Our landfill gas lease is due for renewal. Why is our site operator offering us a lower royalty?
|Author: Travis Benn||Read time: 3 mins|
|Client type: All||Technology: all|
At Lumify Energy, we’re asked a lot of the same questions by our clients, questions range from starting a new project to managing existing projects to navigating projects that are coming to the end of their lease agreement.
We hope that our new Ask Travis series will provide short-form nuggets of information to other landowners who may have the same questions.
Landfill gas leases can last for twenty or more years, so there are often shocks in store when the time comes for leases to be renewed. For one of our clients, this is exactly what happened. A council had a landfill site and received royalty income from the sale of the landfill gas. The project had been running successfully for two decades, with the help of a site operator. When the site operator wanted to extend the contract, they proposed giving the council just half of the existing royalty income.
This placed the council in a tricky situation. It was already struggling financially due to factors including central government funding cuts and the Covid-19 pandemic. The council also had ongoing aftercare costs associated with managing the landfill site itself. The local authority needed to increase or maintain its current income and considered bringing the project in-house if the landfill gas rent was not going to cover those costs. The site operator offered a lower royalty due to uncertain economic conditions and planned around a worst-case scenario in which the landfill gas might deplete sooner than expected.
The council evaluated their site operator’s royalty proposal but struggled to verify the amount of landfill gas remaining and to determine the actual operating cost of the landfill gas engines and other activities carried out by their site operator. Potential future revenues were also in doubt due to fluctuating energy prices and the ending of governments subsidies in March 2027.
We assisted the local authority by carrying out a detailed forecast and assessment of the landfill gas remaining, based on the current stage of the landfill site’s lifecycle. This included forecasting and modelling the future profitability of the landfill gas project, to provide a comparison between the future returns from either bringing the project in-house or renewing the landfill gas lease on the proposed terms.
This helped the local authority to renegotiate a significantly improved lease with the landfill gas operator, based on a clear understanding of the site’s past performance and future potential, as well as current market royalty rates and various income streams available. But why was the local authority being offered less landfill gas royalties? The simple answer is that the landfill gas operator was being commercially prudent. The local authority feared that they might lose the existing ROC subsidy for the landfill gas project, if they moved to a new site operator or brought the project in-house. Therefore, the local authority wanted to satisfy itself that the landfill gas project was still financial viability without the support of ROC subsidies, and to ensure they were diligent in all areas of running the landfill gas project.
As with so many similar cases, good information is critical to understanding how much income local authorities can expect to receive from their landfill gas projects. There are plenty of ways to ensure negotiations and renegotiations go successfully, and it can be helpful to obtain support from an expert, who acts as an extended member of the local authority’s team.
We provide councils with industry insights and expert knowledge to ensure they achieve the best value from their landfill gas projects. If you find yourself nearing the end of your landfill gas lease, get in touch with our team to discuss how we can help.
If you have any questions that you would like us to answer, get in touch and we will attempt to feature the answer in one of our future blogs.