Diligence required for renewable energy to deliver land use diversification benefits

Farmers are increasingly looking at their business, particularly in the sheep and beef sector, and asking what other income they can derive from their assets: ‘without impeding what we are doing now, what else can we do to make the farm pay?’ 

Finding diverse revenue streams is not new, in fact it is arguably as old as farming itself.

In more recent times, renewable energy, from solar panels or wind turbines, are a form of land use diversification that presents a potential opportunity.

Under the Paris Agreement, by 2030 New Zealand is committed to reducing net carbon emissions to 50 per cent below 2005 levels, and achieving net-zero carbon emissions by 2050. This requires a strong focus on transitioning to renewable energy sources, such as solar and wind.

An investor seeking to develop a solar farm needs land that meets several criteria, including sufficient exposure to sunlight, easy contour, and the scope to minimise the visual impact any development would have on the surrounding area. Proximity to the power grid, with easy access to a substation through which power can enter the national network, is also a vital consideration.

Farm purchases where the objective is to develop a solar farm are frequently initiated by the purchaser, not the vendor. Purchasers generally know better than the existing farm owner whether a farm meets the necessary criteria. Such purchase agreements might include scope to lease the farm back to the vendor to continue farming, albeit modifying farming practices, particularly grazing, around the solar panels, where this can be practically achieved. Sometimes the first step for investors is to secure an option to purchase, giving them time to undertake due diligence, rather than buying the farm straight out before development plans are verified.

Northland has been the focus of solar farming to date. Several existing New Zealand utility companies have purchased land for solar development. Elsewhere in the country the activity has been somewhat more piecemeal, investors taking options on farms, then going through lengthy due diligence to develop their plans, often including going through consent processes, before finalising deals and undertaking the development. When such parties are based outside New Zealand, they also need to obtain Overseas Investment Office approval, which may put these prospects beyond the realistic expectations of landowners.

Development of wind generation comes with similar challenges. These include access to the network and the capacity to mediate the concerns of neighbours anticipating that their views will be impeded. Installing a viable wind turbine also depends on topography.

Wind generation is generally based on leasing from the existing landowner, who has greater freedom to continue farming than if it were a solar farm development. However, the possibility of constructing wind turbines will also be subject to extensive technical testing and due diligence regarding the location’s viability. If that comes with a long-term lease payment from the power generator, and the introduction of much needed revenue to support other farming endeavours, it will probably ultimately be regarded as worth the initial uncertainty.

Just like any other possible land use diversification strategy, renewable energy can offer advantages. However, these are more likely to be realised if they are properly evaluated before they are implemented.