Wind farm electricity generation – new opportunities?
In April 2023, it was reported that electricity generation by wind farms and turbines had hit a record high of 24.6% of the total electricity generated in the UK. Wind power is clearly now a big player in the UK energy production market, and this market share continues to grow.
Many schemes that were discussed and then abandoned in the past are now being reconsidered as the demand grows. At the same time, wind farms typically have a lifespan of 20-25 years, so many of the early adopters are now coming towards the end of their initial lease period, and the equipment is approaching the end of its useful life. Power companies and landowners are now both considering their options as they approach the end of their current arrangements.
Broadly, there are three options:
1
2 & 3
Repowering
Repowering a wind farm involves replacing the equipment and is comparable to setting up from scratch, although with existing infrastructure and connection agreements already in place with the possibility to be repurposed. A grid connection is a significant hurdle to overcome in setting up a wind farm which, despite a government pledge to relax the restrictions in December 2022, shows no sign of changing.
On any repowering, the footprint of the site may change to account for an increase in the number and size of turbines, which creates an opportunity for discussion and restructure.
Decommissioning or extending
Planning restrictions or site limitations could mean that decommissioning or extending the existing arrangement are the only options. It’s crucial for landowners to be aware of lease expirations and to allow themselves enough time to consider the various options.
In the next section, we explore the key points to consider when the time for renegotiation arises. Many of these points are applicable for a new scheme. This is certainly not a comprehensive list, and we would always advise speaking with an expert to discuss specific circumstances.
Options for wind farm agreements
In the early days of wind power generation expansion in the UK, obtaining planning permission and grid connection was not guaranteed. An option agreement was a common strategy to pass on this risk to a developer. Once the planning permission was obtained, the landowner may have entered a straightforward lease agreement for the land and a regular fixed rent.
An alternative position was to set up a joint venture agreement to share both the risks and rewards of the project. A joint venture agreement could be between a landowner and a developer, or a landowner and a power company directly (although this was a much rarer structure). Both of these routes have advantages and disadvantages for those party to the agreement.
When these initial agreements are coming to an end, there are opportunities for negotiation for landowners and power companies alike. These may involve power generation agreements where the parties jointly generate the power, or amendments to the leased areas or lease terms.
Future proofing the arrangement
For many landowners, IHT planning and succession planning are important considerations. The ending of the initial lease may give rise to an opportunity to pass on assets to the next generation before further value is created in a new lease, or to reorganise the position to preserve IHT relief, now that the landowner is 20 years or so older. BPR can be a valuable IHT relief, which is available on trading businesses. A simple lease arrangement would not qualify as a trading business, meaning that, whilst it’s a regular income stream, it’s not particularly efficient for IHT purposes. A joint venture may be more efficient for IHT purposes but may come with a more variable cashflow.
Entering into a joint venture as a separate entity can be complex for power companies, and they may prefer a straightforward lease. It should be noted that early negotiation is key to ensure the best outcome for both parties.
Instead of a blanket lease across the whole area, it may be beneficial to grant a lease on very specific areas, where the wind turbines and infrastructure are actually situated for example – sometimes known as a ‘spot and stripes lease’. This could mean that there are areas of land which may still be used for a trading business, like arable crop growing. This will maximise revenues and may also help secure IHT relief under BPR. BPR is available where the business is deemed to be wholly or mainly trading (more than 50%), considering various factors. Where land is used for both trading and non-trading activities, maximising the trading use can help secure or preserve BPR for the business overall. Separating elements of land from the lease can also provide options for succession, so it’s worth considering before the expiry of any lease. Each scenario will need to be considered on its merits and specific facts.
"Entering into a joint venture as a separate entity can be complex for power companies and they may prefer a straightforward lease. It should be noted that early negotiation is key to ensure the best outcome for both parties."
Maximising revenue for landowners
Landowners who are less concerned with IHT planning may be more concerned with maximising their revenue from the proposed new agreement. Sharing the risks and rewards through using a joint venture arrangement can lead to increased revenue, however the appetite to take on the risk has to be considered. This will of course depend on the individual’s circumstances.
Ensuring that the income is received in the most tax efficient way is also an important consideration. There are various areas to consider, including in whose hands the income is required and the most appropriate structure to achieve this.
Often the perception is that a corporate structure is more tax efficient, but if the landowner requires the funds to be extracted from the company into their own hands, the income will generally be subject to two layers of taxation.
If the landowner is entering into a trading joint venture, rather than a lease agreement, then other tax reliefs may be available, including capital allowances, which would allow the writing down of the machinery purchases against taxable profits. There may also be grants available on the purchase of new equipment which, despite the renewable incentives being reduced, may still be valuable.
We have extensive experience in helping landowners negotiate these arrangements. The key is to seek advice early enough in the process, so that the whole arrangement can be fully analysed to provide the best benefits to current and future generations. Wind projects are long-term and as such, long-term needs should be considered.