Why it may be the right time to invest in solar.
When farms started looking for diversification projects in the early 2000s, farm scale solar was one of the obvious choices. There was an attractive subsidy regime in the ‘feed in tariff’ which applied to most forms of green energy (at different levels, depending on the scale of the project) and farm scale photovoltaic (PV), anaerobic digestion (AD) and wind powered systems could often achieve payback in 7-8 years, or even less where some of the power could be used on farm.
Inevitably the massive take up of the subsidies, the growing volume of green power and the highly visible solar farm parks, which were not to all tastes, led to the phased reduction of subsides, with the FIT being scaled back and ultimately abolished for new installations completed after March 2019. This led to the collapse of many installation companies and rapid reduction in the size of the installation industry. At the same time the value of the export tariffs (where power was exported to the grid) dropped from about 7p per Kwh to under 5p. Those who had installed their panels, turbines or wind generators prior to about 2005 continued to make a decent return (the FIT was guaranteed for 20 years), but generally the investment was only economically feasible for those operating on a massive scale or those where most of the power could be used on site in lieu of buying in electricity at commercial rates.
Recent changes in the world, and consequently the electricity supply market, have altered the economics. For various reasons, including COVID-19, world supply and demand, oil prices, a fire at the terminal where electricity is imported from France and, latterly, events in Russia and Ukraine have led to a surge in gas prices. At the same time, the phasing out of coal fired power stations and the reluctance to commission new nuclear facilities are constraining supply in the longer term. All this has meant the current price for exported electricity on a twelve-month contract has risen from about 4.5p/unit last March to well over 16p/unit at the time of writing. The price of shorter-term contracts is considerably higher at well over 20p/unit.
It is also becoming clear that PV panels can last for up to 30 years and modern panels are now smaller, more reliable and more powerful. Moreover, the inverters which transform the current flows are also becoming more reliable, and now carry ten-year warranties rather than five. In a less volatile market than that which existed in the 2010s, the price of PV installations has fallen to about £950 per Kw, so a 100Kw plant (covering about an acre) would cost around £100,000-£110,000 (including the grid connection, which is usually a substantial cost that is not mentioned in headline figures) but at current prices might return to over £16,000 pa, or more if some of the power is used on site or the sales are managed actively. Even allowing for depreciation over 30 years, the rate of return is interesting.
The investment is not, of course, entirely risk free. The biggest variable is the export tariff: we have seen that almost quadruple in value over the last six months, and there is no guarantee that it will remain at current levels, although specialists within the energy industry have recently commented that they do not see power prices coming down in the next few years, at least, and there currently seems no suggestion that they will test the 5p mark again in the foreseeable future. There is also the question of planning permission, which is not a foregone conclusion – some organisations are fundamentally opposed to PV installations on high quality farmland and wind turbines will normally meet objections. Of course, a PV or wind turbine site will only be feasible if it is near to power lines of at least three phase capacity.
On the other hand, one might argue that the fundamentals are still sound in the medium/long term. The growth in electric cars and population generally is likely to mean an increased need for electricity and, post COP26, many traditional generation systems will be disappearing.
The tax position is quite interesting: the infrastructure will generally be eligible for AIAs and unless most of the power is used on farm, the installation will be taxed as a separate trade, which opens up the possibility of s64 or s72 loss reliefs (subject to capping where relevant). Interestingly, it appears that where an existing installation is expanded the restriction in loss reliefs for part time trades will not necessarily apply where the losses are relieved against other profits of the same trade. As a result, payback periods can be quite short, particularly where prices are at current levels. Where much of the cost can be offset by loss reliefs and/or much of the power can be used in site, payback periods of well under ten years now seem realistic.
As a diversification this will not be for everyone. Capital investment can be quite high and it will involve the loss of productive land. It may be easier to lease eligible land to a company which will pay an enhanced rent, but that is not always the right answer from an IHT perspective – if the panels are owned and operated as a trade, they should normally be eligible for BPR, which would not be the case for a rented site.
Where there is poor land, under the three phase lines, not too shaded and facing south, small scale solar is well worth considering!*The views expressed are the author's and not ICAEW's.