies, as well as financial optimisation of existing assets.

Return to the Operational Renewables Projects page.

Read the next article in this series: Ongoing Regulatory Compliance: Environment Agency and Health and Safety Executive

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