Solar Farm Developments
Solar farms are playing an increasing role in the broader renewable landscape as we move to ‘net zero by 2050’. This article attempts to share a little insight into a few areas that Landowners’ might wish to consider when negotiating a solar farm lease agreement.
Typically 5% of the UK’s electricity is now generated by solar photovoltaic (PV) panels. At the time of writing, sitting in Colchester on an overcast May day, the real-time dashboard on the National Grid ESO App (free to all) shows that solar is currently contributing 16% of the total GB electricity generation. In the East of England region alone, the live data shows solar at 23%, behind wind at 28% and above nuclear (Sizewell B) at 22%. One further interesting fact that caught my imagination recently, quoted at a breakfast meeting of agricultural valuers, is that the total land under the UK’s solar arrays aggregates to an area equivalent to one fifth of the land currently used for golf courses!
If you have been researching the opportunities of solar, you may recognise that, in the main, existing solar farms are curiously rated at 49.9MW. This is not a coincidence. Any energy project at 50MW or above has been classed as a Nationally Significant Infrastructure Project (NSIPs), to be decided by the Secretary of State who grants a Development Consent Order. However, in the National Policy Statement for Renewable Energy (EN3) published in March 2023, the 50MW threshold was adjusted from ‘50MW of electricity generated’ to ‘50MW of electricity transmitted to the Grid’. As solar panels generate DC electricity which then needs to be transformed into AC for transmission, the conversion rate is approximately 75-80% (a 1.2 load ratio). An output of 50MW AC is generated by a 65MW DC solar farm without it being classed as an NSIP by the March 2023 EN3 reclassification.
What are the key considerations?
All new solar farms usually start with the landowner being asked to grant the energy company an ‘option for lease’. This option grants the energy company a lease of the property if and when planning is obtained. We’ll consider below some of the key areas that might be discussed at the outset and should not be overlooked.
A vast maze of cables supporting the solar farm will criss-cross over your land, requiring the grant of ancillary rights of easement and access in the lease. These easement strips for underground media could easily sterilise future, and potentially more valuable, development land. Do consider this carefully if there is a reasonable prospect of developing your adjoining retained land. In addition to electricity cables, any solar farm will need telecommunications and possibly water. You will need to have a conversation about leasehold repairing conditions should any land drains be cut and it is important to recognise that, in practice, what is underground will be left. The residual cables will be valuable but the question to ask is whether they must be removed or left so as not disturb the soil?
Your solar farm will also need a switch gear house to accommodate the switch and transformer so do ensure that the switch gear house is not located where it will be a blight on the family home. Whilst lift and shift provisions may be negotiated these will almost certainly be prohibitively expensive. With technological advances, sites are now required for longer than previously. Ten years ago, a contractual term of 20 years was quite common. Now it is likely to be 40 years, often with rights to renew or extend. They will also be business leases with security of tenure, unless excluded.
Whilst it may also seem so far off, the decommissioning provisions will have to be considered and most probably backed up by a form of reinstatement security or bond. A decommissioning bond, insurance policy or bank guarantee will often be reviewed on the 10th and 20th anniversary to ensure that the sum is sufficient for the decommissioning value, with payment made within 5 working days. Alternatively, the lease may provide that, ‘”The Tenant shall on the 20th anniversary of such Commissioning Date put security in place in favour of the Landlord” to cover the cost of returning the site to a working farm. The Tenant will not be liable to remove any infrastructure which has been adopted by Statutory Undertakers, so do obtain clarification on whether this may include any substantial concrete plinths being left in situ. Given these commitments, deeds of covenants will be needed if the lease is assigned or novated or where the freehold is to be sold subject to the lease.
What are the financial considerations?
When it comes to the discussions on rent and other sums due under the lease, do make sure that you are clear on whether the rent base rate will be based on a £/acre or £/watt model? If the rent is to be determined by the watt, is this AC or DC or capacity or electricity delivered? Due to the 1.2 load ratio mentioned in the introduction above, the power delivered to the grid is 15% of capacity. Income is usually guaranteed and sometimes indexed with regular reviews.
It would not be unreasonable to expect that an initial Construction Rent and Decommissioning Rent at 50% of base rate is defined in the lease. However, the draft wording will need to be scrutinised carefully so that there is a clear timescale for when the Construction Rent will convert to full rent. It would be unwise to accept terms which state that full rent will be paid when the development is installed or delivered, otherwise this could go on for years. It would be far better that the Tenant covenants to pay full rent after 12 months or sooner when it starts generating onto the grid.
There will be provision for an element of battery storage incorporated in the scheme, as batteries regulate the grid. They are however currently valued a little higher than PV, at approximately £2,000/MW of storage capacity but your land agent will be able to direct you on this. Again it might be wise to place a cap on the installed export capacity, at say 0.5 or 1MW, otherwise the Tenant might seek to slide more batteries on (without proper compensation at least). This would be regulated by the lease definition of Permitted Use, such as, ‘battery storage less or equal to 1 MW’.
Reasonable compensation for crop loss or damage caused to the Landlord’s Property will be payable to the Landlord as assessed in accordance with Central Association of Agricultural Valuers.
Business rates are likely to be applicable. Whilst you will be used to your farmland being exempt, a solar farm is liable to business rates.
Green credits is a fast-evolving area and you will want to discuss this with your land agent. Often all payments received which relate solely to the ground beneath the solar panels will belong to the Landlord. Any other green benefits will usually go to the Tenant. Your accountant will be able to advise whether it is preferable to ensure that the green benefits are excluded from any revenue rent calculation if they are passed on to the Landlord.
You will also need to discuss the IHT implications with your tax adviser. As the solar farm is not agricultural but an investment business both Agricultural Property Relief and Business Property Relief might be lost, causing a large increase in IHT. Only your accountant will be able to advise whether you should consider splitting the farm business by way of a Special Purpose Vehicle.
Sites are usually quite unique and there will always be specific provisions that relate just to a particular project. There is no “one size fits all” approach that can be taken. You will have seen from the examples given in this article that it is vital to discuss any prospective solar farm development with your land agent, tax adviser and legal team before embarking on any negotiations.
If you would like to discuss any of the legal or practical considerations discussed in this article with Thompson Smith and Puxon, please contact Alex Butler-Zagni on 01206 217025 or e-mail Alex@tsplegal.com