AUDIT OF THE ECOENERGY FOR RENEWABLE POWER PROGRAM PROJECT AU1304

TABLE OF CONTENTS

EXECUTIVE SUMMARY

The ecoENERGY for Renewable Power (ecoERP) program was launched in April 2007 to encourage the generation of electricity from renewable energy sources such as wind, low-impact hydro, biomass, photovoltaic and geothermal energy. Although no new contribution agreements will be signed after March 31, 2011, many projects will continue to receive payments up to March 31, 2021.

At March 31, 2011, 104 projects qualified for funding under the Program, representing investments of approximately $1.4 billion over 14 years, and almost 4,500 megawatts of renewable power capacity.

Recipients such as independent power producers, private and public utilities, cooperatives and businesses that produce electricity from low-impact renewable power sources receive funding through contribution agreements for their approved projects.

In fiscal year 2011-2012, contribution spending totalled $126 million. In fiscal year 2012-2013, the planned contribution spending for the ecoENERGY for Renewable Power program is $143 million.

The 2012-2015 Risk-Based Audit Plan, approved by the Deputy Minister, identified this audit as a “High Audit Priority” due to materiality ($1.4 billion) and because there has been no previous audit on this specific program.

AUDIT PURPOSE AND OBJECTIVES

The overall purpose of this audit was to ensure that the management control framework for the ecoENERGY for Renewable Power program is working as intended. Specifically, the audit was to provide reasonable assurance that:

  • The Program has an efficient governance process in place;
  • The Program is administered with due diligence and transparency in accordance with the approved terms and conditions; and
  • The Department exercises risk-based control, monitoring and oversight activities over the Program.

SCOPE

The scope of the audit covered the major aspects of the internal control framework with respect to the ecoENERGY for Renewable Power program. The audit examined contribution agreements and associated transactions from fiscal years 2007-2008 to 2011-2012. The audit excluded departmental operations & maintenance and salary transactions as these costs represented approximately 2% of total Program funding.

STRENGTHS

The Program has been diligent in its monitoring activities. Constructive engagement with recipients and timely feedback was evident throughout the payment process. Recipient audits and technical and environmental assessment site visits were conducted on a regular basis since the Program was introduced in April 2007.

The Program’s archival, data storage and record keeping systems facilitate program monitoring as well as prompt information retrieval for decision-making purposes. Complete project information, from receipt of the recipient’s notice of project application to project reporting, is captured in the ecoEnergy for Renewable Power database. This database was designed in-house and specifically for the ecoERP Program.

AREAS FOR IMPROVEMENT

While there are sound controls in place, the audit noted that due to the highly specialized nature of the Program, it would be prudent to have a well-defined knowledge management and human resources succession plan in place. In addition, the audit identified some gaps in the area of pro-active disclosure. In order to ensure adequate transparency it will be imperative for such information to be disclosed in a timely and accurate manner.

AUDIT CONCLUSION AND OPINION

Overall, the audit team can provide reasonable assurance that the ecoERP Program has an efficient governance and monitoring system in place and that the Program is administered with due diligence and transparency in accordance with the approved Terms and Conditions.

In my opinion, the management of the program could be strengthened if a well-defined knowledge management and comprehensive human resources succession plan is put in place to ensure that Natural Resources Canada (NRCan) has the necessary expertise to see to the Program’s ultimate successful conclusion on March 31, 2021.

The opinion is based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed on with management. The opinion is applicable only to the entity examined.

Audit Branch considers that the Management Action Plan presented for this audit adequately addresses the issues identified.

STATEMENT OF CONFORMANCE

In my professional judgement as Chief Audit Executive the audit conforms with the Internal Auditing Standards for the Government of Canada, as supported by the results of the internal Quality Assurance and Improvement Program (QAIP).

Christian Asselin, CA, CMA, CFE
Chief Audit Executive

INTRODUCTION

The ecoENERGY for Renewable Power (ecoERP) Program contributes to the Government of Canada’s Clean Air Agenda through the development and production of renewable power.

The Program was introduced in January 2007 to support deployment of approximately 4,000 megawatts of renewable power capacity and reduction of 6.0 to 6.7 mega tonnes of greenhouse gases through production of 14.3 terawatt-hours of electricity. It was created to boost clean energy supplies, help Canadians use energy more efficiently and reduce air pollutants and greenhouse gas emissions from conventional energy generating sources. This $1.4 billion program will run for 14 years and supports a broad selection of low-impact renewable power sources such as wind, hydro, solar and biomass.

Recipients such as independent power producers, private and public utilities, cooperatives and businesses that produce electricity from low-impact renewable power sources receive funding through contribution agreements for their approved projects from April 1, 2007 to March 31, 2011. Each contribution agreement sets the limit for eligible production. Although no new contribution agreements were signed after March 31, 2011, the Program continues to pay the incentive of one cent per kilowatt-hour for a ten-year period, as outlined in contribution agreements, up to March 31, 2021.

In fiscal year 2011-2012, contribution spending totalled $126 million. In fiscal year 2012-2013, the planned contribution spending for the ecoENERGY for Renewable Power program is $143 million.

This audit was identified as a “High Audit priority” in the 2012-2015 Risk-Based Audit Plan, approved by the Deputy Minister. In addition there is a requirement from Treasury Board Secretariat (TBS) that this program report the results and recommendations of internal audits starting in fiscal year 2012-2013.

AUDIT PURPOSE AND OBJECTIVES

The overall purpose of this audit was to ensure that the management control framework for the ecoENERGY for Renewable Power Program is working as intended. Specifically, the audit was to provide reasonable assurance that:

  • The Program has an efficient governance process in place;
  • The Program is administered with due diligence and transparency in accordance with the approved Terms and Conditions; and
  • The Department exercises risk-based control, monitoring and oversight activities over the Program.

AUDIT SCOPE AND METHODOLOGY

The scope of the audit covered the major aspects of the internal control framework with respect to the ecoENERGY for Renewable Power program. The audit examined contribution agreements and transactions from fiscal years 2007-2008 to 2011-2012. The audit excluded departmental operations & maintenance and salary transactions as these costs represented 2% of total program funding.

The audit methodology was based on Treasury Board guidelines on internal auditing and standards defined by the Institute of Internal Auditors (IIA) and included:

  • A review of relevant background documentation;
  • Interviews with key corporate and program personnel;
  • An examination of program records and other supporting documentation (to determine if effective financial and program controls had been designed);
  • A review of 47 contribution agreementsFootnote 1 and 488 claims for payment; and
  • A reconciliation of ecoERP contribution agreements listing from the Department’s financial system with the ecoERP websiteFootnote 2and NRCan’s proactive disclosure websiteFootnote 3.

CRITERIA

Appendix B illustrates the audit objectives and audit criteria used to assess the adequacy of the ecoENERGY for Renewable Power management control framework.

FINDINGS AND RECOMMENDATIONS

GOVERNANCE

Summary Finding

While the Department has an efficient governance process in place for the ecoERP Program, a human resources succession plan for the Program has not been formalized.

Supporting Findings

Overall, there is an efficient control framework in place for the design and delivery of the Program. The Program took into consideration the lessons learned from the Wind Power Production Incentive Program, which preceded this Program. Improvements were made in estimating the capacity factor and the dissemination of information to potential recipients. The audit did not identify any duplication of effort by recipients. There are clear and concise Program administration requirements which must be followed by recipients at all times. These include third party metering and annual performance reports. Recipients also provided project information via the ecoERP website. The Program developed various standardized templates for acceptance and rejection of projects, consultations with Aboriginal groups and for verifying production information. Regular briefings and updates are provided to senior management. For example, the Program Manager briefs the Program Director weekly who in turn briefs the Program Director General bi-weekly. All significant issues must be signed-off by the Assistant Deputy Minister.

SUCCESSION PLAN

The ecoERP Program, a relatively small entity (5 employees), is highly technical and specialized in nature. In the initial stages of the Program, two employees had the technical expertise to support the Program. At the time of the audit, the majority of expertise resided with only one individual.

Management has indicated their intention of drafting a Memorandum of Understanding (MOU) with other Sectors such as the Innovative & Energy and Technology Sector for technical expertise should the need for additional support arise. The audit team found that there was no formal human resources succession plan in place.

RISK AND IMPACT

The absence of an effective knowledge management and human resources succession plan may pose a risk to the Program delivery given the expertise required and the longevity of the Program (until March 31, 2021).

This operational risk is rated as minorFootnote 4 in view of the fact that management is considering entering into MOUs with other Sectors in order to have access to additional expertise should it be required.

RECOMMENDATION

1. The Assistant Deputy Minister of the Energy Sector should initiate a well-defined knowledge management and comprehensive human resources succession planning process to ensure that NRCan does not lack the necessary expertise to support the ecoERP Program.

MANAGEMENT RESPONSE AND ACTION PLAN AND TIME FRAME

Accepted

The Program has transitioned from a phase during which new projects were being reviewed and accepted to a phase where the Program will be delivering incentives to already approved projects. As a result, the requirements for technical expertise have changed. With the Program Manager as the senior technical advisor, the Program has an expert to handle any technical issues that arise. Management will also implement Memorandums of Understanding with other Divisions in NRCan for technical assistance. Also a formal succession plan will be developed.

Completion Date: March 31, 2013

PROGRAM ADMINISTRATION

Summary Finding

The Department exercises due diligence in administering the ecoERP Program, however, a reconciliation process was not in place to ensure that all contribution agreements and material amendments were proactively disclosed on the departmental website.

Supporting Findings

The Program has the appropriate controls in place to ensure consistent assessment and approval of projects. The ecoERP Program is “rules-based” and thus rigorous criteria were used to assess eligibility. The audit team found that project evaluations were conducted in accordance with approved eligibility criteria. In addition, the Program had developed a Program Administration Manual in order to assist ecoERP personnel and management in administering the approval process of project proposals submitted under the Program. The Manual described in great detail the six main stages addition to the requirements of the Program.

Program management engages with the Center of Expertise (CoE) for Grants and Contributions and Legal Services as needed. Standard agreement templates were developed and aligned with the Terms and Conditions of the Program. Recipient contribution agreements were developed through a process that addresses risk.

Of the 47 contribution agreements reviewed, evidence on file indicated that the Program staff exercise due diligence in administering the Program. The Program has a rigorous system of checks and balances in place to ensure that recipients meet the stated requirements in the terms and conditions of the contribution agreements.

In instances where there were metering figures and corresponding invoices which had to be re-checked or rectified, prompt actions were taken by Program management to engage the recipients to get such matters resolved in a timely manner.

Where there was the need for explanation, pointed technical questions were posed and responses were provided by the recipients accordingly. In some instances where the recipients required technical guidance or other forms of assistance, such was readily provided by the Program's technical advisors and administrative staff.

The audit team also found that:

  • Potential recipients had access to information about the ecoERP Program;
  • There was appropriate segregation of duties between receipt, evaluation and approval of project applications; and
  • Changes to Program Terms and Conditions were duly documented and appropriately approved.

PROACTIVE DISCLOSURE

The proactive disclosure of contribution agreements reflects the broader government commitment to transparency and strengthening accountability within the public sector. This requirement was introduced in 2004 to ensure that contribution agreement information is collected and presented consistently across government to facilitate public access. According to Treasury Board Policy, contribution agreements over $25,000 must be disclosed. Footnote 5

The areas of responsibility over the process of proactive disclosure at NRCan are defined as follows:

  • Program Management is responsible to enter information on CAs into the Agreements Module & SAP Interfaces (AMI) corporate application; and
  • Once entered in the AMI system, the CoE is responsible to upload the information onto the internet.

The audit team reviewed data on 104 projects of which, 103 agreements required proactive disclosure on NRCan’s proactive disclosure website:

  • 102 agreements (98%) were disclosed on the site:
    • 98 agreements were stated accurately.
    • 4 agreements were stated with inaccurate values.
  • 1 agreement (1%) was not disclosed.

The audit team noted that the Program does post its contribution agreements on another external website entitled the ecoEnergy for Renewable Power program, of which 100% of contribution agreements were disclosed.

The agreement that is not disclosed had been originally disclosed in 2009, however, the agreement was recalled by the Program due to a change of the recipient’s name in the agreement and therefore removed from the website. The new agreement was signed and again included in the AMI system and while a system notification should have alerted the Center of Expertise, the disclosure was not renewed.

Three of the four agreements that were inaccurately disclosed were amounts that were in the process of being adjusted due to revisions to eligible production. However, the Centre of Expertise had not been directly advised that the revisions had occurred in two of these three. The third agreement did not require an adjustment, so its disclosed amount was correct. The fourth agreement was correctly reported in the AMI system but inaccurately disclosed due to an input error in the proactive disclosure website.

RISK AND IMPACT

Failure to proactively disclose all contribution agreements could result in not following the spirit of proactive disclosure, thus impacting on transparency.

This reporting risk is rated as minor Footnote 6as senior management had disclosed the majority (98%) of the contribution agreements on the proactive disclosure website and 100% of the contribution agreements (with the exception of the dollar value of the agreement) on the ecoEnergy Renewable Power program website.

RECOMMENDATION

2. The Assistant Deputy Minister of the Energy Sector should initiate a timely reconciliation process to ensure that all ecoERP contribution agreements are accurately disclosed on NRCan’s proactive disclosure website.

MANAGEMENT RESPONSE AND ACTION PLAN AND TIME FRAME

Accepted

The Program Manager is in the process of ensuring that all ecoERP contribution agreements are disclosed.

Completion date: Underway

In addition, the program manager is in the process of developing a verification process to ensure that all ecoERP contribution agreements are accurately disclosed on NRCan’s proactive disclosure website.

Completion date: January 31, 2013

MONITORING

Summary Finding

The Department exercises risk-based control, monitoring and oversight activities over the ecoERP Program.

Supporting Findings

CLAIMS FOR PAYMENT

Claims for payments are based on eligible production and are submitted on a quarterly basis. Discussions with management and staff indicated that there is a rigorous verification process in place for documentation and invoices. The Program manager has staff with the appropriate technical background to review the documentation and follow-up promptly with the recipients to ensure that the claims for payment are submitted correctly.

Overall, the majority of the claims for payment are being supported by the required documentation when originally submitted, thereby contributing to a speedier technical review and Finance and Administration Act (FAA) Section 34 certification, (which confirms that goods and/or services have been received and are in compliance with the terms and conditions of the agreement). An analysis of payment data for the Program revealed that the average time for FAA Section 34 certification was 53 days from the receipt of the completed claim in fiscal year 2008-2009. In fiscal year 2011-2012, the same metric had decreased to 31 days, indicating improvements in efficiency. File reviews indicated that payments were often delayed because recipients did not include all required supporting information. As the Program matures, recipients are getting better at submitting complete information to support their claims.

The audit team also noted that 22 contribution agreements had Electronic Data Interchange (EDI) payments set up for the recipients. This type of payment reduces the time it takes for payments to be processed. As a result, recipients receive their contribution sooner than the regular cheque payment mailing process, which can average from two to four business days.

In order to further strengthen the Program by expediting the payment process, Program management could consider the following:

  • Implementing EDI payments for the remaining recipients;
  • Revising the initial “receipt date” on claims for payment when the original claim submitted by the recipient is incomplete. This will ensure that the date recorded into the financial system by the Shared Services Office accurately reflects the point in time when the claim contains all necessary supporting information and is ready for processing; and
  • Monitoring the time required for FAA Section 34 certification.

PROGRAM MONITORING

Based on the Program’s Risk-Based Audit Framework, 35 to 50 recipient audits were to be undertaken over the 14-year period of the Program, resulting in an average of two to four audits per year. Recipient audits are expected to assess compliance with the Terms and Conditions of the contribution agreements specifically in reference to incentive payments on production. At the time of this audit, 11 recipient audits had been conducted. Four were conducted in fiscal year 2009-2010, two in 2010-2011 and five in 2011-2012. No significant issues were identified in any of the recipient audits.

Program authorities also carried out periodic technical site visits to ensure that projects were built as proposed and that invoices reflected the physical set up of the project. The target was to conduct five to ten technical site visits per year. At the time of the audit, 59 site visits had taken place. No adverse findings were noted.

Program authorities also conducted environmental assessment site visits to ensure that the projects were built according to required standards and to verify whether the suggested mitigation measures were implemented correctly during the construction phase. As at the time of this audit, 63 of such site visits had taken place. No significant issues were identified.

RECOMMENDATION

None

MANAGEMENT RESPONSE AND ACTION PLAN AND TIME FRAME

Not Required

APPENDIX A – STANDARD RISK TYPES AND AUDIT RATINGS

Standard Risk Types

Standard risk types are classified based on the COSO Footnote 7Internal Control-Integrated Framework as follows:

Strategy – High-level goals, aligned with and supporting the Department's mission.

Operations – Effective and efficient use of resources.

Monitoring – Accurate assessments or evaluation of activities.

Reporting – Reliability of operational and financial reporting.

Compliance – Compliance with applicable laws, regulations, policies and procedures.

Standard Audit Risk Ratings

Audit findings are rated as follows:

Major: A key control does not exist, is poorly designed or is not operating as intended and the related risk is potentially significant. The objective to which the control relates is unlikely to be achieved. Corrective action is needed to ensure controls are cost effective and/or objectives are achieved.

Moderate: A key control does not exist, is poorly designed or is not operating as intended and the related risk is more than inconsequential. However, a compensating control exists. Corrective action is needed to avoid sole reliance on compensating controls and/or ensure controls are cost effective.

Minor: A weakness in the design and/or operation of a non-key process control. Ability to achieve process objectives is unlikely to be impacted. Corrective action is suggested to ensure controls are cost effective.

APPENDIX B – AUDIT OBJECTIVES AND CRITERIA

The audit criteria were derived from widely recognized control models (e.g. Canadian Institute of Chartered Accountants Criteria of Control – CoCo) and TBS Policies and Directives. Actual performance was assessed against the audit criteria resulting in either a positive finding or the identification of an area of improvement.

The purpose of this audit was to ensure that the management control framework for the ecoENERGY for Renewable Power Program is working as intended.

The following audit criteria were used to conduct the audit:

Audit Sub-Objectives Audit Criteria
Sub-Objective 1:

The Program has an efficient governance process in place.
1.1 Management has an effective control framework for the design and delivery of grant and contribution programs.

1.2 Roles, responsibilities and accountabilities are clearly defined and communicated.

Sub-Objective 2:

The Program is administered with due diligence and transparency in accordance with the approved terms and conditions.
2.1 Program promotion and recipient application is conducted in a manner that is fair and accessible.

2.2 There are transparent control processes to ensure the consistent assessment and approval of projects to meet the objectives of the program.

2.3 Recipient agreements are consistently developed through a process that is tailored to address risk and recipient requirements.

2.4 Grants and contribution over $25,000 are disclosed in accordance with proactive disclosure requirements.

Sub-Objective 3:

The Department exercises risk-based control, monitoring and oversight activities over the Program.
3.1 Program reviews recipient payments to ensure compliance with the requirements of the Financial Administration Act (FAA) and the Directive on Transfer Payments.

3.2 Monitoring, reporting and auditing of individual recipients are performed proportionately to their risk level and in accordance with the terms & conditions.

3.3 There are monitoring and reporting processes in place to support program review and the departmental performance measurement strategy.