Financing Wind Power Projects: What Landowners Should Know
|Topic: New wind farm projects||Read Time: 13 mins|
| Landowner type:
Independent landowners | Institutional landowners
|Energy: Onshore wind|
If you’re a landowner-developer, you may be wondering what happens when it comes to financing wind power projects. From financing it yourself to securing external investments, we’ll run through every option available to you.
So, you’ve decided to take the leap and place a wind project on your land. Now, taking matters into your own hands without an external developer comes with a host of considerations. And that includes the all-important question: “How should I finance a wind power project?”
There have always been several ways to go about things for landowners who want to build a project alone.
You can stick to self-financing or engage with external parties like banks who can offer you financing. There’s not necessarily a “right or wrong” way to go about financing wind power projects. But one method may be better than another depending on your personal situation.
And that’s where we come in.
In this detailed dive into financing wind power projects, we’ll take you through the risks associated with building a wind farm alone. Oh, and insights into the banks that offer Green Loans to landowners looking to expand their horizons.
What Would Be the Return on Investment for a Wind Turbine?
If you’re looking at financing wind power projects, you’ll want to know whether you’ll eventually see a return on investment (ROI).
Generally, it will take around 12 to 20 years to see an adequate return on investment from a wind farm. This accounts for the initial turbine costs and average energy production. It’s also important to note that operating costs will always be subtracted from any final calculation.
Once the initial cost of the project is fully paid off, you’ll start seeing far higher ROI figures. In most cases, the ROI depends on the net income received from a project and overall capital costs. So, you might think that smaller wind farms would have a greater ROI as initial costs are recouped quickly. But in our experience, the sheer income potential of larger turbines gives them a higher ROI over time.
Crucially, though, the financing structure of your project should help you realise ROI as soon as possible. That’s the overall goal here.
What Are the Options for Financing Wind Power Projects?
In terms of financing small-scale projects, it’s often possible to self-finance depending on overall cost. However, if you don’t have the cash to front the project, it’s typically easier to get funding for smaller projects. This is because it’s generally easier for banks to do their due diligence with slightly simpler (and cheaper!) projects. But if you’re looking at a large commercial-scale project, you’ll probably need an external helping hand. Now, let’s explore the possible options for financing wind power projects as a landowner-developer.
If you’re a landowner-developer and have sufficient funds, you can look into self-financing. This isn’t overly common, as many landowners just don’t have enough capital upfront to make this a possibility. Plus, there’s also a lot of risk involved in self-financing, which many landowners simply don’t want to go it alone. But if you have the cash flow to create a large wind farm and recoup the costs later down the line? Well, it can be hugely lucrative to self-finance.
The first thing you’ll need to do is be clear about the potential return on investment that your project might provide. According to Octopus Energy, the development process can cost around half a million pounds, depending on its size. But as a general rule of thumb, a wind farm costs between 1 million and 1.5 million per megawatt.
It’s worth mentioning that these costs include construction and development fees. So, it’s possible that self-developing your site would cut a significant amount from this overall estimation as you’re not paying to lease your own land.
Unlike landowners who are simply leasing their site for rental income, landowner-developers will need to shoulder all financial burdens. You will need to apply for planning permission and pay appropriate grid costs. Construction fees, maintenance, design, foundations, and cabling costs will also fall on you. Although you’ll be taking on all the development costs of a project, going it alone also means reaping the rewards after you’ve subtracted the initial investment, of course.
At the beginning of the process, you’ll need development at-risk capital to explore the suitability of the site and get planning permission. Past this point, you’ll need to get enough funds to construct the turbines and keep the project viable.
As most wind farm projects have lifespans of 20-25 years at minimum, you’ll need to maintain it for its usable life.
What about repowering?
If your project recoups its initial investment in the time period we outlined earlier, you may then wish to repower. If you do this, it usually means replacing the existing turbines with larger and more powerful ones. This often frees up sections of land as you need fewer turbines to produce the same energy output.
The repowering process comes with its own costs, but it’s typically less cash than you need to start the original project. It’s also worth mentioning that with more experience as a self-financed landowner, you can seriously consider larger-scale projects. Although the cost to place larger turbines on the land will be significant, larger projects are far more profitable.
What are the benefits of self-financing?
As we briefly mentioned, self-financing the project gives you 100% of the financial benefit once the project is operational. Although you do carry all the risk if the project fails, of course. Another major benefit to self-financing a project is that you’ll retain the full rights over your land. So, you won’t need to deal with any tenants.
The only thing you’ll need to consider is that you may incur extra costs if you need to appoint qualified consultants. Usually, self-financing a project requires quite a lot of legal and financial help. From surveying and figuring out feasibility studies to obtaining planning permission – it’s all in your hands. But if you appreciate being hands-on with projects, self-financing (if it’s possible!) is certainly the way to go.
Leasing the site post-construction
If you’re looking to finance a project as a landowner-developer but don’t want to run the project, you can lease the site. This involves passing the project to a site operator who will pay to lease your land. Projects leased in this way are usually developed by an external developer. However, it’s possible for a landowner to control the construction process and secure initial investments before bringing a site operator on.
Bank financing is probably the most popular route for landowner-developers as it relieves the initial burden. Plus, the financing comes from a trusted source that is unlikely to falter during the wind farm construction process. And when you’re financing wind power projects, reliability and communication are both key.
Several UK banks currently offer investments for new renewable energy projects. This includes solar PV, battery storage plants, and of course – wind farm projects. You’ll want to essentially interview several different banks before settling on financing. But if you’d like a little taste of what’s available from well-known high-street names, we’ll quickly fill you in.
Santander has been supporting low-carbon projects since 2004. They support landowner-developers during the construction phase and operational phase of a wind project’s life.
They currently offer:
- Senior debt facilities sized over the operational period with up to 10 years of legal maturity.
- Minimised set-up costs by using trusted advisors and liaising closely with treasury experts.
- Participation in syndicated facilities for larger projects.
- A centralised portfolio management team.
These solutions are offered to UK-based projects and can significantly reduce the initial financial burden of a project.
The Renewable Energy Funding Scheme offered by the Cooperative Bank allows you to borrow money for investing in energy technologies. It’s geared more toward projects that are looking to improve the efficiency of an existing business. So, it’s worth bearing that in mind before diving in.
They currently offer:
- Up to 100% funding for renewable energy projects to boost the sustainability of your business.
- The Bank of England Base Rate plus an agreed interest margin (this is worth investigating beforehand!).
- Loans from £25,000 to £250,000, depending on the scale of your project.
- Arrangement fees at 1% of the total loan.
- 70% of the market value in funding depending on the sector.
It’s worth noting that the amounts offered here likely won’t be enough to cover large-capacity projects. The maximum cap of £250,000 could be used alongside other funding to construct a wind farm. But in terms of financing wind power projects in full, it’s probably not going to be enough.
If you’re looking for project-based lending solutions for a wind power project, Clydesdale Bank is another financing option. Their specialist team of 4 is based in Scotland, but they operate on a UK-wide basis. If you’re wondering who they help, their current customers range from SME developers to landowners, farmers, and private equity firms.
They currently offer:
- Development and operational stage finance.
- Execution and portfolio management.
If you’re financing wind power projects with high initial investments, HSBC is another bank to look at. They offer the Green SME Fund which is designed to make sustainable solutions more accessible for businesses.
They currently offer:
- 1% cashback on the loan value (for loans of £25,000 and below, a Representative 7.1% APR applies).
- Loans to SMEs with a group annual turnover of up to £25 million. The maximum loan value is up to £25 million but can be as low as £1,000.
- 90% of the loan proceeds must be applied in alignment with one of the categories in the Green SME Fund Eligibility Guide.
Although you’ll need to jump through the Eligibility Guide’s hoops, the potential maximum loans here are worth investigating.
Barclays offers a Green Loan to farmers who are thinking of diversifying their income and want to sell surplus energy back to the grid.
They currently offer:
- A dedicated team of Energy Relationship Directors to help guide you on your renewable energy journey.
- Loans to help finance eligible green projects.
- Agricultural finance to help farmers through challenging markets, sustain their businesses, and grow.
Triodos is known for providing finance for renewable energy and environmental sector projects. Thus far, they’ve financed 610 small and large-scale energy projects in the solar, hydro, and wind sectors.
They currently offer:
- Project and structured finance with loan sizes of up to £20 million.
- Construction finance, operating finance, and re-financing.
- Long-term senior debt facilities with terms of up to 18 years.
- Sterling fixed and variable interest-rate facilities.
- Assistance with raising capital.
If you’re interested in seeing a successful wind farm Triodos has already financed, you can check it out here!
If you’re financing wind power projects, NFU offers leading installers, finance, and insurers for the job.
They currently offer:
- Technical experts to identify appropriate solutions for your circumstances.
- Accredited installers to prepare a no-cost proposal.
- Help with securing finance and insurance.
- Ongoing support throughout the investment and construction process to keep everything running smoothly.
If you need it, they can even assess the feasibility of your land and make a formal grid application on your behalf. For landowner-developers worried about balancing too many plates, this can be incredibly beneficial. And if you want to go with a developer, NFU can even help you run a competitive process to narrow options down.
They currently offer:
- Borrowing options from £25,000 with fixed and variable interest rates.
- Repayment terms from 3 months up to 25 years.
- Capital Repayment Holidays.
A note on bank financing
Although bank financing is incredibly useful if you need to secure an immediate investment, you’ll need to consider interest. Virtually no bank will offer financing without some kind of interest to improve their initial ROI. So, before diving in, it’s important to consider how interest repayments will factor into your overall financial plan.
Financing from external investors
With green projects becoming all the rage with global attempts to meet net-zero, you may get decent interest from personal investors. High-net-worth individuals with assets totalling at least $1 million are a good starting point for one-on-one investing. But it’s also worth looking into crowdfunding and angel personal investors who seek a minority stake in the project. Although all of these options involve splitting a share of the profits, it can help you gather those initial upfront costs.
Risks Associated with Financing Wind Power Projects
Uncertainty in the early stages
One of the main risks associated with financing wind power projects is uncertainty. This can include the risk of not getting planning permission, paying for option agreements, and even failing to procure equipment. If a project is set back and you’re forced to sink more money in as a landowner-developer, the scope could change significantly.
A project may run over budget or behind schedule during the construction stage. And if this happens, you’ll need to allocate more money to paying teams and defaulting on off-take contracts. This can happen if supply chains face issues, laying foundations overruns, or virtually anything in between.
The technology you’re using and rely on must be up to scratch. And before a wind farm is properly up and running, landowner-developers will need to test everything from blades to nacelles. The entire turbine will need to work seamlessly, as outlined in an initial feasibility study. If it doesn’t, you’ll probably need to use more of your funds to put right what’s wrong. For already tight budgets, this can cause serious issues.
Relying on off-takers
There’s a certain revenue risk that comes with creating a project and selling energy to the grid. If you’re not planning to repurpose the energy for an onsite business (like our clients at Dewlay) you’ll rely on off-takers. They will essentially have a contract to purchase the energy from the project. If anything goes wrong with these contracts, you may be left with surplus energy that you’re unable to sell. This will make achieving an adequate ROI far more difficult.
Maintenance risks and operational risks
During a project’s life, there’s always a chance that something will need to be fixed. Whether that’s turbine blades, nacelles, transformers, or even power lines, you’ll need to keep a close eye on things. And with this scheduled and regular maintenance comes associated costs! If you’ve not planned for these, you may find yourself shelling out far more over time than you anticipated.
Tips for Choosing the Right Options for Financing Wind Power Projects
Understand when money will be spent (and how much)
We should mention that most of the money required for financing wind power projects is spent in the construction phase. This is when you’ll be expected to pay a construction team, lay cables, and build the turbines. Plus, you’ll need to think about sourcing the relevant materials for the turbines and any monitoring equipment.
This can be a hefty initial investment (that you’ll hopefully recoup later!). So, you’ll want to make sure you’re choosing a financing method that lets you manage this without being personally detrimental. If you can finance this out-of-pocket, that’s great. But you may feel more comfortable reserving your funds and turning to banks or external investors instead. This way, you can keep some capital aside for unforeseen issues down the line.
There’s no right or wrong approach, but you’ll want to carefully weigh up interest rates and startup costs. Otherwise, you might be stuck in a rut and fail to reap the rewards from your site for far longer.
Carefully interview any potential external investments
It probably goes without saying, but you shouldn’t take on any external financial assistance without serious research You typically won’t find investors that are willing to part with their cash without any strings attached. And even banks will lop on interest rates that will increase the overall cost of what you’re borrowing over time.
This doesn’t need to be detrimental. But you don’t want to sign on the dotted line of a legally binding document without fully understanding it. For this reason, we always suggest running any potential investment contracts or prospects past a specialist solicitor. Not only can they pick apart wording, but they may even be able to help you negotiate better terms.
Understand your responsibilities (and whether you can live with them)
We briefly talked about this earlier, but it’s important to understand your responsibilities before financing wind power projects. If you’re self-developing, the onus is utterly on you to plan, design, and deliver a project. That includes financing it, too! On the other hand, landowners working with site operators can take a relatively passive role.
Although you’ll need to sign option agreements and communicate with your site operator, your rent will be paid. It’s also important to remember that the financial burden of a developer-led project will lie solely with the developer. That means you can earn passively from your property without sinking your own money into the mix. The downside to this arrangement is that you’ll only get a small percentage of the site’s overall income. With self-financing, both the risk and reward are all yours.
So, Are Wind Farms a Good Investment?
All in all, we’ll always stand by wind farms as good investments.
Although the cost of a single turbine can be as much as £3.13 million if you’re going large, the ROI can be enormous. In fact, single turbines of the same size can make a whopping £7,100,000 every year! If you have the capital to invest in financing wind power projects, the potential returns are worth waiting for. Just remember to choose the right financing option that keeps you secure, confident, and settled as the project progresses.
Can I get a government grant for a wind turbine?
Unfortunately, there are no longer national grant schemes for wind farm projects. This will come to an end when the Renewables Obligation scheme ends in 2027. It’s hoped that the government might introduce subsidies to support new projects as they attempt to meet net-zero limits. But with a ban on new onshore wind projects currently in place across England, this isn’t currently looking promising.
How can I invest in wind farms in the UK?
Although you can invest in a wind farm by starting one yourself, you can also take a backseat with shares. You can become a wind energy stocks shareholder or even trade financial derivatives with spread bets. But there’s nothing wrong with taking a more involved position by leasing your land or developing a project!
What is the most expensive form of financing?
Equity capital tends to be the most expensive form of capital as investors typically expect a profit-share approach. But depending on how high-interest rates are with specific banks, these can be comparable!
There you have it: the ultimate guide on financing wind power projects for landowners
If you’re interested in starting a wind farm as a landowner, feel free to get in touch with the team at Lumify Energy. We completely understand how overwhelming this process can be. Whether you want to scan the market to understand potential ROI or just need a helping hand, we’ve got you.