The effect of a renewable energy project on the whole farming business must be assessed, rather than looking at it in isolation, warn advisers.
Doing your own robust and realistic calculations will also help to understand the likely returns – the figures produced by those selling the technology do not usually paint the whole picture, says James Fulton of property and business adviser Berrys.
However, far too many farmers and landowners rely on such figures, he says. “In almost every case the returns are shown on an Earnings Before Interest Tax Depreciation and Amortisation [EBITDA] basis. This gives only a general overview of cost and income.
“On that basis, a £50,000 investment offering an annual income of £5,000 might look like a 10% return – better than the bank – but if the money was in the bank, at least it would still be there at the end.
Renewable energy – business planning
- Needs independent costings
- Consider effect on cashflow
- What demands will it put on the business – extra borrowing, skills, time?
- Assess increased risk
“You either have to put in cash at the start and depreciate the asset or if you are borrowing to fund it, you must account for interest and capital repayments and also for the cost of dismantling and restoring at the end of the project.”
Even with relatively simple projects there are likely to be repair, insurance or other costs that must be factored in to the appraisal.
Where a separate company is set up to take advantage of lower corporation tax rates, there will be 20% tax to pay on profit, points out Mr Fulton. If an investment is owned by a higher-rate tax payer there may be 40% or 45% tax to pay.
Cashflow is another crucial consideration. “If you are borrowing – can the capital and interest payments come out of the cashflow generated by the scheme itself – and after the tax payable – or are you going to have to put some cash in yourself?
“Most appraisals do not take into account whether a scheme is cash-positive from the start, which, following two poor harvests, will be vital for most farming businesses.
“If it is cash-negative for the first three years, which is not impossible, it simply puts the business in an overtraded position and puts it under strain.”
Read more: All the latest Renewables news
Some of the problems Mr Fulton has encountered on farms that have embarked on renewables projects stem from the fact that the sector operates on a totally different basis to that on which farmers are used to doing business.
“Grain is traded on standard terms, relationships are built over long periods – this is totally different. Often the salesman just wants to make his sale and move on.”
While solar and wind generation is largely passive in terms of physical demands on the farm business, anaerobic digesters need significant management expertise and input, which means the physical integration of the new enterprise with the core business must be considered.
This means looking not only at likely labour demand, but also at changes to cropping that may bring new risks and challenges, as will managing feedstock supply. The practicalities of handling and selling or disposing of digestate must also be considered.