How to value Windfarms and other Renewables Projects

NEW RICS INFORMATION PAPER

As author of the new RICS Information Paper on Renewables Valuations I hope readers will appreciate this introduction and overview of the paper.

RICS (Royal Institution of Chartered Surveyors) has published an Information Paper on the valuation of renewable energy installations.

The paper concludes that:

“The appraisal of renewable energy generation capacity presents a challenging valuation task, to deal with a variety of site conditions against a scarcity of market evidence. Therefore, the valuer must pay particular attention to:

  • the agreement and confirmation of instructions with the client, and with regard to any other users of the valuation report
  • physical, financial and other data
  • meticulous recording and evaluation of all sources of information
  • careful selection, justification, application and adaptation of methods
  • clear analysis of data and sensitivity
  • comprehensive and clear reporting.

“It is imperative that the valuation is soundly based in every step of the process, and fully and clearly explained in the report, including any and all assumptions made. This should serve the best interests of clients, practitioners and other users of the valuation by providing the valuation advice they need while ensuring that the prevailing challenging conditions are fully appreciated. With this accomplished, the valuation should enable clients and valuers to proceed with the appropriate level of confidence.”

The new paper should be of particular interest to the financial sector, which is still coming to terms with the long-term implications for finance secured against property interests.

The earlier sections review the use, application and adaptation of traditional valuation approaches to the appraisal of renewables for Market Value purposes.

  • Direct market comparison has obvious limitations,
  • traditional investment approaches (income capitalisation) can be useful when valuing a landlord’s interest in an arm’s length transaction and in some joint ventures
  • replacement cost approaches present particular challenges
  • Discounted Cash Flow appraisal would follow industry practice for larger developments, but as the appraisal is likely to be particular to each developer the resultant Net Present Value  is more likely to be an Appraisal of Worth (to a particular investor) than an opinion of Market Value (as defined in RICS and International Valuation Standards)

Some aspects of renewables valuation present special challenges:

  • Sites for future development present particular uncertainties around timing, grid connections, planning consents and conditions, and confidence in the developer’s ability to see through and sustain the completed project
  • Intricate lease terms need care.  For example, stepped rents may depend on the actual output from the site.  Higher levels of output may be no more than predictions at the planning stage.  It has been known for some large sites never to achieve the thresholds for higher layers of rent payment, so risk/discount rates need to reflect this.
  • Joint ventures and more intricate leases will also need considerable care in interpretation.  This can start with the identification and definition of the site itself, but can go on to much more complicated aspects like the impact of ‘connectedness’ between the parties involved.
  • Reversionary aspects also need careful consideration.  If plant life, lease terms and planning consents mean an effective operating life of about 25 years what will happen to the site thereafter?  The working assumption in the profession at the moment seems to point guardedly towards an assumption of reversion to earlier uses (typically farming).  In this situation the renewables venture is effectively a depreciating asset.  To some extent this might be addressed within the valuation approach, in that the capitalisation factors (Years’ Purchase figures) used by valuers imply an equivalent rate sinking fund to replace the initial capital investment.  The broader elements of this do however need to be understand by clients and financiers.
  • Knock-on effects may reduce the value of property in the same ownership.  Some agreements leave detailed micro-siting considerations of, eg cable runs, for later consideration and these in turn may have consequential affects which need to be ascertained and evaluated.  In the run up to the publication of this paper, RICS has also warned of the risks that ‘free’ photo-voltaic installations may pose to the mortgageability of residential property (link to press release here).

But the paper also offers a timely reminder that we must not overlook the traditional covenant risks in asset valuation.  These include the possibility of technical problems and delays, and general risks of covenant default.  A good example occurred last year with the failure of Proven wind turbines.  This resulted in a Safety Order which put the brakes on all output from the affected turbines, and led to the financial failure of the company when it emerged that it would be unable to meet its warranty obligations.

The new guidelines have already been welcomed on Twitter for their importance in underpinning the government’s green deal (@parity projects 9 May: We need this to give the #greendeal extra hope: RICS Renewables Valuation paper http://www.ricsbooks.com/productInfo.asp?product_id=19206 Cost £20 @charlescowap @RICSnews).

Valuers up and down the country have had a preview of the new guidelines as they have been developed (see here for the slides which accompanied some of these briefings) and the draft paper was subject to extensive review from a steering group of valuers and other experts in this field.  In addition it was subject to public consultation in Autumn 2011 before being finally signed off by the RICS Valuation Standards Board earlier this year.  It therefore represents a considerable distillation of leading professional opinion in this emerging area of practice.

Readers wanting to know more, with an opportunity to pursue their own questions on Renewables and their impact on asset values, can also sign up for a RICS Training Web Class to be held on 30 May.  This 90 minute session will present an overview of the latest guidance, some examples and will offer participants plenty of opportunity to raise their own questions with the author and other delegates.  Details of the RICS Training session can be found here.

The Information Paper itself is available as a pdf file for downloading by RICS members from the member-only section of the RICS website, here.  Non-members can buy a copy from RICS Books, here.

Meanwhile practising valuers and other professionals in this field are welcome to consult me both informally and formally on the impact of the new guidelines, with regard to specific instructions, general aspects or specific requirements for inhouse or local training in this area, as several have done already.

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