Burnetts logo

Is Green really the colour of money?

A decade ago, renewable energy was a concept that many people saw as a new age fad that would eventually fade. However, with EU carbon reduction targets, default penalties, and the potential threat of environmental taxes, renewable energy is now something to be taken seriously. Burnetts' Head of Agriculture looks at some of the energy opportunities available to landowners.

A decade ago, renewable energy was a concept that many people saw as a new age fad that would eventually fade.

However, with EU carbon reduction targets, default penalties, and the potential threat of environmental taxes, renewable energy is now something to be taken seriously.

In addition, a government subsidy incentive system in the form of the Feed In Tariff (“FIT”) provides index linked payments for 20 - 25 years.  This has produced the concept of an investment with a definitive return and has certainly provoked a response from the business world. This response includes property owners wishing to diversify and take advantage of renewable projects as well as investors looking to fund such projects with a view to obtaining a healthy return on their investment.  Despite this, there are a number of people who still harbour some scepticism about whether renewable energy can really equate to sufficient money in the bank to justify the amount of investment and extent of commitment required.        

Anaerobic Digesters (AD)

Anaerobic Digesters are already in place in the UK albeit in relatively small numbers compared to other countries such as Germany. The uptake by the general farming community has been relatively slow because of a number of key factors:

Cost of investment - The tariff for these projects continues to increase. The hope is that this will induce more businesses to move from thinking of developing an AD plant to actually being able to afford to going ahead with it on a self build basis.

Impact on farming operations – considering that for one of the larger AD plants to operate as efficiently as possible, it requires a holding of 700 acres or so on a rotational energy crop cycle, for many, a project of this nature is just not possible. For those who have such a holding, it would effectively render existing farming operations impossible to continue. From an investment point of view, it would also mean putting all of your eggs in one basket and a basket, which is built on the basis of relatively new technology.

Taking account of the above, it is easy to see why so few projects are taking off the ground. However, these concerns can be alleviated to a certain extent when you consider the alternatives available to the self-build approach:
 

  • Co-operative arrangements – where a number of farmers co-operate by agreement with each other and perhaps with business investors for the construction of a plant and supply of energy crop to fuel it. In many cases, this would spread and limit the investment risk and reduce the effects on existing farming practices.
  • Outside Investment – in the current economic climate, the concept of guaranteed money (or as guaranteed as any government promise is these days) unsurprisingly has not gone unnoticed by investors. There are various opportunities available in terms of:
            + private investment companies/structures and lease arrangements with landowners; and
            + lease and buy back options whereby all or part of the investment associated with construction can be funded and potentially repaid over time.
  • Gap Funding – where the landowner(s) put down some of the start up money required and a third party provides the remainder  

Wind Turbines

We are all familiar with wind farms. However, with the number of large scale farms actually in place and those in the planning pipeline, the number of additional farms may now slow down.  This will be particularly so if the “cumulative effect” remains as a key argument in the planning process whereby planning constraints prohibits the landscape from being cluttered with turbines.  Projects of this large size tend to be based purely on investment from third party companies with the landowner receiving an annual rent, which can either be fixed or dependent upon power generated or perhaps an element of both.  In these schemes the benefit to the landowner is relatively less than that of the developer company (but the landowner does not have any capital outlay or risk relating to planning, construction or future maintenance).   

However, such large schemes should not be confused with the smaller turbines, which can be a cost effective investment for landowners and other businesses wishing to generate power for their own sites. Looking at a recent case study, a turbine 11KW in size costing £60,000 to install, run properly and with optimal wind conditions could pay for itself in 5 and a half years leaving the remainder of the life of the turbine to generate income for the land owner.

PV technology

Photo voltaic technology has transformed from being seen as either a new age hippy idea or something that would never work in a country that rarely sees the sun. Now it is seen as a concept that offers a huge range of apparatus including those suitable to be installed for the benefit of a residential dwelling or which could fill a field full of PV panels, producing energy but without necessarily preventing the land being used for its normal agricultural purpose in terms of grazing.

For those who do not wish to make any capital outlay in PV technology, such schemes can still be embraced with the assistance of investors who are willing to install and pay for PV panels under a lease arrangement with the land/property owner. Roofs of farm buildings (with particular focus on large areas of roof space such as those found on poultry sheds) can be utilised.

The investment required to implement PV technology is also relatively palatable compared to other renewable opportunities thus making the technology a very popular choice for home owners or for land owners wishing to diversify. However, as a result of their feasibility and popularity, the FIT has now been reduced on the basis that (a) the government fear proliferation of solar power farms and (b) this sector is less dependent upon individuals being provided with significant incentives. The government’s view appears to be that other alternative forms of energy generation projects require further stimulation if they are to come to fruition in significant numbers.  Nevertheless, modest investment with equally modest returns and the opportunity to cut out at least some of the volatility in energy prices, where energy generated can be used by the producer, will seem a very sensible option for many currently weighing up their renewable options.
 

Hydro Schemes

Hydro schemes are acknowledged to offer very attractive returns to landowners and investors alike, particularly as, unlike wind and solar schemes (which require specific weather conditions in order to generate maximum power with greatest efficiency), they rely on relatively constant conditions, such as running water and tides, to produce power. However, the siting of hydro-schemes is notoriously difficult and so if considering such a scheme, expert advice as to the suitability of the site in mind should be sought at the outset.
 

Conclusion

It is important to note that whilst all of the above projects offer potential new income streams courtesy of the green revolution, they also pose a threat to the properties on land they may be secured upon in terms of the covenants imposed and the financial risks involved. Whether you are at the planning, construction or agreement stage, specialist advice should be sought from those who have sufficient expertise to identify the risks of such significant personal investment and relationships with third parties as landowners need to ensure the green money keeps them the land owner in the black and out of the red.

Richard Miller is Head of Agriculture and a Partner in Burnetts’ Energy Law team.

For further information about energy law, contact Richard on 01228 552222, email rm@burnetts.co.uk.

About the author

Richard Miller profile photo

Richard Miller

Richard is Head of Burnetts’ Agribusiness and Property team.

Published: Friday 23rd March 2012
Categorised: Agribusiness, Renewable Energy

All Factsheets