Renewable Energy

10 May 2004

The current rush by developers to secure sites for renewable energy schemes has been sparked by the renewables obligation legislation which requires that, by 2010, ten per cent of all electricity sold by electricity companies must be sourced from renewable energy sources.

Hydro imageThese sources include solar energy, hydro, wave power, tidal energy, geothermal energy, bio-fuels and on-shore and off-shore wind.

The legislation has created long-term security for the renewables market, with companies that fail to comply being obliged to buy out their obligation and pay a fine.

Wind TurbinesWind energy in particular is booming. A total of 23 new wind-energy projects were confirmed for construction in 2003, the highest growth in the UK wind power industry in a single year. Many more developments are currently at various stages of proposal.While this situation may appear to be beneficial for landowners, there are pitfalls. Some landowners have concluded agreements that, in retrospect, appear to be highly favourable to the developer.

An understanding of the economics underpinning renewable energy production is crucial to assessing what constitutes a fair return. The value of renewable electricity is made up of three parts:

  1. The base electricity unit – i.e. the value of the electricity itself. This varies according to the generator type, location, and the terms of the Power Purchase Agreement under which it is sold. Typically the value will be between £10 and £15 per megawatt hour.
  2. The levy exemption certificate (LEC) this is the climate change levy imposed on commercial sales of electricity. Renewable energy is exempt from this charge and the renewable generators can negotiate a proportion of this value for each unit produced, at approximately £2.30 per megawatt hour.
  3. The renewable obligation certificate or ROC. This can vary between £20 and £35 per megawatt hour and generators of renewable energy can share in the accumulated fines and buyout payments.

Due to the nature of wind energy, a wind farm does not operate all the time. Negotiations with developers should be based on a proper understanding of the difference between the value per megawatt installed capacity and the value per megawatt produced. There is a very significant difference, for example, between hydro and wind schemes.

The extent and nature of the site, the access provisions, the extent to which the development sterilizes the use of surrounding areas, the implications of any Section 75 Agreement, and the provisions for rent reviews, all combine to have a significant impact on the overall value to the landlord.

CKD Galbraith is at the forefront of advising clients on issues relating to renewable energy developments in Scotland, and our experience to date has proved invaluable for many of our landowning clients. We have now been involved in negotiations concerning some 400 megawatts of wind-power sites and in the region of 30 megawatts for hydro sites. In all of these we have added significant value to the landlord’s interest.

Of course, knowing the game means we are well placed to act for clients wishing to oppose any development that may affect them.We oversaw the conception, construction and commissioning of a pre-Scottish renewable order private hydro scheme at Ardverikie Estate in the late 1980’s. This development generates a substantial annual revenue for the Estate running at an efficiency rate of 70 per cent. The technology has moved on since then and we have developed and negotiated a range of public and private markets for the scheme over the past 20 years of production.

For more information relating to renewable energy schemes, please contact Mike Reid.

 

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