A place in the sun: investing in slar farms 8 August 2017 Accrding t a tweet frm the Natinal Grid, Friday 21 April 2017 was a landmark day because, fr the first time in mre than 130 years, Britain functined as nrmal withut turning n its cal-fired pwer statins. The cuntry's daily electricity came frm a cmbinatin f gas pwer plants (47%), nuclear plants (18%), wind farms (18%), slar panels (10%) and bimass (6%). Renewable pwer is an increasingly imprtant part f ur energy infrastructure. This article describes the current market fr ne element f the renewables sectr; slar farms. Overview f the slar farm industry Slar farms are greenfield r brwnfield sites fitted with phtvltaic slar panels and ancillary equipment, which are cnnected t the electricity grid. In 2010 there was a rush t develp slar farms in rder t take advantage f the generus gvernment subsidies, such as feed-in tariffs {"FITs") and payments under the renewables bligatin ("RO") scheme, which culd be claimed by eligible renewable energy generatrs at that time. These subsidies have been prgressively scaled back (and, in the case f the RO scheme, clsed) t new "There is a thriving market fr the nward sale f these realestate backed investments". generating capacity ver time, leading sme bservers t predict a decline f the UK's slar industry. Hwever, the cst f phtvltaic panels has fallen significantly in recent years, which means that secnd generatin slar farms are cheaper t assemble and therefre still a gd investment despite lwer subsidy levels. Additinally, recent advances in battery strage technlgy means that cmbined slar and battery farms are becming increasingly attractive. Such installatins enable energy t be exprted t the grid even when the sun is nt shining r at times f peak demand, s generatrs are better able t match supply t demand and enhance revenues. www.traverssmith.cm
Als, the first generatin f slar farms are still in peratin and still benefitting frm the riginal FITs rates (usually under 25 year cntracts) s there is a thriving market fr the nward sale f these real-estate backed investments. WHAT ARE THE CURRENT HOT TOPICS IN THE SOLAR FARM MARKET? Why are slar farms an attractive real estate investment? Slar farms have becme an appealing real estate investment class in their wn right fr the fllwing reasns: 1. The current shrtage f mre traditinal infrastructure investment pprtunities - fr instance, there are at present very few PFI/PPP prjects taking place in the UK. 2. Reliability: the annual variability f slar radiatin levels is just 4% (in the UK), lwer than wind variability. The tpics f current interest and cncern t investrs in this market include: Battery strage advances these are already helping cut the intermittency f slar utput and allwing slar assets t prduce during peak electricity pricing perids. Business rate increase there is cncern in the industry that the ecnmic viability f cmmercial rftp slar installatins culd be dented by increased business rates. Cmpetitin fr sites especially if mre residential building is permitted n greenfield land fllwing the gvernment's recent husing white paper which is perceived as having heralded a lsening f the restrictins n husing develpments in such areas. 3. The stable yield received n these investments, due t their dual incme stream the prceeds f the sale f the pwer generated (with the added benefit f peratrs knwing hw much they will get fr each MW/hur generated) and, where available, subsidies. Their lw set-up and maintenance csts increase their incme stream stability. The life span f slar panels is generally 25 years, but they can last up t 40 years if prperly maintained. 4. Slar funds ffer returns that are nt crrelated with the equity markets: their dividend yields are therefre useful in times f high market vlatility. Legal issues t be aware f when investigating the suitability f a slar farm fr purchase r refinancing 5. Title A. Agricultural land is smetimes unregistered. This makes it much harder t review wnership and t determine the existence f third party rights. B. Such land is als smetimes subject t agricultural tenancies r farming partnerships, which can be cmplicated and can invlve sme security f title issues. C. There might be separate third party rights such as rights fr the grazing f sheep. D. Is the land charged? If s, bank cnsent t the arrangements will be needed. E. Have wayleaves been granted fr pwer cables t crss third party land? F. Check there are n rights r reservatins which restrict rights f light ver the prperty. G. There shuld be bundary agreements with neighburing landwners (this may be the landlrd n whse land the slar farm is lcated, and/r thers). These are likely t include nn-interference 2
bligatins n the part f the landwner s that, fr instance, they cannt grw trees abve a certain height, alng with a right fr the slar peratr t g int the neighburing plt t trim hedges and trees and t deal with any ther issues that might affect the functining f the slar farm. 6. Planning cnsent A. Check that there is a planning cnsent and that it has been prperly implemented. B. Has the capacity permitted by the cnsent been exceeded? C. Check that the cnsent includes any ancillary wrks such as battery husings, cables etc. D. Cnsents are nrmally temprary, s check that its lifetime is adequate. E. If it is nearing its expiry, cnsider making a new applicatin t replace the expiring ne which can accmmdate any further develpment, upgrade fr alteratins etc. Remember that there will be a requirement t remve all structures n expiry f an ld cnsent if nt renewed. 7. Renewable incentives A. Check RO/FIT status f prject (where relevant) 8. Cntracts t be checked and reviewed: A. There will usually be an ptin agreement and/r a lease with the landwner which will need t be reviewed. If ne f these arrangements needs t be varied r renegtiated then this can be a time-cnsuming prcess if the landwner is unused t negtiatins f this srt. There is n industry-wide accepted frm f ptin r slar farm lease which means that each ne is bespke. They will ften cntain ptentially large "Lng-term, stable yields with relatively lw peratinal csts makes this an appealing asset class fr a range f investrs, particularly thse such as pensin funds lking fr a lng term hld." decmmissining/reinstatement csts fr slar farm tenants at the end f the term f the lease, in respect f which many landwners will require cllateral/security (ften in the frm f a perfrmance bnd) t cver the risk. Leases may als cntain step-in rights fr the funder, ften in the frm f a "direct agreement" (which is smetimes annexed t the lease and smetimes entered int n the same date as the lease) under the terms f which if the tenant defaults then the funder takes ver the relatinship with the landwner and the running f the slar park. B. EPC cntract which may include the fllwing details: level f insurances (such as prperty, emplyer's, public liability, prfessinal indemnity and prduct liability insurances); FIT r RO accreditatin (t get subsidies, if available); defects liability perid fllwing cmpletin/acceptance; manufacturers' warranties fr panels and equipment such as the generatr; prvisin f spare parts; cllateral warranties/third party rights and/r perfrmance bnds; cmpletin tests; guaranteed availability; perfrmance and delay liquidated damages; and limitatin perid. C. Operatin and maintenance cntract, which may include the fllwing items that need t be checked: term; level f insurances (such as prperty, emplyer's, public liability and prfessinal indemnity insurances); services may include cmmissining, reprting, mnitring, analysis and diagnsis, preventative/crrective maintenance, spare parts management; perfrmance rati liquidated damages; cllateral warranties/third party rights and/r perfrmance bnds. 3
D. Grid cnnectin agreement: Is there a valid cnnectin ffer and acceptance? Is an adptin agreement required and in place? Is a metering agreement in place? Have the grid cnnectin capex csts been discharged? Are there any knwn r anticipated grid utages? A strng lng-term ptin Despite the dwindling gvernment incentives and ptential returns fr new slar farm prjects being less attractive than they have been in previus years, the market fr existing slar prtflis as an alternative asset class remains attractive. Additinally, new build cmbined slar and battery strage prject are likely t becme increasingly ppular as technlgy becmes mre established. Lng-term, stable yields with relatively lw peratinal csts makes this an appealing asset class fr a range f investrs, particularly thse such as pensin funds lking fr a lng term hld. There is als the added appeal f investing int a sectr which Is reducing ur carbn ftprint. This article was first published in the Estates Gazette n 24 June 2017 FOR FURTHER INFORMATION, PLEASE CONTACT 10 Snw Hill Lndn EC1A 2AL T: +44 (0) 20 7295 3000 F: +44 (0) 20 7295 3500 www.traverssmith.cm Paul Kenny Partner, Real Estate E: paul.kenny@traverssmith.cm T: +44 (0) 20 7295 3385 The infrmatin in this dcument is intended t be f a general nature and is nt a substitute fr detailed legal advice. Travers Smith LLP is a limited liability partnership registered in England and Wales under number OC 336962 and is authrised and regulated by the Slicitrs Regulatin Authrity. The wrd "partner" is used t refer t a member f Travers Smith LLP. A list f the members f Travers Smith LLP is pen t inspectin at ur registered ffice and principal place f business: 10 Snw Hill Lndn EC1A 2AL. Travers Smith LLP als perates a branch in Paris. 4
The infrmatin in this dcument is intended t be f a general nature and is nt a substitute fr detailed legal advice. Travers Smith LLP is a limited liability partnership registered in England and Wales under number OC 336962 and is authrised and regulated by the Slicitrs Regulatin Authrity. The wrd "partner" is used t refer t a member f Travers Smith LLP. A list f the members f Travers Smith LLP is pen t inspectin at ur registered ffice and principal place f business: 10 Snw Hill Lndn EC1A 2AL. Travers Smith LLP als perates a branch in Paris. 5