Green energy sees move to alternative finance models

A dramatic increase in renewable energy projects being refinanced over recent months is creating opportunities for landowners but notes of caution too.

Refinancing covers a number of areas, from those with self- or bank-funded schemes wanting to release capital by taking out a loan against the project to reinvest elsewhere, to developers selling projects to City investors backed by pension funds.

Following cuts to support there has been a huge decline in the funding of new energy projects says Hiten Sonpal, senior director at Lombard Green Energy Finance.

About 80% of business with this lender this year comes from refinancing existing schemes.

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As renewable technology and income generating potential proves itself, lending against the energy asset itself (asset finance) is becoming a more popular way of releasing capital.

Asset finance does not usually require security over land or buildings so farmers who funded projects through a conventional secured bank loan may be able to free-up security by borrowing against the generating asset, he notes.

Businesses still have to demonstrate their ability to meet repayments.

“Asset finance interest rates vary according to individual circumstances but are typically 1% to 3% higher than loans secured against land,” says Mr Sonpal.

Asset finance against an energy project is therefore not for propping-up a failing core business, he warns.

Sites with a proven track record of income generation (at least 12 months) are likely to get a better deal as up to 100% of revenue could be taken into account when assessing serviceability.

Know who pays the rent

Where larger developer-led schemes are being refinanced, there should be minimal impact on landowners renting-out sites, but it is important to ensure tenants meet lease commitments and keep landlords informed.

In most cases, it is the leasehold interest in the project that is being sold, which means all landlord/tenant rights in the original agreement are passed to the new owner, explains Darren Edwards of Fisher German.

However, most leases include an obligation on the tenant to keep the landlord informed during any refinancing process and many, but not all, include a lump sum assignment payment for the landlord when the project is sold on.

Some investors are also looking to buy the freehold of the site rather than pay an annual rent, notes Mr Edwards.

Such a windfall may suit some landowners, but offers must be considered carefully, particularly the tax implications, access to the site and any impact on the wider holding value from selling a block of land.