Just a few years ago, an approach from a wind or solar farm developer was so novel that many landowners seized the opportunity to strike a quick deal. It is now far more common for several proponents to be knocking on a landowner's door at the one time, leaving landowners to assess competing proposals.
Here are five questions landowners can ask renewable energy project developers to identify a superior offer.
- How certain are your plans?
A typical renewable energy project proponent will ultimately ask a landowner to sign a bundle of documents with an aggregate term of 50 to 80+ years. There is therefore significant pressure on landowners to contemplate the long-term future of their properties when negotiating those agreements, which will usually bind future owners. Failing to foresee and address hypothetical problems at the outset could devalue a property in the assessment of prospective purchasers or financiers.
To buy time for negotiations on long-term agreements to run their course, a project proponent will often propose a preliminary short-term agreement that allows access to a property for investigations and includes an exclusivity commitment from the landowner—a promise not to deal with any competing project proponent for several months.
If the proponent is satisfied with its preliminary investigations, it will typically then propose an “option to lease” under which the landowner is obliged to proceed if further milestones such as development approval, grid connection and finance are achieved.
Before committing time and energy to the negotiation of progressively longer-term commitments and locking out potential other opportunities, a landowner should ask for evidence that a particular project proponent has mature plans for its project and the capacity to execute them. Such evidence could include maps showing a detailed “desktop” design of the project, including indicative locations of turbines/panels, battery storage, powerlines, access tracks, substations and other ancillary infrastructure. Landowners might also be offered the opportunity to inspect other projects constructed or in construction by the project proponent.
- How long will you need to decide and what will you pay for the opportunity?
For the term of any preliminary access/exclusivity agreement and the subsequent term of an option to lease, a project proponent will have the opportunity, but not the obligation, to proceed. It will usually use the time to complete its investigations as to the suitability of the proposed site, pursue applications for development approval and grid connection and arrange funding for construction.
Given the opportunity costs of committing to a particular project proponent, when it comes to the term of the exclusivity/option arrangements, generally the shorter the better.
Also, now that there are many competing project proponents in the market, the trend is for higher exclusivity fees and higher option fees.
- How will you structure the rent?
There is a strong chance that, over the decades between first committing to a project and its ultimate decommissioning, any dollar amount agreed upon as the stating rent (whether on a per-megawatt-of-installed-capacity basis, as is typical for wind farms, or a per-hectare basis, as is common for solar farms) will quickly begin to appear paltry as land values, electricity prices and other measures of the “opportunity cost” of a landowner’s commitments under a renewable energy project lease inevitably increase.
Indexation of the rent to the consumer price index (CPI) should be a landowner’s minimum expectation. Also ask whether a project proponent is prepared to commit to rent reviews, at defined intervals, linked to the value of the underlying land and/or project revenue.
- What security will you provide for decommissioning, make good and rehabilitation?
When thinking through the life of a proposed project, also consider the inevitable point at which the depreciated value of the built infrastructure will drop below the cost of decommissioning it at the end of its useful life. At that point, logic suggests it would be financially advantageous for the project owner to walk away rather than honour a promise to decommission its infrastructure and “make good” the site.
By that time, the project could have changed hands any number of times, the then owner might not be in a strong financial position, and it is almost certain that the landowner will not be dealing with the same reputable people with whom the landowner began negotiations.
To counter the temptation for the then-owner of the project to flee, leaving behind a mess and a broken promise, a landowner should ask for security for decommissioning and make good obligations, such as a bond for an amount equal to the estimated costs that can be applied to fund such costs if the project owner fails to pay them.
The times at which instalments of such a bond are provided is key. Naturally, it is tempting for a project proponent to offer to put money aside only a few years before it will need to be spent. Superior offers will better align the instalments of the bond with the decline in value of the renewable energy infrastructure as it approaches the end of its useful life.
- Will you cover valuation, accounting and legal costs?
The detail of access/exclusivity agreements, options and leases are important, as are the headline numbers for fees and rent. Also, I have written before about the opportunity to align a renewable energy project agreement with a landowner’s long-term succession and taxation planning objectives.
Most landowners will therefore want a team of experts to assist them to secure a good outcome when approached by renewable energy project proponents, and many project proponents are prepared to cover landowners’ professional costs.
Thynne + Macartney assists landowners to make the most of an opportunity.
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