How can farmers & landowners diversify their income streams?

With the new Labour government pledging to double onshore wind power and triple solar power by 2030 – and farmers increasingly looking to diversify their income streams – many more renewable energy projects are likely to be kickstarted in the coming years.

Given the long-term commitment, sums, risks and challenges inherent in any energy development, it is important that from the outset both developer and landowner are aware of what is required of each party, and what ought to be agreed to ensure a good relationship during every phase of a renewables project.

Pre-development phase

Once the developer has found an appropriate site for their scheme, and the landowner has accepted outline terms for the project, an ‘option for lease’ agreement is usually agreed between the parties. This agreement – which typically lasts between three and 10 years – provides the developer with (amongst other things) rights to access the property to conduct site investigations, and – when certain conditions are met – the right or obligation to enter into a lease of the site. In return, the landholder receives an upfront sum, known as an ‘option fee’.

Operational phase

Once both planning permission and a grid connection offer are obtained, the developer will exercise its option to enter a lease with the landowner to govern the construction and maintenance of the site. The rental value will typically be tied to the power output of the scheme, and/or the area of land used to site the project. Where landholdings are split between multiple owners, rent will be apportioned, typically determined by the amount of land contributed and type of development on their part.

Restoration phase

Decommissioning of the project site will typically take place two to four decades after development. The lease agreement will set out terms for decontaminating and reinstating the site, which is to be the developer’s responsibility at the end of the lease. During the lifetime of the agreement, a ‘decommissioning bond’ is usually paid by the developer to cover restoration costs.

Considerations

During the pre-development phase of the renewables project, the landowner will seek to ensure that they can continue farming operations. In some cases, these can continue during the operational phase, such as with the grazing of sheep under solar panels (which can also provide a benefit in terms of inheritance tax). In addition to being protected from decommissioning costs, landholders will also typically demand that disturbance to their property resulting from site investigations, installation of equipment and access is adequately compensated.

On the other hand, the developer will want to ensure that a landholder is restricted from doing anything during the pre-development phase which may undermine or disrupt development of their property. Additionally, they will seek to ensure that neighbouring activity by the landholder does not negatively affect the energy output of their project (by blocking light or air, for example) during the operational phase. They may also wish to be able to transfer or assign the option or lease to a group company or ‘special purpose vehicle’, to isolate financial risk.

Renewable energy schemes – whether wind, solar or battery storage – both help the UK meet its net zero targets and provide landowners with a reliable income stream for many decades. With the length of these agreements lasting upwards of 20 to 30 years, and long-term considerations needing to be factored in early on, it is advisable to obtain legal advice as early as possible.

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