Autumn Rural Update Issue 3: Renewable Energy - What is right for you?

We have all seen plenty of coverage of the energy crisis across UK media channels - but what does this mean for landowners and can it provide opportunities for investment in renewable energy sources?

Read Issue 3 of our Autumn Rural Update on the link below to find out what you should know before looking at solar panel, anaerobic digestion plant and wind turbine infrastructure. With discussions around the food versus fuel debate, changes to power purchase agreements and subsidies, and a drive to decarbonise the energy supply market this is an issue not to be missed.

An evolving renewable energy market by Henry Haworth

Power Purchase Agreements (PPAs) are medium to long-term contracts for the sale of electricity to an energy supplier, the contracts generally last from 6 months to 3 years however can be locked in for longer period of even 20+ years.

The graph below shows average agreed PPA prices per MWh. The graph shows the trend of agreed PPAs from late 2018 to now with future prices modelled until late 2023. As can be seen it is expected that prices will peak significantly over this winter period with some greater stability coming in 2023, albeit at a considerably higher rate (£300/MWh) than the £40 – £60/MWh that we saw in 2018 – 2021.

Consideration needs to be given to the length of PPA when looking at the value per MWh, for example a PPA agreed over the next 6 months will have a higher rate than one over the next year as the shorter PPA will take advantage of the higher winter energy prices. Longer PPAs take into consideration both winter and summer energy prices as well as possible market changes. Seeking the advice of a broker is recommended when agreeing a new PPA, often they will have arrangements with energy suppliers allowing them to achieve higher rates and recover their costs for any work as part of this, meaning that you will incur no cost for getting a new agreement.

New Stream Renewables (2022) - PPA Market Analysis 26/10/22

Food vs fuel - Solar should have a bright future by Ed Blundy

From the establishment of the first on-shore wind farms and solar parks to gas-peaking plants and battery storage systems, Brown&Co’s renewable energy team has been involved in countless developments over the past 20 or so years. Now we have synchronous condensers, new substations, hydrogen electrolysers, electric vehicle charging points and possible micro-nuclear reactors to add to the mix.

The world of renewables is fast moving and with that comes different issues.

Currently, one of those is potential cumulative impact. Let’s look at field-scale solar. This is a proven technology with very few moving parts and can be rolled out, at scale, relatively quickly; as such it is an obvious candidate for helping the UK to electrify its economy and can go a long way to helping meet our climate change obligations and maintain £20bn of economic and employment activity. Since 2019, all this has been achieved without subsidies.

A possible disadvantage is the area of land needed to host large scale parks. This has encouraged an interesting debate with both energy and food security on the agenda as a result of war in Europe.

There is concern about whether land proposed for use as a solar park should instead be used exclusively for food production, which raises some interesting questions. 

Planning policy suggests that, where possible, the use of best and most versatile land (BMV) should be avoided; this currently includes grade 1, 2 and 3a land. 

That is perfectly reasonable – except in circumstances where a substation is also located within BMV land. If that’s where the substation is, then that’s where the grid capacity is.

Building a solar park on the closest ‘non-BMV’ land can result in a need to run cables across tens of kilometres to the substation. 

Not only is this cost prohibitive, but there is the permanent environmental impact of the cable installations to consider, probably greater than the temporary impact of a solar park close to the substation on BMV land.

Another point that must be borne in mind is that whilst a lot of the land that is identified for solar development has been farmed well in recent years, some of it has been farmed very hard too. 

In some cases, taking such land out of production for a few decades will have a positive impact on the soil. A move from sterile monoculture to species-rich grass and wildflower meadows will result in an enormous amount of additional organic matter building up in the soil, aided by a process of natural regeneration. This will mean that when it is reinstated, in accordance with planning conditions, the generations of farmers who follow are likely to find the soil and its structure in considerably better shape than before it was rested. Rarely does this potential long-term dividend get reported by the media.

Another popular concept, which is gaining more publicity, is combining raised solar arrays with conventional broadacre cropping underneath. This has pros and cons. If the solar strings are sufficiently high, suspended on poles and cables, the cultivators, seeders, sprayers, combines, trailers and balers may be able to pass underneath. However, the additional cost of the installation and the reduction in sunlight on the crop - and possibly rainfall – may well have a material impact on the viability of both the solar and the crop. 

Plenty of time and effort is being invested in this model so we must wait and see whether it is a commercial solution to not having to choose between food or energy. 

It is a similar story with Natural Capital and Eco-System Services. The allocation, valuation, and monetisation have to be discussed and agreed upon as part of the process. 

However, a critical issue facing the sector is delays in connecting to the grid. 

Projects with anticipated connection dates of 2023 and 2024 were advised in 2022 that it is more likely to be from 2027 to 2030.

Such delays can have profound impacts on planning permission durations, option periods and other potential projects. It is the case, however, that in certain areas, guidance is emerging from the grid that in fact the position may not be as bad as first feared and in fact connection dates for some projects may not be as far away as had been thought.

Brown&Co’s energy team is currently immersed in solar and storage projects, plus condensers, substations and cable easements, and also the brokerage of projects, valuations, secured lending, landlord and tenant matters and dispute resolution.

For the most part, farmers and landowners want renewable energy opportunities to be part of their diversified future. 

A sustainable business has to be financially sustainable, not just ecologically sustainable. 

We have made huge leaps forward in the past decade. The capital is available, the skills are ready and the legislative framework is positive.

Renewables present valuable opportunities for diversification, withdrawal from and survival without production subsidies and the chance to play a part in rural Britain’s contribution to help meet climate change objectives and to decarbonise our economy.

Renewed opportunities for AD development amid soaring energy value and new support by Charles Whitaker and Will Scott

Investment in new anaerobic digestion (AD) plants is very much back on the agenda with the increased value of energy and a UK and European drive for renewable energy sources to decarbonise the energy supply market.

Investment funds and AD development businesses are chasing new opportunities and these offer farmers a chance to diversify income streams and land use, but careful consideration around location, long term impact and contractual terms is essential.

The huge rise in electricity and gas prices, even with the new energy price cap measures introduced by the government, have escalated prices to two or three times where they were in 2019-2020.

Coupled with the announcement of the new Green Gas Support Scheme (GGSS), there is a growing interest in developing large scale commercial AD plants with a variety of feedstock sources.

The GGSS has replaced the non-domestic RHI - which ended in March 2021 - for new large scale biomethane AD plants.

The scheme is funded through the Green Gas Levy which, unlike the RHI, is not funded directly by the government but will be added to energy customers’ bills.

The new scheme opened in November 2021 and will remain open for a four-year period to encourage larger scale investments into biomethane AD plants, with a 15 year inflation linked tariff.

The current tiers are:

• Tier 1 – 60,000 MWh – 5.51p/KWh
• Tier 2 – 60-100,000 MWh – 3.53p/KWh
• Tier 3 – 100,000 + MWh – 1.56p/KWh

Other important criteria for the scheme include:

• A requirement for 50% of all biomethane produced, by energy content, to come from waste/residues
• The Greenhouse Gas (GHG) emission threshold has been lowered to 24g of CO2eper MJ of biomethane - compared to the current RHI limit of 34.8g
• Expansions and conversions to existing plants are not eligible, the new subsidy only applies to new biomethane injection plants

With all this in mind, the AD landscape has changed, from the position of farmers producing feedstock and utilising digestate with a significant net commercial value and also the opportunity for new AD plants.

Brown&Co can help identify AD opportunities, including planning, scoping and application, gas grid application, feasibility assessments, financial modelling and contract negotiation.

For existing plants, a multitude of factors are influencing the commercial terms around feedstock supply agreements.

The rise in global commodity prices, the substantial increase in cost of production across the majority of broad acre arable crops, an overall rise in net crop margins compared with 2020 and 2021 and more competition for a slot in the rotation have to be reflected in the commercial terms around feedstock supply agreements.

AD digestate now also has a commercial nutrient value well over its handling and spreading cost due to the cost rise of inorganic fertilisers; this was something that, in the past, had generally been harder to justify purely on a cash cost benefit where any significant distance existed between the growing land and the plant.

The landscape has now changed. To hold a net margin return of £750-800/ha, we now see a need for maize pricing delivered to plant to be between £50-60/t at 32-35% DM, depending on terms such as distance from field to plant and cost and quantity of digestate return.

There are important details to consider for both existing plants and their supply arrangements, and for new plants.

These range from the length of the term of feedstock supply, CPI increases and linkage to fertiliser cost, to the quantity and cost of digestate return and payment for removal of digestate from the plant.

We would advise that any feedstock supply arrangements should also include a right for an equivalent quantity of digestate returned to farm – AD maize removes a great deal from soils and it needs to come back.

A new lease of life for on-farm wind energy? by Henry Haworth

Interest in onshore wind generation is firmly back on the rise in the UK since September’s mini-budget signalled a possible easing of planning restrictions.

The Feed in Tariff scheme incentivised the initial interest in wind energy but, when this tariff reduced and tougher planning regulations were introduced in 2015, the investment boom in wind ground to a halt.

In a turnaround, more favourable planning rules, combined with high energy prices and the need for local and national governments to achieve upcoming Net Zero targets, onshore wind is now a consideration for many sites.

In the days of subsidy support, most onshore turbines sold into the UK market were limited in scope, usually up to 500kW, to maximise the subsidy rates received. These units were often capable of producing up to 1MW of power. 

With subsidy scheme demands gone, new installers can now install up to twice the capacity with equipment that physically looks the same and is cost comparable to models with half the total production capacity. This is significant for the potential returns of new projects. 

While all this presents a positive case for investment in onshore wind, these projects still require careful upfront consideration as they are not suited to every location. Consideration must be given to wind speed, visual impact, radar interference and restrictions within grid capacity. 

The UK grid is significantly constrained as a result of the new generation connections over the last 15 years and, although it is slowly receiving infrastructure upgrades, the roll out will be slow. 

The highest benefit from projects will be seen where they can meet onsite use through energy savings. But, as wind cannot be easily predicted, an export connection is key to ensure any unused power can be exported and sold. 

To view this edition in an interactive format please visit the link below. Don't forget to come back next Thursday for Issue 4 in our Autumn Rural Update series.

Issue 3