Author
“No evidence, no claim” is in essence what Ofgem has told the energy industry following an investigation into the eco-friendly power generator Drax Power Limited’s (Drax) reporting of environmental and sustainability data. We consider what companies can learn from this decision and what consequences there may be when a company cannot produce sufficient evidence to satisfy their regulator.
A recent case study
Drax was fined £25,000,000 by Ofgem in August 2024 following an investigation that found it: (1) had had misreported data it is required to report for the year 2021/2022 due to having “an absence of adequate data governance and controls in place“[1]; and (2) had insufficient evidence to show (a) how its “annual profiling submission” for that year was arrived at and (b) the reliability of data that was reported on the “forestry type and sawlogs” for wood used in its biomass fuel.
Ofgem has expressly confirmed that nothing indicates Drax has been issued with any Renewables Obligation Certificates (ROC) incorrectly and that “we have not found evidence to suggest deliberate misreporting“.
Drax’s error was in the quality of its data reporting to Ofgem, which Ofgem accepts was unintentional.
Under the Renewables Obligation scheme (RO Scheme):
- Energy suppliers have to present Ofgem with ROCs for each MWh of electricity supplied, failing which they will be fined. This incentivises them to buy renewable energy from renewable sources. Renewable energy generators get ROCs for the energy they generate, which result in subsidy payments.
- Drax is accredited under the RO Scheme to use biomass to generate renewable energy at its Yorkshire based power station (which it converted from a coal power station).
- Drax claims ROCs for electricity it generates using woody biomass that meets specific environmental and sustainability requirements. Last year it claimed 9,279,992 ROCs with an estimated subsidy value of £548,000,000.
Why is the data reporting important?
Drax must report to Ofgem on the types of biomass used to generate the electricity, providing it with “annual profiling data” on “additional biomass characteristics“, which is not used for the issuing of ROCs. Failures in Drax’s internal controls and data governance were blamed for its “misreporting data in relation to their annual profiling submission to Ofgem” for 2021/2022. Ofgem found it was unable to provide sufficient evidence to support its submission or “the reliability of its reporting” about some of the fuel it used during that period.
Ofgem explains in its decision that accurate information is important because it:
- helps “improve statistics on biomass use“;
- helps “monitor the effects of biomass use on the areas of origin“; and
- allows “the Secretary of State to understand and monitor the extent to which both primary forests and sawlogs are used in woody biomass, which has consequences for carbon emissions and biodiversity“
The accuracy of the data reported is therefore clearly very important as it is used to inform policy as different sources of renewable energy have different impacts on the environment and land.
The fine can therefore be seen as a warning to Drax and all participants in the energy industry to ensure they have appropriate systems in place and that reporting is accurate so that informed decisions can be made on sustainability and environmental issues at a policy level.
Engagement with the regulator and good evidence
Drax cooperated with Ofgem during its investigation and agreed on measures that it will take, including commissioning an independent external audit of the profiling data from its international supply chain for the year 2023/24. If it had not cooperated in this way, it could probably have expected a more significant fine.
Drax provided Ofgem with “an independent annual sustainability audit report…which provided assurance that reporting has been accurate in relation to the land and greenhouse gas emission criteria“. Ofgem stated that this important piece of evidence was why it has expressly confirmed that the ROCs received for energy generation are not in question and neither is the subsidy Drax received under the RO Scheme.
The potential repercussions of poor evidence
If another generator was under investigation and was not able to provide the same reliable, independent and tangible evidence of the environmental and sustainable credentials of its fuel, Ofgem may question whether it meets the necessary criteria and ultimately whether that generator has been correctly issued with ROCs and subsidy funding.
In those circumstances, if the credibility of their data cannot be substantiated, the effects on that generator could be catastrophic to its long-term viability. It could face:
- a much wider and more in-depth investigation spanning multiple years;
- calls to repay subsidy funding for the year in question and possibly further;
- claims from energy suppliers if their ROCs received for the purchase of renewable energy purchased from the generator are cancelled (although it would seem harsh for suppliers to be penalised in this way when their energy was purchased from a renewable generator in good faith); and
- claims from individual (or groups of) electricity customers in the UK who ultimately fund the RO Scheme through payment of levies on their electricity bills.
Further, directors could face claims from shareholders and investors arising from breaches of their fiduciary duties which results in the diminution of share value.
Evidence, evidence, evidence
Drax received a £25,000,000 “slap on the wrists” for poor admin. If it had not been able to show evidence that proved to Ofgem the sustainability credentials of its fuel-source, then it could have been a lot more serious.
As discussed previously in Iain Connor‘s greenwashing articles about investigations by the Advertising Standards Agency and the UK Consumers and Markets Authority, anyone making or relying on environmental statements should anticipate that regulators will want good independent evidence. This evidence should be contextually relevant in terms of the time period covered and specific to the company making the claims, to back up claims or reports. The company should also maintain good book-keeping. The more evidence to support your position the better you will sleep at night.
If you want to discuss greenwashing, please contact Nick Roberts.
Ofgem’s decision following its investigation into Drax can be reviewed by following this link.
[1] Quotations in this article in italics are all taken from the Ofgem Decision: investigation into Drax Power Limited dated 29 August 2024.
Author