Scotland's agricultural sector has seen a welcome growth in the number of biomass schemes coming online in the last two years in particular. The reasons for this are many and varied.
The quality of the technology has improved. Funders are more comfortable with the steady returns and reliability of machinery, so seem more willing to commit to the investment required. The relatively low start-up costs (compared with onshore wind) attract a farming sector facing genuine financial pressures in other areas. For a hard-pressed agricultural sector, what's not to like?
While Scotland's rich landscape and farming heritage offer innumerable opportunities for biomass schemes to be developed, at Turcan Connell we have seen a wide variety of schemes on offer to provide investment for potential projects. For the unwary, the opportunity to prosper from the land – the very essence of farming – can be put at risk.
For landowners seeking to procure debt finance to fund a biomass development, the volume of new projects seems to indicate that funders are now more confident with the available technologies. Rather than reviewing contracts or spending large sums on due diligence, debt finance funders seem keen to rely on"the name" of the technology provider rather than the contract terms. This is undoubtedly helpful to the farming sector and to technology providers alike.
Where private equity or other forms of funding are sought, we are seeing an increasing range of structures available. For farmers concentrating on crop calendars to maximise biomethane output, often the more relevant skill is that of a lawyer. Special purpose vehicles (SPV), shareholders' agreements, and cashflow waterfalls are more regularly becoming key components of proposed biomass schemes.
For the farmer, several key points of advice should be taken. For projects where the profit is in the feedstock payment to the developer, the obligation to purchase is as important as the obligation to provide. Testing regimes, feedstock menu variations and weighbridge or other methods of measurement should all be checked, to ensure the farmer is getting what he thinks he is getting. For projects where membership of the project company is offered, the farmer may require minority rights protections, the benefit of anti-dilution and permitted transfer provisions, a regular right to a dividend, together with control over budgets and spending. The ability of the developer to assign its interest in the SPV may need to be discussed. Without a detailed review of the structure of the project company, the worst-case scenario may arise – the farmer being frozen out of his own project.
Equally, from the developer's perspective, a degree of security is needed, both to take the decisions necessary to complete the construction phase successfully, and to prepare the project for a re-financing or sale once a period of successful operation has occurred. Good developers have the experience of taking schemes from the drawing board to the farmyard, and given their capital is being exposed to risk in the early years, are entitled to reap the benefits of a successful scheme alongside the farmer.
As one of Scotland's pre-eminent law firms in the agricultural sector, we are best placed to advise on the most appropriate business structure to maximise potential returns for projects, for farmers and the development community alike. Given the variety of schemes on offer, and given that every farm is different, we are in the ideal position to provide best advice and see developments through to completion.