Valuation: renewable energy installations

Creating value

29 November 2012

A new information paper advises on the valuation of land for sites where a significant part of the value comes from the potential to generate renewable energy. By Charles Cowap

Growing alarm about climate change and energy security has stimulated widespread development of renewable energy facilities. RICS Rural Professional Group has produced a range of information and guidance for members, including the very well-received Options and Leases for Renewable Energy Schemes, published last year, and the Briefing on Anaerobic Digestion, to mention but two. The group has now grasped the nettle again with the publication of an information paper on the valuation of renewable energy installations, following feedback from members demonstrating a need for this.

Renewable energy technologies range from wind farms to hydropower, encompassing solar photovoltaics, anaerobic digestion and other technologies. New facilities have ranged from the very modest, providing part of a household’s requirements, to the substantial, providing enough electricity for the total needs of modestly sized towns. To date, electricity has been the main output, but a growing interest in the production of heat is now anticipated as well. Government support for this emerging industry has strongly encouraged development, and can give the misleading impression that this is a highly secure form of investment. But there are risks too.

The new information paper addresses the capital and rental valuation of freehold and leasehold landed interests for sites where a significant part of the value arises, or might arise, from the potential to generate renewable energy - principally, electricity. While the information paper has been prepared against a background of prevailing UK conditions, RICS recognises that the principles outlined have global application.

Site owners, developers and financial backers increasingly demand valuation advice on renewable installations. Valuations are required in connection with loan finance, on sales and purchases, and on the negotiation of option agreements. Increasingly, valuations will also be required in connection with asset management and taxation.

This information paper is therefore a timely resource for valuers. It reviews the purposes for which valuations may be required, identifies factors that demand close consideration by valuers, discusses the application of the main methods of valuation to renewables, including discounted cash flow, and prompts consideration of particular procedural aspects that demand close attention. In doing so, it highlights those aspects of the RICS Valuation - Professional Standards (Red Book) that require special care.

The information paper concludes that the valuer must pay particular attention to:

  • the acceptance and confirmation of instructions with the client, and with regard to any other users of the valuation;
  • 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; and
  • comprehensive and clear reporting.

This should serve the best interests of clients, practitioners and other users of the valuation in providing the valuation advice they need, while ensuring that the challenging conditions in which this advice is provided are fully appreciated, enabling clients and valuers to proceed with the appropriate level of confidence.

Moving forward on a common basis

'Currently the valuation of renewable energy installations is an area of limited collective professional experience due to the lack of reliable and transparent market data. This highlights the need for valuers to be very careful in verifying their own analysis of both market information and their choice of methods, if necessary with help from colleagues and renewable energy specialists. This paper intends to help the profession to move forward on a common basis in the development of practice in this emerging area.

'The most challenging valuations will be for development proposals for new sites, particularly those put forward by inexperienced site owner-developers. A significant element of this uncertainty and risk is removed when dealing with a very experienced developer and site operator. The most straightforward valuation requirement is likely to be the valuation of a freehold interest that is subject to a lease to a generator with a good track record, on a site with a reliable track record let on simple lease terms. The challenges will be judging the adequacy of the rent and the choice of a suitable yield, investment period and after-use. This information needs to be fully supported.'

Extract from RICS Valuation of renewable energy installations information paper

Charles Cowap MRICS is the principal author of the information paper, and a chartered surveyor and education specialist with more than 30 years’ experience of new developments in estate management and valuation. He has worked on various valuation publications

Further information