Planning on the agenda at 2012 AD & Biogas Conference

Farmers need to demonstrate to lenders that they have considered all areas of planning an AD plant, not just the financial aspects, farm consultant Bidwells told delegates.

Problems always arise with large-scale technical projects but there were some things farmers should be aware of to make the process run more smoothly, said sustainability and bioenergy consultant John Scott-Kerr.

For example, farmers had a tendency to do things themselves in order to control costs. This was not necessarily the wrong approach, but they should assess their project from a bank manager’s point of view to avoid conflict, he said.

“Recognising where conflict arises between a farmer and bank manager and overcoming this is important for both sides. Banks are looking for a certain level of planning, for example to see that the right people are involved and feedstocks are guaranteed.”

Daily running

Part of this planning is considering who will run the plant day-to-day. Running an AD plant is a skillset that can be picked up quickly but it needs almost constant attention with someone on hand at a moment’s notice should any issues arise.

Farmers often underestimate the amount of work needed to run the plant and think they will be able to do it alongside their normal work. “It’s naive to think you might have free time to dedicate to it,” Mr Scott-Kerr warned farmer delegates.

Get specific advice

He said farmers should speak to someone who has completed an AD project of a similar scale and nature because all projects were different.

Tariffs may change

Take steps to implement plans as soon as they are agreed to mitigate risk of rising costs and falling subsidy rates. AD plants can take up to five years to be fully functional from the initial planning stages.

“Recognising where conflict arises between a farmer and bank manager and overcoming this is important for both sides. Banks are looking for a certain level of planning, for example to see that the right people are involved and feedstocks are guaranteed.”
John Scott-Kerr

“Because of the length of time between the concept and having the plant up and running there’s always a risk that Feed-in Tariffs might change. Rates could also change from being Retail Price Index-linked to Consumer Price Index-linked,” he said. “Any return linked to RPI is desirable, but for how long is this going to be the case?”

However, providing the scale and inputs were right, these factors should not affect the project too badly. If managed correctly, an AD plant can be an excellent investment but “there will be battle scars along the way”, said Mr Scott-Kerr.

Mitigate AD risks

  • Tie up feedstock supply early and make sure it is grown by someone who knows the crop
  • Make sure supply is consistent and contracts are in place
  • Have a plan for where your digestate is going to go and ensure you have the appropriate licenses and spreading agreements
  • Gases are dangerous. Take control of health and safety and carry out rigorous risk assessments
  • Capital expenditure is linked to concrete, metal prices and the euro. Be aware of exchange rates and commodity price risks which can be mitigated.

Securing finance

Analysing how an existing farming business will work alongside a proposed AD plant is a key component to securing finance, said Clydesdale Bank.

In assessing finance applications, banks will initially be looking at key areas and farmers will need to show they have taken these into consideration.

These include demonstrating good management experience in an existing business as well as AD expertise, how the plant is complementary to the existing business and how much risk is placed on existing income streams.

Farmers should also demonstrate they have considered:

  • The scale of the proposed project compared with the existing business and whether it represents an additional income stream or a takeover
  • Financial forecasts for the existing business and the AD project
  • Assumptions around feedstock supply including alternatives
  • Whether it will be supported by a Renewables Obligation Certificate or Feed in Tariffs – smaller scale on-farm projects are more likely to use FiTs
  • The form of gas utilisation – CHP, grid injection, sale of heat
  • Whether digestate will be a cost or revenue stream for the project
  • The choice of technology, reference plants, warranties and the financial strength of the provider
  • Project management
  • Position with planning and other permits and licences
  • Contractors and warranties for construction.

Farmers should be aware that as part of a finance application, some initial expenditure will be required for the bank to check the viability of the project, said Richard Nuttall, partner at Clydesdale Bank.

“While not compulsory, a third party project evaluation report is useful to assess the business plan. Typically these cost under £5,000, said Mr Nuttall.

Legal checks would be needed to ensure security was properly in place and that contractual agreements for project development and freehold site or lease agreements to an AD project company were in order.

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