Farm Power: Weigh up your renewables options
© Lightsource Renewable Energy Deciding whether a renewable energy investment is right for your business is far from straightforward. Get it right and there are good returns available, but a wrong decision can have long-term implications.
There has been a surge in renewable energy uptake since the introduction of Feed-in Tariffs almost five years ago and industry estimates suggest there is still as much as 20GW of untapped generating potential on UK farms.
See also: Farm power green energy opportunity offers earnings and security
That represents a massive opportunity for farm businesses, but with a background of falling government support for renewables, any investment must be planned carefully to ensure it delivers financially and complements the strategic plan for the core business – which may well be helping to fund the project from the outset.
Start with the basics
The starting point for any farm business considering renewable energy generation should be to assess what resources, natural and man-made, are available on the doorstep.
Some, such as a fast flowing river, exposed windy hilltop, or expanse of south-facing roof, may appear obviously suited to a particular technology, but monitor and record how reliable these elements are through the year.
It is also worth conducting an energy audit of the business to identifying variations in the existing energy supply and demand profile of the business, areas where energy efficiency can be improved and where renewable generation could be an option, says the NFU’s Jonathan Scurlock.
“There are a lot of easy wins with energy efficiency that can payback much faster than an investment in renewable energy generation. Once you start examining energy use and efficiency it is likely to lead you down the renewables route anyway.”
Before doing anything though, he urges farmers to question what is driving their interest in renewables (money, ethics, diversification and so on), as this can influence the type of project best suited to the business.
How much involvement?
Understanding how much you want to be involved with the project and the level of risk you are prepared to take is crucial.
Some may want to develop their own project that better utilises existing labour, skills, machinery, and buildings, lets them take all the risk, but benefit from all returns. Biogas production, for example, will suit farmers with the right assets that want an engineering challenge that requires daily management.
However, at the other end are those that want minimal involvement and are happy to rent an area of land or roof space to a developer and let them take the risk (and returns) in exchange for a predictable annual rent.
If considering such developer-led schemes, headline rental figures should be considered but should not be the deciding factor, say advisers. Responsibilities must be made clear on aspects such as grazing licences, maintenance of grass around solar panels, public liability insurance and what happens if anyone defaults on payments.
Make the most of energy on-site
Cuts to renewables support mean it is vital to maximise on-site energy use to get the best returns from any project, says Mark Chamberlain of Hallmark Power. This means matching technology closely to energy demand on the farm.
“Solar, for example, is a good fit where there’s a high electric demand during the day in summer, such as for cooling milk or powering offices, while a biomass boiler works best where there is a large heat demand on-site year-round.”
Displacing as much electricity as possible bought for 10-12p/kWh returns more to the business than simply exporting to the grid at nearer 5p/kWh and also helps “future-proof” the business by reducing exposure to future energy price rises.
When assessing any project, it is vital to consider some key financial data, which should ideally be supported with real examples from technology providers.
- How much will the project cost to install (everything from feasibility studies and planning applications to groundworks, equipment and construction)?
- When is this paid for, and in what currency? (Beware of exchange rate fluctuations when buying from outside UK.)
- What is the predicted performance?
- Does the developer assume it will run at 100% efficiency? Is this realistic? Ask for evidence
- What is the annual return and payback?
- How does payback change at different levels of performance?
- How much energy can be used on-site? Are there ways to change practices or equipment to use more?
- How does changing this proportion alter payback?
- What are the annual running costs?
- How much does performance drop as the technology ages?
Barriers to overcome
There are many factors which could restrict development and prevent a project proceeding, but the biggest is the available grid capacity and connection, says Andrew Watkin of Carter Jonas.
“Some areas already have a cap on the amount of electricity that can be exported, which can be a major constraint to any project. The cost of upgrading supply can also run into tens or hundreds of thousands and there are inconsistencies across the country in the way connection offers are handled by distribution network operators [DNOs].”
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Barriers to renewable energy generation investment |
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Applies to… |
What’s the issue? |
What can I do? |
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Grid capacity |
Any technology exporting electricity to grid. A particular issue in SW England. Larger projects most likely to struggle to find available capacity. |
DNOs insist the grid is getting close to capacity in many areas, making it harder to accommodate new electricity generation. |
Many DNOs offer flexible connection deals where cost is lower, but there are limits on how much power can be exported at certain times. Check grid capacity early. |
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Grid connection |
All technologies, but a particular issue in remote areas (such as single-phase electric). |
Many farms do not have adequate supply cabling to connect a renewable energy project to the grid. It is very expensive to upgrade or run new cables to offlying sites. |
Check grid connection at the outset. Consider off-grid projects and/or battery storage. |
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Environmental constraints |
Any technology. Very site-specific, although protected areas (SSSIs, National Parks) are most at risk. |
A wide range of possible issues, including visual impact, loss of species or habitat, noise, odour, water pollution risk, downstream impact or additional traffic. |
Ensure relevant environmental audits are carried out, work with local communities and other interest groups (such as the RSPB and Natural England). |
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Planning |
Most technologies, although smaller projects may not need planning (for example, rooftop solar installed under Permitted Development Rights). |
Many projects are not able to proceed due to planning objections – wind turbines can be particularly controversial. Civil/ military aviation may also be an issue to consider. |
Involve the community from the outset and address concerns. Consider community funding to get residents on side. |
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Land availability/ feedstocks |
Biogas. |
Plant operators need a secure, consistent supply of feedstock for at least 10, ideally 20+ years, plus land to spread digestate. |
Self-supply feedstocks from own land or use long-term feedstock contracts. |
Funding the project
There are many ways to fund a renewable energy project, however the most suitable option will depend on many factors, such as the developer’s attitude to risk, whether they want to receive all or part of the returns and existing borrowing requirements.
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Renewable energy project funding options |
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Finance type |
Pros |
Cons |
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Bank finance Farmer funds all or part of the project with a bank loan secured against existing assets. Repayments typically covered by a proportion of future project income (30%) and other income from the core business. |
+ Allows farmer to “own” the project and receive all returns + Banks more open to renewables now-many offer funding, so shop around + Often handled by existing bank manager – familiarity + Relatively low interest rates available |
– Farmer takes most of the risk – May not be possible where other loans are already secured against assets (land/buildings) – Lending process can be slower than some other routes – Amount available limited by ability to cover repayments and security |
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Crowd funding Internet-based lending, where many individuals can invest varying sums in one project. The person developing the project typically puts in 30% of capital. |
+ Project taken in isolation and lending is against actual or potential income from the asset over its lifetime + Doesn’t compromise existing loans secured against other assets + Relatively quick way of getting funds + Low-risk projects with straightforward income stream attract strongest interest |
– Generally need planning and grid connection in place first – Not really an option for smaller projects (<£300k) – Complex projects may have less appeal – Relatively new sector that is less well understood than conventional lending – Interest rates may be slightly higher than banks |
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Developer-led Energy developer is granted an option (lasting 12-18 months) to develop a site in exchange for a rental income. Developer takes responsibility for the whole project over its lifetime (feasibility to operation). |
+ Low risk and less involvement for farmer + Secure, index linked income for 20-30 years (typically £700-1,200/acre for large-scale solar) + May be able to secure a revenue-based rental (typically 4-6%) |
– Developer takes all income from the project and benefits from uplifts in performance – Farmer is tied into a long-term contract – check detail carefully – Generally applies to large-scale projects – Uncertainty over procedures if developer goes bankrupt during the term and site handover at the end of the lease |
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Community investment Members of the local community are offered to buy a stake in a project. Business structures can take many forms, such as joint venture, shared ownership, or bonds. |
+ Can help projects through the planning process (community involvement must be offered for projects >£2.5m) + Provides alternative source of finance + Brings benefits to rural communities and is good PR for the industry + Could bring new ideas |
– Relies on sufficient interest from the local community – Adds complexity, time and cost during project set-up – Returns are shared among relevant parties – Mainly applies to larger projects – Complex or controversial projects may still struggle to attract interest |
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Joint venture Can be a JV between landowner and developer or between two neighbouring farmers pooling resources to develop a project. |
+ Tax saving over option & lease – (reduces inheritance tax exposure where income treated as trading income and qualifies for business property relief) + Gives landowners the option to take a greater share in the risk and reward + JV can be considered between landowners where access is needed over another farm |
– Potentially tricky to agree details, timescales and responsibilities of both parties – More expensive and time consuming to set up than traditional option and lease – Complexity arises when deciding what happens when one party leaves (planned or unplanned) |
The Farm Power project aims to bring about a step change in the uptake of sustainable farm-based energy across the UK.
Farm Power was founded by Forum for the Future, Farmers Weekly and Nottingham Trent University, and is guided by a steering committee made up of National Grid, United Utilities, NFU, Business in the Community, The Farm Energy Project, Lely, Thompson Farms, Lightsource Renewable Energy, Endurance Wind Power, and additionally funded by The Ashden Trust and the Esmeé Fairburn Foundation.