Farmers with land bordering electricity substations could have a lucrative business opportunity.
Strutt & Parker energy specialist Robert Paul explains.
What is the opportunity?
The electricity grid needs sites for diesel-powered generators, which can act as an immediate backup when there is a surge in demand for electricity or if a power plant is having problems.
These are called short-term operating reserve (Stor) sites.
Who might benefit?
Landowners next to a 33kV or bigger substation can lease land to a developer to install and run a Stor.
The window of opportunity is limited, as it is not clear exactly how many sites will be needed nationally.
However, one developer is known to be looking for 400MW of capacity over the next five years and another wants 50 sites.
Demand is strongest in London, the South West, West Midlands and in parts of south Wales.
What is an installation like?
The sites are low level and pretty unobtrusive, particularly once screened.
The developer creates an earth bund and installs concrete pads for the generators to stand on.
Each generator is typically 400kW, so a 20MW site needs 50.
They aren’t particularly noisy and you can include a decibel limit within the contract.
The generators typically only operate in the hours of darkness and only for 150-400 hours/year.
What is the potential income?
Each site is different, but generally landowners should be looking to get paid £1,000-£2,500/MW of capacity a year.
Rents are higher in areas where there is strong demand.
A standard scheme is 20MW, although smaller and bigger ones do exist.
This means landowners with a Stor could be receiving between £40,000-£60,000/year, for 20-25 years, for the use of just one acre.
Rents should be index-linked or have specified reviews built into the contract.
Is everyone getting that money?
There is a concern that many landowners are agreeing to much lower rents than they should be paid.
One developer, who has agreed leases with about 30 landowners, is paying only about £10,000/year.
This is low when you consider that the developer will be earning £1.25m-£1.5m/year in income from the site.
If I am approached by a developer, what do I need to ask?
If approached by a developer, remember there is likely to be interest from others too.
A problem can arise when a developer asks a landowner to sign a letter which gives them permission to seek a grid consent connection, which is personal to that one company.
This means if the landowner chooses not to do a deal with them, or vice versa, the landowner is unable to go to an alternative developer because any spare grid capacity will be owned by the first developer.
Farmers should insist that any grid offer is transferred back to them in the event of no deal being agreed.
This means they are not permanently tied to the first developer if they can’t agree terms.
Landowners should ask that the developer pays all their reasonable legal and professional costs, irrespective of whether the matter completes (the developer may not get planning or decide to walk away).
Next, produce detailed heads of terms, which set out the rights the developer has during the time-limited option period to make applications to connect to the grid, do site surveys and work up a planning permission.
The heads of terms should also establish how the lease is triggered, how the rent is reviewed, what is allowed on site and how the landowner’s interests are protected.
Can landowners develop a Stor themselves?
The process tends to be developer-led, as it is complicated and requires significant investment.
The developers’ contracts for Stor are also very short-term, which brings risk.
This is an opportunity for landowners to rent land to a developer who will take all the risk and pay very good rents.
I don’t think this is a market that landowners should necessarily be investing in themselves.
Are all developers reputable?
There are only a handful of them out there and they are generally reputable.
But the people who are offering £8,000-£10,000/acre are driving a tough bargain, which does not reflect what the scheme is worth.
What are the tax implications?
The rent is obviously treated as normal rental income.
Land used for Stor will not attract agricultural property relief from inheritance tax and a significant rent could tilt the balance on a business property relief claim across wider assets.
Capital gains also needs to be considered from the outset.
Transferring the land to the person the landowner finally wants to own the scheme, as early as possible in the proceedings, can help the CGT position.
Is there any risk of liability for the landowner?
If the heads of terms are right, then the landowner will be giving exclusive possession to the developer who will be responsible for everything that happens in the compound.
The lease will indemnify the landowner against claims, including environmental or personal injury.
The developer must have insurance to cover any liabilities along with adequate procedures in place to minimise the risks and deal with any clean-ups.