MHA | Small scale solar for rural businesses – is it worth it?

Small scale solar for rural businesses – is it worth it?

Joe Spencer · February 1st 2022 · read

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About 10-15 years ago small-scale solar installations were one of the simpler and more popular forms of agricultural diversification. The yield was underpinned by an attractive “Feed in Tariff” (FIT) which provided a subsidy for all electricity produced, with different scales for photovoltaic (PV) anaerobic digestion (AD) and wind powered systems. Any surplus electricity could be sold back to the grid for a modest price and the payback period was generally reckoned at 7-8 years, with the FIT running for a 20-year term.

The rapid growth of the industry soon led to the FIT being scaled back and ultimately abolished for new installations completed after March 2019. As a result, the installation industry contracted rapidly with a number of firms going out of business. Some new installations continued but generally the investment was only economically feasible for those operating on a massive scale or those where most of the power could be used on site in lieu of buying in electricity at commercial rates.

Recent changes in the electricity supply market may have changed the economics somewhat. Set against the need to find sources of income to replace the falling Basic Payments, the current price for exported electricity on a twelve-month contract has risen from about 4.5p/unit in March to well over 15p/unit at the time of writing. The price of shorter-term contracts is considerably higher at well over 20p/unit. At the same time, experience is suggesting that PV panels can last for up to 30 years and the more complex associated inverters now carry 10-year warranties. Moreover, the price of PV installations has fallen to about £950 per Kw so a 100Kw plant (covering about an acre) would cost around £100,000 - £110,000 (including the grid connection) but at current prices might return over £15,000 pa, or more if some of the power is used on site or the sales are managed  actively. Even allowing for depreciation over 30 years, the rate of return is not unattractive.

As always, there are caveats. A site will require planning permission, the grid connection will be dependent on some fairly high voltage powerlines being nearby and of course, there is no guarantee that current prices will be sustained, although given the switch from fossil fuels to green power and the growing demand for electric cars one might hope that price movements would generally be positive. In the longer term, there is even the possibility of electric tractors, so having an on-farm source of recharging power would have its merits.

From a tax perspective, the infrastructure will generally be eligible for AIAs (though large-scale installations will fall within the special rate as integral features). Unless most of the power is used on farm, the installation will be taxed as a separate trade, but this then opens up the possibility of s64 or s72 loss reliefs (subject to capping where relevant). Where much of the cost can be offset by loss reliefs and/or much of the power can be used in site, payback periods of under ten years now seem realistic.

Diversification has long been promoted as one of the ways in which a farm can survive under the new subsidy regime. Not all businesses will have the management skills, physical assets or location for the more conventional property-based diversifications, but where there is poor quality land with power cables nearby, it may be worth at least assessing the move from harvesting crops to harvesting wind and sun.

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