Which Payment Arrangement Is Best When Repowering a Wind Farm?
|Topic: wind farm extension||Read Time: 6 mins|
| Landowner type:|
Independent landowners | Institutional landowners
|Energy: Onshore wind|
If you’re trying to find the best payment arrangement for your wind farm extension and want to earn as much as possible, keep reading. In this rundown of rents, we’ll help you find the payment arrangement that is best for your project.
So, you’ve decided to repower your wind farm and want to figure out how to receive the appropriate compensation for renting your land.
But which payment arrangement is going to work best for your needs?
Do you want to maximise potential income while balancing risk? Or are you more interested in getting a reliable amount of cash in your pocket each year?
If it’s time to negotiate payment terms on your wind farm extension, you’ll want to have the right information to hand.
From fixed rent to hybrid options that give you greater visibility over your project, this rundown of payment arrangements for repowering your wind farm is bound to come in useful.
Now let’s dive in.
Payment Arrangements to Consider When Repowering Your Wind Farm
The first type of payment arrangement to consider when repowering your wind farm is fixed rent.
This is where the landowner receives a fixed payment regardless of how the wind farm extension performs.
The rent is usually given to the landowner annually and in advance, increasing over time with inflation.
Although it’s one of the more stable payment arrangements which suits risk-averse landowners, it may not be the most commercially viable.
So, let’s find out whether fixed rent is the payment arrangement you should go for when repowering your wind farm.
|Advantages of Fixed rent|
|Paid to the landowner regardless of how well or poorly the project performs.|
|Provides certainty and allows landowners to accurately estimate the long-term income of the project, which usually increases over time with inflation (RPI or CPI).|
|It’s more marketable to prospective buyers of the property as it is low risk yet provides high certainty.|
|It requires a minimal amount of time, resources, and cost to check the accuracy of payments.|
|The landowner isn’t exposed to any operation or financial risks associated with the project. |
For example, if the project isn’t operating for a year, the landowner still receives the agreed rent in full, and the landowner isn’t exposed to energy price volatility.
|Disadvantages of Fixed rent|
|As the landowner isn’t exposed to operational or financial risks, the amount paid to the landowner is typically less than the current market rent.|
|The landowner has no visibility or knowledge of how well or poorly the project is performing financially. This means it can be difficult for landowners to feel invested in or connected to the project.|
|It’s difficult to prove the market rate when leases come to an end, as there are a smaller number of landowners who have fixed only rents.|
|This type of rent may indicate that the landowner is less commercially savvy and/or is more reliant on the guaranteed income.|
Overall, fixed rent is an excellent choice if you want a guaranteed income from a project and are happy to accept less cash for reduced risk.
If you want to maximize the income from your project and are willing to risk energy price volatility, you may want to look elsewhere.
Turnover rent payment arrangement sees landlords receive rent based on the percentage of their site operator’s income or the overall turnover from a project.
It’s typically paid quarterly or annually and is usually higher than fixed rent (though it comes with greater risk!).
If you’re prepared to keep a close eye on calculations and the accuracy of payments, it may be a better choice than fixed rent.
|Advantages of Turnover rent|
|Usually, a higher rent is received compared to other payment methods as the landowner shares some of the operational and financial risks of the wind farm repowering project.|
|It allows the landowners to see how well or how poorly the project is performing. This means that landowners become more knowledgeable and commercially savvy over time (especially when it comes to renegotiations).|
|Landowners feel more invested in the success of the project and may be more willing to assist site operators in other areas of the project (like onsite monitoring).|
|It is highly preferable to receive a percentage of the profits which can be unilaterally determined by the site operator.|
|Disadvantages of Turnover rent|
|85% of landowners discover calculation errors during the life of their project due to complexities involved in the calculations.|
|More time and diligence are required to regularly monitor the accuracy of payments.|
|There is scope for differing opinions about what constitutes turnover or income, and it isn’t uncommon for landowners to be unaware of deductions made by their site operator.|
|It can be difficult for landowners to obtain the information necessary to verify the accuracy of their payments. Examples include the power purchase agreement due to its commercial sensitivity.|
|Landowners are more exposed to income volatility.|
|Rents may be reduced if site operators sell the electricity generated to an associated company below the full market price.|
If you don’t like the sound of fixed or turnover rent, you might want to take a hybrid approach.
Hybrid rent is a combination of fixed rent and turnover rent.
Landowners who choose this payment arrangement will receive a guaranteed minimum rent plus a bonus payment.
This means that if your project is doing particularly well, you’ll receive a percentage of the turnover on top of any fixed payments.
|Advantages of Hybrid rent|
|Landowners have full visibility of how well the project is performing and become more knowledgeable over time. This means they are well-positioned to negotiate when the lease expires.|
|Landowners are not fully exposed to the financial risks of the project. For example, if the project stops working, the landowner still receives a minimum floor payment.|
|Disadvantages of Hybrid rent|
|This type of rent requires more time and diligence to regularly monitor the accuracy of payments.|
|It could be difficult for landowners to obtain the information necessary to verify the accuracy of payments, meaning you could be paid less than you’re owed.|
|There is scope for different opinions about what constitutes turnover or income. It isn’t uncommon for landowners to be unaware of deductions made by their site operator.|
|Landowners’ rent may be reduced if the site operator sells the electricity generated to an associated company below the full market price.|
|85% of landowners discover calculation errors during the life of their project due to the complexities involved in the calculations.|
Multiple of outputs or generation rent
The final type of payment arrangement to consider is multiple of outputs or generation rent.
For this payment arrangement, landowners receive rent based on the amount of electricity a site produces, which is then multiplied by a fixed value.
This makes it an excellent choice if repowering your wind farm will significantly increase your output!
The payments are made quarterly and will also increase over time with inflation.
|Advantages of Multiple Outputs of rent|
|The landowner isn’t exposed to energy price volatility or subsidy changes, and payments are not linked to the actual income generated by the project.|
|Minimal time and cost are needed to check the accuracy of payments. However, landowners may still need to check that the payments are being increased correctly with inflation.|
|There is less scope for disagreement regarding the amount of rent to be paid due to less complex and less subjective calculations.|
|The landowner’s rent is not affected if the site operator sells the electricity generated to an associated company below the full market price.|
|Disadvantages of Multiple Outputs of rent|
|The landowner is exposed to the operational risks of the project. For example, if the project isn’t operating, then the landowner receives no payments.|
|The landowner has very limited visibility in terms of how the project is performing financially. Because of this, the landowner is not in an advantageous position when it is time to renegotiate, as fewer commercial insights have been gained.|
|Landowners might not be able to verify the amount of electricity produced and must rely on the information received from their site operator.|
|There are a smaller number of landowners who have a multiple of outputs rent. So, it would be more difficult for landowners to prove the market rent when they are renegotiating.|
It’s always best to carry out market research before landing on the payment arrangement for your wind farm repowering project.
After doing this, you’ll be able to understand the pros and cons of each option in more detail.
Although fixed rents are suitable for wary landlords who want to receive a set amount from their project each year, they aren’t always the most lucrative option.
But if you’re concerned about incorrect calculations or don’t want to monitor your project closely, they can be ideal.
As many potential complexities can arise from the way your lease is worded, it’s always a good idea to check in with a team of experts before taking the plunge.
By taking a financial and legal approach, you’ll choose a payment arrangement that works best for you.
If you’re on the hunt for more information about leases, repowering, and all things renewable energy, feel free to reach out to our team!
We’ll help you make sense of your project, make those crucial decisions without worrying, and help you achieve the best deals possible.