The power tools for renegotiating your renewable energy project lease agreement.
|Author: Travis Benn||Read time: 7 mins|
|Client type: All||Technology: all|
When a renewable energy project is nearing the end of its lease, there are two main areas that landowners need to consider, in preparation for an in-depth renegotiation of the terms.
Renewable energy project leases typically last up to 30 years, which means the landscape surrounding the project – and the contract itself – may need to be radically changed to fit with current market conditions.
Since the earliest leases were established, the industry has often moved on. We frequently see that key figures involved in the original setup of the project are no longer involved. Renegotiating favourable terms requires a strategic approach and careful planning.
Often, the landowner will need to demonstrate the current market rent of the site, and then demonstrate the current, net present value of the site. But what do these two aspects mean in practice, and how can you get them right?
To succeed at the renegotiation stage, you need to be organised, prepared and armed with plenty of data and market knowledge.
Let’s look at the ‘power tools’ that you can use in your negotiating.
Demonstrating current market rent
Landowners should be ready to demonstrate the current market rents being paid by other site operators at similar sites across the UK.
Often, site operators are only aware of the rents paid at the sites that are in their own portfolio, but they will need to have evidence to create a robust business case if they are to justify paying a different rent.
Assessing all of this information and forward planning may take a little time, but it is well worth the added effort. This information is likely to benefit one party more than the other – for instance, if the renter can justify paying less than their current rent, or if the landowner can justify a rental increase.
Thankfully, the landowner is in a better position for negotiating on price, due to their ownership of the site itself and because the market has moved on significantly in their favour in the last few years.
We recommend trying these simple steps on the road to discovery:
Research the possibilities
Identify and list all other sites in the UK of the same technology and similar specification, i.e. wind farms, solar farms, landfill sites, or hydro sites of a similar size to the project in question.
This will help to develop a clearer picture of the rental possibilities in the area and within the same sector, putting you in a much better position when negotiating.
While the process of sourcing this information could be time-consuming, it’s worth the investment if it ultimately leads to a better outcome, and will help to provide a clearer picture of the true market value of the site.
Document key information
After this first stage of discovery, it’s important to document all the important information to help support the rental decision.
Find out and note the following for each of the sites identified:
· The amount of rent paid per year
· The amount of electricity generated per year
· The number of years since the site has been operational
· The age and location of each site
· How much still needed to be paid off for equipment
Select the most relevant information to aid negotiations, and use this to propose a suitable rent to tenants.
Demonstrating the net present value of the site
Landowners should also calculate the net present value of the site. Site operators will need to achieve a certain target rate of return from the project.
By fully understanding the site’s future income potential, landowners will know how much room there is for negotiation, and that will enable both parties to achieve a desirable rate of return from the project.
Landowners could use the following steps to do this:
1. Obtain a breakdown of how much electricity has been produced by the site, each month, during the past 15 years.
2. Use this data to identify seasonal trends and the current stage of the project in its life cycle.
3. Identify a shortlist of comparable sites, i.e. of the same technology, size, location, operational conditions, and equipment, that were at a similar stage of their project life cycle ten or fifteen years ago. This will allow landowners to graphically show the average output achieved by each of those sites.
4. Compare and reconcile the future output expected on steps 1 and 2 above.
5. Forecast the future income and costs expected over the next ten years, based on the scenarios identified above (demonstrating current market rent) alongside the expected future energy prices, and expected future running costs of the project.
It’s likely you’ll need to source outside help with these steps, so be sure to refer to your team of experts to help you along the way to a renegotiation.
Show your site operator that you’re prepared and you know what you’re doing. Approach your renegotiation with knowledge! This is what we do for our clients. This also increases your team’s knowledge and understanding of the project along the way, ultimately empowering you as well as getting you a much better deal.
There’s no need to be daunted by renegotiations. They might seem challenging at first, but as a landowner, you are in a great position to renegotiate the terms using current market rents as your guide.
Before you can do that, you need to explore what they are and provide evidence to support these findings. By following these steps, you’ll be in a much better position to communicate your site's potential and achieve the outcome you want.
Need a helping hand? Contact Lumify Energy to discuss your project and its unique requirements in more detail.