Farm Ireland
Independent.ie

Saturday 10 December 2016

Advice: Weigh up your options on solar energy contracts

Farming finance...

Martin O'Sullivan

Published 09/03/2016 | 02:30

Now that the market for wind energy sites has cooled off the focus has turned to solar energy and in particular sites that are located close to an ESB sub-station.

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What the energy companies are seeking is sites in excess of 25 acres and what they are offering in the first instance is a financial incentive to enter into an option agreement, typically for a two to three-year period, with sums of between €100 and up to €1,200 being offered to the landowner for the duration of the option agreement.

The Option Agreement commits the landowner to entering into a possible 25 year plus lease agreement with the solar energy company in the event that the option is exercised.

The big question for landowners is whether to commit now or hold off until later.

Commit now or hold off

Before the energy company is in a position to enter into a lease they will have a number of challenging hoops to jump through.

Firstly they have to acquire a connection to the national grid, and secondly they have to acquire planning permission.

Since the price to be paid per unit of electricity produced from these solar farms has not yet been announced, and the expectation that the number of applications will be far in excess of present requirements, applicants may have to succeed in a bidding process to supply energy at a defined price.

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The financial terms on offer for rent of the land to be occupied by the solar farm appear on the face of it to be very attractive with figures ranging from €800 to up to €1,500 per acre being quoted depending on where the land is located.

The lease rent will not normally be paid until electric current is flowing commercially from the solar farm and will be paid three to six months in arrears.

Ireland enjoys good levels of solar radiation with the southern half, particularly the south and east coasts enjoying higher solar radiation levels.

These are the more desired areas for solar power companies and rents in such locations will tend to be higher than in inland locations.

From the landowner's perspective, the question is whether they should commit to signing an option agreement now or wait until the government publishes its position paper on feed-in tariff support for solar energy generation which is expected later on in the year.

I will summarise what I see as being the pros and cons of entering into an agreement now rather than waiting until later.

Advice

When one considers the very attractive rents on offer and the possibility that the demand for grid connections may well exceed supply, it is difficult to justify a case for not committing now.

Holding off in order to achieve a higher rent may prove to be a case of 'much wants more' and time lost may be money lost.

However landowners need to be very careful with regard to whom they commit to.

Do not be influenced by short term inducements or promises of future community contributions.

The larger the project the greater the prospect of success and of the project becoming a reality as economy of scale will be crucial in developing a viable project.

Co-operation among neighbours in agreeing to deal with the same company could be vital to the success of a project.

What one does not want is to have a number of different companies signing up neighbouring landowners adjacent to a particular sub-station and all of them seeking planning separately.

Landowners should pay particular attention to establishing the credentials, financial standing and experience that the company has in developing solar farms.

Before signing the option which also commits the landowner to a 25-year lease, it might be prudent that the landowner's solicitors would look for proof of funds that the solar company is adequately financed to bring the project to the construction stage.

Income Tax Considerations

Leases of land for the purposes of erecting a solar farm will not qualify under the current land lease tax exemption scheme.

This means that all of the income will be taxable which could for the higher rate tax payer result in half of the rent going to the tax man.

Capital Acquisition Tax

Where a site is rented for a solar farm it is no longer an agricultural asset and becomes a commercial asset thereby not qualifying for Agricultural Relief.

This could have a bearing for both the land owner and or his successors. In a case where the land owner is a relatively young person who may come in to a future inheritance of agricultural assets, the capital value of the solar farm site may render him ineligible for Agricultural Relief.

This could prove very costly. Farmers contemplating entering into a lease should seek advice from a recognised farm tax expert.

Capital Gains Tax

A farmer who has not owned and farmed the land for a 10 year period prior to entering into the lease or who is under 55 years may have an exposure to Capital Gains Tax if they were to transfer the wind farm site to a son or daughter.

The capital value of a site will be a multiple of the rent being generated and could amount to a very substantial value as compared to the value of the land when he or she acquired it.

Again farmers should seek good tax advice where they are contemplating such a move.

Basic Payment

While the Department of Agriculture have not made any formal announcement on whether lands occupied by solar panels will be eligible for the Basic Payment, my understanding is that they may not qualify going on the experience of other EU member states.

From 2016, where land parcels on which 70pc or more of the area is regarded as ineligible land, then the entire land parcel becomes ineligible for any payments.

This would indicate that for example if 60pc of a land parcel was under solar panels, access roads, etc., then the remaining 40pc of the land parcel would be potentially eligible for Basic Payment and ANC schemes.

However if 71pc of the land parcel was under access roads, solar panels, etc, then none of that land parcel would be eligible for payments.

This would mean that a landowner may be left with excess entitlements with the option of leasing them or acquiring replacement land.

Either option will have an associated cost that along with the tax cost will have to be taken into account when assessing the overall cost benefit of the lease.

Should I commit to a contract now?

YES

Committing now gives the solar energy company a head start in terms of acquiring a grid connection and acquiring planning permission with the result that the farmer could conceivably be in receipt of rent within two years if all goes well.

While solar farms are not likely to receive as much public opposition as wind farms, nevertheless getting in early may prove advantageous before any public opposition gains a head of steam.

Delaying a decision may result in money being lost forever as 25 years is a long time and many landowners may not outlive the lease.

Because of the uncertain political position that Ireland now finds itself in, government policy on solar energy may be slow in coming.

NO

It is not known what level of feed-in tariff the government will provide and it is possible that offers may improve when this information is available.

Landowners who delayed committing to wind farm developments or telephone masts generally fared better.

There is no guarantee that the energy company will be successful in developing a solar project. Time may weed out the weaker companies.

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