Harnessing energy: renewables

UK Energy Secretary Ed Davey was recently jumped into reasserting the government’s dedication to the expansion of renewable energy generation, to 30 per cent of demand by 2020, in a public row with fellow minister John Hayes.

Alex Salmond chose the annual conference of RenewableUK (‘The voice of wind and marine energy’) to announce his government’s raised target of generating 50 per cent of Scotland’s electricity from renewable sources by 2015, on the way to the SNP’s target of 100 per cent by 2020.

Employment gap

Renewables is seen as a sure provider of new employment, with 11,000 jobs in Scotland alone currently, and 28,000 forecast by 2020 in the burgeoning offshore sector.

It is notable that the policy and targets depend heavily on the ‘big wind’ industry and small schemes appear relatively insignificant, although the Routemap includes 500MW targeted to be in community ownership, of which 150MW is now commissioned. The momentum of the renewables industry is now formidable and private investors are enjoying the ride while they can.

Regardless of change to the country’s political landscape, renewable energy will play a major part in the future development of our countryside and its social and economic structure. It was ubiquitous in the 18th, 19th and early 20th centuries and, after a lull following the establishment of the National Grid, is now back in our lives because of the Kyoto Protocol, the resulting EU targets and the UK renewables obligation and feed-in tariff schemes, in addition to the Scottish government’s industrial ambitions.

However artificial the economic drivers may be, they are here and the Feed-in Tariff and Renewable Heat Incentives are backed by statutes which make investment in renewable energy schemes low risk in comparison with almost any other you can find, which is why all manner of city investors are donning their wellingtons and heading for the hills, jostling with the established utility companies and each other in search of viable power generating opportunities.

The most familiar project resulting from this interest is the large windfarm and the multi mega-watt hydro scheme, procured by a large corporation or a consortium of corporate investors, costing many millions and founded on a lease agreement with the owners of the land over which the scheme is spread, with lease terms ranging from 25 to more than 40 years.

The bugbears for these projects are the log jams in the planning and grid connection processes, in fairly equal measure, either or both of which can result in delays of many years. Those projects currently lingering in the planning process represent a multiple of those now in operation, but the likelihood of most of them receiving consent, a grid connection and funding in the foreseeable future is slim.

This is where the smaller private renewable energy schemes come into the picture.

Small jinks

Small schemes (hydro schemes up to 2,000 kilowatts (2MW) and wind projects up to 1.5MW), present a much lower profile to the planning and grid connection obstacles, and still smaller developments, down to 100kW or even less, can transform the economics of a rural estate because of the scaled structure of the feed-in tariff which balances their proportionally higher fixed costs.

Such schemes can jink through the system and be operational in a relatively short time (although we are still talking years for all but the smallest).

Many such projects are going ahead and the majority involve a single landowner harnessing the energy resources available within their boundaries, perhaps with a single simple access agreement with a neighbour to ease construction or grid connection.

However, our experience and wider anecdotal evidence suggests that a significant number of potentially practical and economic schemes which span neighbouring properties are not happening because of perceived difficulties in arriving at workable joint ownership or co-operative agreements.

This is where the well-informed professional adviser comes in.

Any wind or hydro project is complex and may be quite unlike anything a typical landowner and their family lawyer or accountant has tackled before. One which requires co-operation, joint investment, responsibility and benefit, probably in an uneven split, is doubly so and can be so daunting as to put off the participants, denying them the huge long-term benefits available.

The good news is that nothing is new under the sun (or rain) and models of appropriate legal structures are being continuously refined with case studies of many situations available to encourage anxious landowners.

Some firms, including most of the big ones, are finding themselves building up valuable experience in this area and have renewables specialists. An example is Turcan Connell, whose partner Jon Robertson supplies the following case study of an Argyll Estate, which provides an example of the legal issues that may arise when considering a run-of-river hydro scheme and how these issues may be resolved.

Case study: Argyll Estate

The main intake for the scheme was to be on a march burn, so the watercourse catchment was shared with the owner of the other bank, and parts of the burn between intake and outfall were owned by a third party.

The ownership of the opposite bank was the primary issue; without this intake the hydro scheme was not going to happen. Luckily, the neighbour was keen to co-operate and to invest in the scheme. A joint venture vehicle was set up, in this case an LLP, regulating the operation of the scheme and the contributions of the members.

Leases of the intakes and the power station site were granted to the LLP.

The catchment owners granted deeds of conditions to protect water flows to the intake and provide access rights and rights for water pipes and cables.

Owners of a water course are entitled to abstract water for ‘primary purposes’ - essentially for drinking, washing and the watering of stock - but otherwise a downstream proprietor is entitled to ‘natural flow, without sensible diminution or increase’. Here, where water that would naturally flow by the houses would now bypass them, the owners could prevent the abstraction.

Although often the downstream proprietor will require a share of the scheme income as the price for consent, on this occasion it was obtained from the third party in exchange for an enhanced water supply and improved access.

In this example, all issues were identified, addressed and resolved at an early stage preventing delay, expense and possibly an interdict later.

Steep growth

In addition to these legal issues, a renewables project gives rise to various opportunities for tax planning and ongoing financial management. These result from the sudden steep growth in the value of a land asset when consent is obtained for a turbine, then again when a scheme is successfully commissioned and the risks largely put behind them.

The possibility for refinancing, the implications for inheritance tax planning, the need to keep on top of claims for feed-in tariff and manage the affairs of an LLP or other special purpose vehicle in the most tax-efficient manner, all provide work for someone.

There are some environmental and practical obstacles to renewables schemes which will be insurmountable, perhaps related to the capacity of the local distribution and or/transmission grid networks, or the policies of National Park Authorities for example, but there are still a great many good potential private projects out there and eventually most will come to fruition.

The challenge and the opportunity for private client advisers is to help their clients identify these and facilitate their realisation, showing how apparently awkward ownership situations can be overcome by following a path well-trodden by those that have gone before and to make the most of the conventional tax planning concepts to enhance the benefits offered by the feed-in tariff scheme while it remains available to new entrants.

     Joe Fergusson is a microgeneration consultant at Bell Ingram, see www.bellingram.co.uk