Tips for extending renewables schemes

By Jim Campbell, SAC Consulting head of renewables

Many farmers who tentatively dipped their toes in the renewables waters in the early days of incentive schemes have now satisfied themselves that there is indeed a reliable source of income to be generated.

More importantly, their bankers, having gathered evidence from the early schemes, can sometimes be persuaded that such projects make viable investment opportunities.

They will most likely require detailed documentary evidence of the viability of a project and will still want the farm as collateral. Nevertheless, funds can be made available and extensions to existing systems and secondary projects are being proposed up and down the land.

So what are the key considerations when adding to an existing renewables energy scheme?

Resource

The original scheme will most likely have occupied the most attractive site and therefore an extension or secondary scheme may have to make do with a lower wind speed in the case of a wind project or a less well-oriented roof in the case of a PV installation, for example.

A good consultant should be able to consider the effect of any such limitations and take this into account when assessing the new proposal.

Offsetting energy

The financial benefit attributed to the original scheme may include the offsetting of otherwise imported energy. As the output of on-site generation increases with further expansion, the proportion used on site will reduce and therefore this benefit will be less significant.

Planning issues

With wind turbines in particular, planning permission is one of the major hurdles to overcome before a potential project can be realised – a full planning submission will be required for additional generators.

This submission will need to consider not only the effects of the proposed turbines, but also the cumulative effects of the existing and proposed equipment, as well as any installations, existing or proposed, in the surrounding area.

The two main issues where cumulative effect must be considered are:

Landscape and visual. This is the most contentious issue, as it is difficult to say in many cases what will be considered acceptable to the local planners and what will not.

Guidelines on what is acceptable and how to quantify the effects are used by professional landscape architects and planning officials and your consultant should be able to advise on how a proposal may be tailored to fit within these guidelines, if at all possible.

In general, where additional turbines are proposed they will be more acceptable to the planners where they are of the same design and scale as any existing turbines.

Noise. Cumulative noise, as perceived at any nearby residential properties, needs to be considered. In some cases, planning permission will be approved subject to a condition that noise levels will comply with standards.

However, it is important to confirm in advance that this condition can be met. Even where a second turbine is further from houses than an existing one, it may be that the cumulative noise will be unacceptable. If so, the local council may require turbines to be shut down.

Confirming that a proposal will comply with noise standards prior to submitting a planning application is the only sensible way to proceed.

Grid connection

For any technology, the cost of grid connection can be one of the largest variables in the overall cost of a project. It should never be assumed that connecting a second turbine or further 50kW of PV panels, for example, will cost the same as an initial installation.

The connection cost does not only include the cabling and switchgear to link your equipment to your point of supply. Any upgrades that the District Network Operator (DNO) has to make to its network to accommodate additional generation capacity will be charged to the owner of the generator.

As grid capacity in your area gets used up, the cost of connecting further generators may become more expensive, in many cases prohibitively so.

Feed-in Tariffs bands

With the FiTs payments to smaller installations being higher (per kWh) than to larger installations, the attraction of considering a second wind turbine or a second solar array on a farm as a second separate site rather than an extension to the original is obvious.

Ofgem will, however, assess each application for inclusion on the FiTs register with reference to the following criteria:

• The relevant Meter Point Administration Number (MPAN)
  
• Street address
  
• OS grid reference
  
• Any other factors that the authority, at its discretion, views as relevant.

If you are connecting your additional equipment to a different property, with its own electricity meter and far enough away to have a separate postcode and Ordnance Survey grid co-ordinate, then it is likely to be accepted as a separate site.

Where you are connecting via the same point as the original equipment, it will be considered as an extension to the existing site. There is a considerable grey area between these two situations where individual cases will be determined at the discretion of Ofgem.

The significance of this is best illustrated with an example. If a farmer has a 60kW wind turbine on his farm generating 150,000 kWh/annum he will receive generation tariff payments at 25.4p/kWh (rate applying for installation before December 2012) or £38,000 annually.

If he installs a second 60kW turbine at a neighbouring property on an equally well-disposed site (after 1 December 2012) and it is accepted by Ofgem as a separate site, he will receive generation tariff payments at 21.0p/kWh (rate applying for installation from December 2012) or £31,500 annually.

If, however, the second turbine is installed and connected back to his main farm along with the original machine it will be assessed as an extension to the existing site and assigned a tariff rate appropriate to the total installed capacity (TIC) of the site – 120kW in this case. Therefore the second turbine would only get a rate of 17.5p/kWh (rate applying for installation from December 2012) or £26,250 annually. The original turbine would continue to receive the 25.4p/kWh.

Equipment rating

The rating issue is relevant to all of the renewables technologies, although the band boundaries are different in each case. You need to be clear about the TIC of any generation equipment you are considering.

Some models of wind turbine are marketed as 50kW, for example, when in actual fact they have a TIC greater than this. The predicted yield may look attractive based on the quoted size of the turbine, but the FiTs rate payable may end up being lower than anticipated when multiple installations are considered.

Two 50kW turbines installed on a site should theoretically receive tariff payments based on a 100kW TIC, for example. However, if the turbines actually each have a declared net capacity (when connected to the grid) of 55kW, the site will then have a TIC of 110kW and therefore FiTs payments will be made at the lower rate applying to 100-500kW installations.

Sites with a mix of technologies

Where different technologies are installed at the same site, such as solar PV panels on a shed roof with a wind turbine in an adjacent field, they will each be considered as separate installations, receiving the appropriate tariff based on the TIC of that technology alone.

Each installation in this case would require a separate generation meter. Otherwise both technologies would receive payments based on the lower of the two tariffs.

Do your homework

Even with tariff payments reduced for newer installations, there are still attractive returns to be had from renewable energy projects.

Where extensions to existing schemes are being considered, evidence on potential yield and costs from existing schemes is invaluable. However, there are many other factors to consider and advice from an independent consultant at an early stage is highly recommended.

Dairy farmer tackles rising costs with solar PV

By Caroline Stocks

A livestock farmer in Cornwall has taken steps to safeguard himself against rising energy costs by installing ammonia-proof solar panels on his dairy unit.

Stephen Bone, who runs 520 dairy and store cattle on his 900-acre tenanted unit in Trengwainton, near Penzance, installed the 50kW roof-mounted solar system in an effort to reduce the impact electricity prices were having on his business.

The farm’s 212-module system is now covering 50% of the business’ electricity needs for milking and heating water and the farm has become a net exporter of energy.

“I began looking at renewable energy options in February 2011,” Mr Bone says. “I decided on a photovoltaic system because my landlord was not keen on the idea of wind turbines.

“I had put up a new cubicle shed a few years earlier, which had a south-facing aspect roof, so because PV was the option with the second-best return, it made sense.”

Having watched the price of panels drop dramatically over the year, Mr Bone was forced into action in November 2011, when the government announced it would end the higher-rate Feed-In Tariffs in December 2011 – considerably earlier than the previously planned March 2012 end-date.

“We had to work so quickly,” he says. “I contacted a company called Photon and they said they could get it installed by December.

“In the meantime I had to upgrade the infrastructure for getting the power out. I agreed the energy would go to Western Power and I had to pay £18,000 to update the transformer on the farm.”

While the farm already had a three-phase system in place, Mr Bone says the investment was worthwhile in case he wanted to introduce more panels or a turbine at a later date.

“PV requires a lot less capital than wind or other renewables systems and has a good return. In total we spent £135,000 but we hope to get that investment back in about seven-and-a-half years,” he says.

Mr Bone decided on 212 LG235 panels, which have a life expectancy of 25 years. “The panels are ammonia-resistant, with a vent slot between each panel. Given the fumes that are coming from the cattle, it could be corrosive for standard panels and we didn’t want to find out in 10 years that they were being eaten away.”

One year on, Mr Bone says he is happy with the return he is getting from the system.

“Including FiTs generation and savings in electricity, we will make about £19,000 a year, which is pretty reasonable,” he says.

“We are selling some back to the grid for 4p/kWh in the summer, when we are producing more electricity than we can use. Hopefully that figure will go up, as well as the FiTs, which are index-linked.”

Mr Bone says he is looking to build on his solar system in the future and explore other schemes to produce renewable energy.

“Admittedly the return on capital doesn’t look as good now, but as a farm we are reliant on energy, so looking at all other options makes sense,” he says.

“Electricity costs have a big impact on my business, so it’s a way of safeguarding the farm against higher energy costs.”

Finance and tax considerations for renewables

By Shirley Mathieson, Saffery Champness head of renewables

Embarking on a renewables project of any scale in any technology – be it wind, solar PV, hydro, anaerobic digestion, biomass or any other system for renewable heat – requires consideration of a range of different issues. It is important that aspects such as finance, taxation, planning for the future and exit strategies are thoroughly investigated before any commitment is made.

The renewables sector is moving fast – influencing factors such as Feed-in-Tariffs, the Renewable Heat Incentive, Renewables Obligation Certificates (ROCs) and the Green Deal are all being updated, reviewed or launched with increasing frequency. While there isn’t space to explore all of these here, it is important to recognise the levels of government support available for the different technologies, how they change and where the cut-off dates for applications lie. Being eligible for the scheme that best suits the scale of your system could make or break its viability.

What I am looking at here are the general finance and tax issues surrounding on-farm renewables schemes, but given that every project is different, it is important to seek proper advice to ensure the decisions made are the right ones for the individual project.

Should I be considering installing a renewable energy scheme?

If your home or business has high ongoing energy requirements, whether for electricity or heat, then it may be worthwhile considering a renewables system, either to meet your own needs or to export the energy you produce. There are some basic considerations:

• Would a renewable energy scheme be compatible with your other activities and what would be the best technology to consider?
  
• You should research all the opportunities to obtain informed advice from experts regarding practical issues, including wind levels for a turbine, as well as bird and environmental impact surveys, suitability of water flow for hydro, available future fuel stock levels for biomass and so on.
  
• In addition, grid connection availability, development timescale, FiTs qualifications and claims criteria, planning application and access rights all need to be explored and considered.
  
• You should undertake or commission a proper feasibility analysis, working out post-tax and finance cost returns and their timing.
  
• Consider the various ownership options for the scheme – outright ownership, joint venture, option and lease (more on this later).

Should I own the scheme personally, through my existing farm business, in a new entity, or through a pension fund?

There are a number of critical aspects to consider, for example:

• What does your existing business do?
  
• Will the energy produced be used only by the business, personally, exported to the grid, or a combination of all of these?
  
• What other assets are held and operated, and in what structures?
  
• Who do you want to benefit from the income your scheme generates?
  
• Are there other members of the family with lower rates of marginal tax who might participate?
  
• What are your plans for succession?
  
• Will you require the protection of limited liability?
  
• Do you intend to own 100% of the scheme?
  
• Is Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) relief an option?

For example, given the financial investment required in, and returns from, a 500kW turbine, there may be benefits in holding it in a separate entity and, if entering into a business structure with others, then limited liability protection would be advisable.

How should I finance the project?

Whether funds are being borrowed or existing capital is to be used, you should ensure comprehensive financial projections are made to provide an accurate forecast of the return from the project, including sensitivity analysis such as fluctuating water flows and low or intermittent wind.

You should consider whether you have sufficient free funds and what your current exposure to debt is. Also look at the other parties involved in the project, the cost of debt compared to income generated from existing funds, “headroom” with your current bank facility, charges for restructuring your existing debt facilities and what assets can be given as security. If a company structure is the preferred option then you need to work out a balance between how much equity you want to bring in and how much you want to borrow.

Is a joint venture an option?

A joint venture may not always be as attractive as it first appears, and it is essential to drill down into the finer details before signing. Here are some points you should consider:

• Are you able to fund and run the project yourself?
  
• What is your attitude to risk?
  
• What are the risk-to-reward ratios of all options?
  
• What would the terms of the proposed joint venture be?
  
• What do you know of the other joint venture parties and what experience in the sector do they have?
  
• What level of involvement is proposed for each party?
  
• Who will manage the project day to day, especially during construction?
  
• What decision-making input will you have?
  
• Will the landowner have first call on profits?
  
• By entering into a joint venture, what exclusivity rights will you have and over what area?
  
• What structure is best for the joint venture (either limited company or LLP is usually best)?
  
• If the developer sells on the project, what implications will this have for you?

For example, a developer may approach you to take a stake in what is essentially their project, but sited on your land. This can reduce the funds you need to raise and hence your risk – but will it give you as good a return?

Is tax relief available for the capital cost of installing renewable technology?

This will depend on whether the system, whatever the technology, is being operated as a trade, used in your business, providing power or heat for private use, or a combination of these.

For example, for trades and businesses, the majority of capital costs will normally qualify for capital allowances. For private use, however, restrictions will apply.

Can VAT be claimed back on the system and associated costs?

There are a variety of factors to consider here, including whether you are VAT registered or, if not, whether you should register. If revenue from the system takes you over the VAT threshold then you will have to register. You should also consider whether the energy generated is for private use and/or business use; whether the energy produced will be sold to the grid or other parties; and whether purchasers of your energy will be using that for business or residential use.

In most circumstances, plant, equipment and related costs for a VAT-registered entity for use in connection with its trade will get full VAT recovery, but an adjustment or a charge will be necessary to deal with private or residential use.

Is tax payable on FiTs income and, if so, at what rate?

The rate of tax paid will depend on the type of entity that owns the system and the total level of annual profit/income of that entity.

For example, individuals (sole traders, partnerships and LLPs) will pay income tax at their marginal rate. In the case of a company, FiTs income will form a part of the company’s profits and will be subject to corporation tax at its marginal rate (20% for small companies).

Is national insurance payable on FiTs income?

It may be, depending on whether the system is being operated as a trade or if the power/heat generated is being used within your business. If it runs as a trade then both class 2 and class 4 national insurance contributions may apply.

What about stamp duty land tax?

SDLT may be relevant if the land on which the project is sited is to be transferred and, if so, its value. You should seek advice.

If the system is sold, does capital gains tax apply?

You need to consider whether the system is operated as a trade or used in a business; whether any of the power generated is used privately; the construction costs and sale price of the system; what other capital gains were applicable in the same year; and whether there is scope to roll gains over.

If the system is sold as part of a trade or was operated as a trade then, with forward planning, there should be opportunity for rollover or other capital tax reliefs and exemptions such as entrepreneur’s relief.

What is the effect on inheritance tax?

Early-stage advice is important to protect your inheritance tax position. The effect of any renewable energy system in which a stake is held should be considered in conjunction with the value of your other assets; the nature and use of other assets (business or non-business); your relationship to the person to whom your assets will pass under your will; the type of entity or entities in which assets are held; and your age and state of health. For a large project on a lease position, consideration should be given to isolating the land in question into a new entity to protect any tax reliefs of the existing business.

Are separate accounts required for a renewable energy system?

They may be. This depends on whether the system is operated as a trade, used within a business or held privately.

Grant funding reminder

The DECC has issued the following advice regarding grant funding and renewables:

• Renewable Heat Incentive. It is not possible to receive a grant from public finds and the RHI for the same project.
  
• Feed-in Tariffs. The scheme is intended to replace public grant schemes and it is only possible to claim both FiTs and grant funding for a project in specific circumstances.
  
• Renewables Obligation. RO support is reduced if a grant was awarded on or before 11 July 2006 and not repaid on or before 31 March 2011.

Biomass heat networks have burning potential

By Paul Spackman

It is almost a year since the Renewable Heat Incentive (RHI) was launched and while uptake may have so far proved less than expected, one renewable technology is dominating the scheme.

Biomass heating installations account for around 95% of RHI applications and an increasing number of farmers and landowners are looking to invest in the technology or get involved by supplying woodfuel, according to Cameron Maxwell from Forestry Commission Scotland.

Many are installing a boiler to heat the farmhouse, while boilers supplying grain dryers are also proving popular. But more larger farm businesses and estates are also looking to develop heat networks, supplying a number of end users, such as the farmhouse, offices, holiday lets and local cottages, he says.

“It’s quite a complicated process to change your source of heating, with quite a long lead time, so I think we’re seeing the natural lag effect. But momentum is growing, especially as more installations come online and people can learn from what others are doing.”

Fuel savings from woodchips

One of those to have ventured down the district heating route is the Roxburghe Estate in the Scottish Borders, which uses woodchip produced and processed on the estate to fuel a 720kW boiler.

The unit, based on the Kob Pyrtec boiler, was installed four years ago by a local Kelso firm, 3G Energy, to heat the largest inhabited castle in Scotland – Floors Castle – which attracts more than 35,000 visitors a year. It also provides heat for the estate nursery and plant centre and work is just beginning on expanding the system to supply heat for 15 cottages and the estate office.

The original system cost £580,000 and the expansion will cost £228,000, but with annual fuel savings of around £33,000 currently, the decision has proved to be worthwhile, says Roddy Jackson, factor of the Roxburghe Estates.

Previously the castle and gardens were heated with oil-fired boilers consuming 100,000 litres of oil a year, which at 65p/litre, cost around £65,000. Last year’s fuel bill was £32,000, which included an internal charge for woodchips at £40/t and farm collecting and loading of chips at £4,300.

“You could argue the woodchip price at £40/t is low, but this reflected the equivalent market price in the first couple of years,” Mr Jackson says. “We have recently applied a more realistic price of £60/t so at this level the saving would be in the region of £20,000-25,000 per annum, so payback in the order of 13 years.

“I remember when we first undertook the feasibility, oil was at 28p/litre and it was very marginal whether or not to go ahead. It was a leap of faith really, but the fact that we had the wood resource and a desire by the Duke of Roxburghe to reduce the carbon emissions resulted in the decision to proceed. It has turned out to be a good decision.”

The boiler was partly grant-funded through the old Scottish Biomass Support Scheme and is not eligible for the RHI.

Fuel use

Depending on the weather, between 350t and 450t of soft woodchip is used each year, from poor grade pine and spruce. Timber is chipped at Bowmont Forest sawmill as required, as the store at the boiler house has capacity for 70t, plus 10t in the automatic feed hopper.

Wood is seasoned for nine to 12 months, with round timber stockpiled at the roadside until needed. Generally wood is 35-40% moisture content, although Mr Jackson says the boiler will operate efficiently up to 45% moisture content.

“This is probably the major difference compared with boilers of 20 years ago, which required much drier woodchip of around 20%. Timber can be left at the roadside to dry naturally and you don’t require large storage capacity for chips,” he adds.

District heating expansion

Mr Jackson says the decision to expand the heating system will improve overall efficiency by using more of the boiler’s capacity and reduce the cost a tonne by greater economies of scale.

“The main challenge is managing the installation to minimise disruption to the cottage occupiers and office staff. The cottages have wet systems installed so with only a heat exchanger to install it should avoid too much disturbance, but the office will entail more disturbance with the internal work required,” he says.

Individual meters will be installed in each house and a rate per kWh has been proposed, he adds. This will ensure fuel is charged at an “attractive discount” to heating oil and with a fixed price set for the year. “We are just finalising arrangements with occupiers, but it will be a win-win all round.”