Farmers considering investing in renewable energy must take more account of the long-term implications for their business, as Paul Spackman learned at last week’s Farm Energy event in Peterborough
The decision to cut support for new solar arrays installed from Monday (12 December) was undoubtedly a bitter blow to anyone who didn’t get schemes up and running in time.
Returns will be significantly lower under the new Feed-in Tariff payment and payback a few years longer. Many experts at the Farm Energy event predicted annual returns of 5-7%, compared with nearer 14% under the old FiT rate. What’s more, the second phase of DECC’s comprehensive review, due to be announced soon, could result in changes to tariffs for other technologies too.
But all is not lost, according to independent consultant, Peter Fane. “Don’t be fooled into thinking renewable energy is a flash in the pan. It is a long-term investment opportunity and FiTs are only one of a number of reasons for investing, so don’t get hung up on the recent cuts.”
Savings in energy costs were a big driver and would be more so in the future, he said. “Ofgem predicts a 60% increase in electricity costs over the next six years, so if you’re paying 10-12p/kWh for electric now, you could soon be paying 17-19p/kWh. The more of this you can generate yourself, the less your business will be affected by rising costs. In many cases it’s the energy use on farm that’s the key to profitability.”
Damian Baker, managing director of RenEnergy, illustrated the point with a model 50kW south-facing roof-mounted solar PV system. Assuming 4p/kWh export value for electricity, 50% usage on farm and electricity prices increasing by 5% a year, he said the system would give a first-year return of 10%, a nine-year payback and generate a total of £258,000. However, increasing on farm usage to 100% increased the first year return to 11%, cut the payback period by one year and resulted in total income of £317,000.
“FiTs have done exactly what they were meant to do by bringing the knowledge and industry into this country. Prior to the Feed-in Tariff launch, it took 15 years to install about 30MW in the UK. Recently the industry has been installing that amount [of new PV capacity] every month and it’s looking like 500MW of PV will be installed by the end of this year.”
He acknowledged the cost of solar arrays had come down massively over recent years, which helped boost returns under the lower FiT rate. While there could be some further reduction in future, he cautioned about expecting big drops in technology cost. He said costs for a typical PV system comprised of: panels 53%, inverters 14%, labour 12%, electrical components 8%, fixings 7% and access 6%. “Panel costs are now getting close to the cost of manufacture. Processes will improve, but at the moment I don’t see anything that will radically change it.”
Barclays Bank head of agriculture Martin Redfearn urged farmers to avoid “knee jerk” reactions to changes in support and think about where renewable energy fitted into the farm’s long-term business plan.
“If you borrow a lump of money to invest in renewables, that’s money that can’t be borrowed to invest elsewhere in the business, so you have to ask where the money will be best spent to help achieve your aims for the business.
“The cost of borrowing is at an all-time low and interest rates are going to remain low for a long time. If you can’t afford to borrow at today’s rates, it’s not a project, it’s a massive risk,” he added.
Mr Fane said other factors to consider before investing in renewables included grant support available for energy crops or improving energy efficiency, tax reasons and market incentives. “For example, it might be easier to let out office buildings if they’re insulated from future rises in electricity prices,” he noted.
The impact on carbon emissions from the farm might also be a more important factor in the future, as end users increasingly looked to improve their own carbon credentials, Mr Baker added. For example, a 50kW solar PV system on a typical 500-acre potato farm could cut overall carbon emissions by 5%, he noted.