Refinancing AD plants – thinkpiece from Bidwells’ Cath Anthony
Ahead of her presentation at UK AD & World Biogas Expo 2018, Cath Anthony, Partner at property consultancy firm Bidwells, discusses what anaerobic digestion (AD) operators should consider when looking to refinance their plant(s).
Once an AD plant has been running for a few years and has a history of performance it is often possible to refinance at lower interest rates. As part of the process a valuation of the site will usually be required.
Typically, when valuing property, market value is assessed by reference to the value of other open market sales (i.e. comparable evidence) of similar property. However, there are few, if any, direct comparables for AD sites. Each site is unique and, given the huge difference in subsidies, the value of almost identical projects commissioned at different times could vary substantially. Sales often involve sales of shares in special purpose vehicles as opposed to purely a property sale.
A potential purchaser will have regard to the possible incomes and costs of a scheme when considering what they will be willing to pay. It is therefore essential that a valuer has regard to the assumptions and data that the market would assume.
This takes account of the projected revenues, including the support payments (Feed-in Tariffs, Renewable Obligation Certificates, Northern Ireland Renewable Obligation Certificates, Renewable Heat Incentive etc.) and revenue from sales of electricity/heat/gas and gate fees, as well as the costs of operating the plant.
This requires benchmarking and a detailed understanding of the market. There are very few Royal Institute of Chartered Surveyors (RICS)-registered valuers who are able to provide red book valuations of AD plants because they are so specialist and not many people have the relevant experience.
When valuing an AD plant I have to have regard to the site ownership, lease agreements, and any other contracts such as feedstock agreements or digestate/operation/maintenance agreements. We will look at the terms of those agreements, how secure they are and any obligations/restrictions.
Feedstock security can be one of the main concerns to investors and so longer-term contracts provide certainty. We will review the historic performance of a plant and how this might change over the lifetime of the incentives.
Whilst funders have become more comfortable with plants which are already operational, there are still risks associated with AD plants that do not eaffect, for instance, solar PV sites. Once a solar farm is up and running there is little maintenance required. However, there are a number of things which can go wrong with an AD plant; if there are problems with feedstock supply or the CHP unit or an AD plant breaks down, it might stop generating which means no income and probably a hefty cost.
We will need to consider the risks to a project and apply a suitable discount rate to provide a value for the site.
If you are considering refinancing it is hugely beneficial to have early discussions as to what information will be required and then to have information easily accessible to make it easier for a valuer to understand the situation and be able to process this more quickly.
If you would like to discuss further please do contact me at firstname.lastname@example.org or on 01223 559509.
Cath has been involved in a wide range of biogas projects, advising on the whole AD process including valuations, option and lease agreements, initial feasibility, due diligence, planning & permitting and feedstock supply/digestate agreements. Cath is a chartered surveyor and a fellow of the CAAV. Bidwells is a founder member of ADBA and a leading provider of consultancy and management services to the farming, food, energy and agri-investment sectors.