The complications of financing AD
Overall, there is a good supply of finance available for properly put-together AD projects, says Michael Stoneham, banking and finance partner at solicitors Brodies.
Financing AD is more risky than other renewable technologies, because AD plants are complex and rely on biological factors, so finance often comes with a premium and many lenders will only fund a project once it is successfully running.
Mr Stoneham says: “Farmers will need to satisfy a lender that they have access to a supply of quality and reliable feedstock to feed the plant in sufficient quantities for it to operate continuously.
“They will also need to show solid plans for operating and maintaining the plant, including putting aside regular resources to pay for anything that needs fixing.”
To get an AD plant built in the first place, there are two main financing options, says James Wood, business development manager at finance broker Charles and Dean.
Mr Wood says: “The first port of call should be your current bank or broker for a business loan.”
A high-street bank could be the cheapest source of funds.
Often they will look to secure this against land you own, but farmers should consider what they want to offer as security.
If banks will not offer a loan for building the plant, bridging loans, project finance or hire purchase may be options, says Mr Wood.
He says: “A bridging loan is normally easier to access than a project finance loan, but is generally more expensive.
“With both bridging loans and project finance loans, you only pay the interest until a certain date.
“Once the plant is fully functioning, the farmer would normally settle the outstanding balance by transferring the debt to a business loan or higher purchase, at which point they would start paying
back the capital, normally at a lower rate.”
To use hire purchase, you would buy the equipment or assets and pay for it in monthly instalments.
Common pitfalls when taking out finance include: over-stretching yourself on repayments; offering too much security; not ensuring you can run the plant properly once it is built, resulting in lower energy generation and making it harder to pay repayments.
With a bridging loan, farmers should be extra confident the feedstock or plant will work, says Mr Stoneham.
He says: “The bottom line is that however you get it paid for, it is essential to ensure the plant is resourced to operate properly. It needs good feedstock and to be properly looked after.”
MATTHEW Flint, director of GR Project Consulting, says: “Under a non-recourse project finance model, investors do not require cash or security from the farmer and will invest in a special purpose vehicle [SPV] that is formed to build, own and operate the plant.
“If any issues occur, the investor’s recourse is limited to the value of the SPV.
“This type of project is suitable for larger projects; the market is currently focusedon projects with an electrical equivalent of about 2.3MW.
“Typically, it suits large mixed farmers, but farmers with a good location might partner with a larger farming contractor, who can help procure feedstocks.
“In most cases, the farmer receives an index-linked rental income for the project site, plus contracts to supply feedstocks and to manage digestate.
They might also take equity in the project.
“Before committing funds, investors typically require contracts for design and construction of the plant, operation, maintenance and management agreements, as well as other corporate and commercial documents, in addition to planning consents.”
JAMES Wood advises:
CHARLOTTE Davies, head of renewable energy and agriculture at Shawbrook Bank, says: “When farmers approach us for help with an AD project, there is no one-size-fits-all.
“Depending on the project, we may offer a bank loan, hire purchase facility or project finance. Key questions and documents will be: