Step 6 – Establish a legal entity
In order to make funding applications, establish banking facilities, secure a site, and enter into contracts or joint venture arrangements, to pay bills and to receive income there should be a recognised legal entity taking the project forward.
For rural businesses, it is important that any liability insurance or the conditions of existing bank finance allow diversification into renewable energy generation so that this activity is covered. In the case of larger projects or stand-alone projects it may also be prudent to isolate the liabilities of the solar PV project from the core business.
For community groups that are not already constituted, this means an appropriate formally constituted body or legal framework, usually where the constitution provides some protection against personal liabilities and potentially including appropriate insurance. The establishing a community group module contains more information on establishing a legal entity.
The form of legal entity taking on the project can influence the range of finance options available and could be critical in securing the finance option most suited to the project objectives. Further information on finance options can be found in the finance module, and a review at this stage may support consideration of the appropriate legal entity to progress the potential solar PV project.
It is important that legal advice from a solicitor who has experience of completing this type of work is obtained at this stage.
Step 7 – Secure the site/s
Once the above legal framework is in place then the site(s) must be secured. This frequently requires you to enter into a legal agreement with the site or roof owner that guarantees your tenure over or access to the site for several years after the expiry of the FIT payment contract. It is likely that this will involve some kind of payment being made to the owner.
Depending on the requirements of the funder you may need to enter into a formal lease agreement or buy the site to enable financial close to occur. At this point you are then liable for all agreed payments.
However, subject to the requirement of funders, you may wish to postpone this step until after the feasibility study has been carried out. A memorandum of understanding (MOU) could be used at this point to secure the site or roof owners intentions in writing. This would reduce risks of purchasing a site, or entering into a lease agreement, only to find that the project is not feasibility.
Step 8 – Secure initial funding
CARES enablement grants provide grant funding to help towards the start-up costs of feasibility studies, community consultation and other preparatory costs. Money is available for community groups to fund project development and feasibility study costs. This is likely to be significantly more than is required for developing a solar PV project. Note: the grant cannot be used to cover the cost of the panels.
Step 9 – Feasibility study
The financial viability of any project depends on the cost of borrowing the capital relative to the income that the PV system will generate, after operating costs. These operating costs will include land rent for the site (if appropriate), maintenance, insurance and rates.
The depth of analysis needed will depend on the scale and complexity of the solar PV project. This could be carried out at risk by the installer/supplier, a paid consultant or by the community energy group.
Solar PV is now a mature technology and there is a good market for panels, associated equipment and services. This means that the best source of good estimates on capital costs is from solar PV panel installers/suppliers through a process of competitive tendering. This will certainly be possible if the size, location and operational parameters of the project are known.
Other costs may include a support frame or base if the system is ground mounted or on a flat roof. Where possible, costs of known items or activities should be identified through competitive tendering to generate ‘real’ quotations.
If your solar PV project is 50 kW or less, then to be eligible under the FIT scheme your installation must be commissioned by an MCS-certified installer using an MCS-certified product or be certified under an equivalent scheme. When you have reached the stage in your project development that you need to engage with MCS certified installers or suppliers, references are available in Further Information.
The amount of electricity generated, the number of panels installed, the point of connection and the distance from the connection point, will all influence connection costs.
Grid connection issues are covered in more detail in the grid connection module. This will allow you to determine whether you need to make any specific arrangements for your grid connection. Small scale single rooftop installation can generally be connected to the grid by a certified MCS installer without your group needing to make any additional arrangements.
Electricity use on-site
It should be determined what portion of electricity generated will be used on site and what portion will be exported to the grid. There may be limitations on using electricity generated by the solar PV system across multiple MPANs. Where relevant (eg solar PV project on a block of flats), the cost/benefit of connecting the solar PV system to one MPAN should be compared against the cost/benefit of connecting smaller solar PV systems on the same roof to multiple MPANs.
If the proposed solar PV system is greater than 50 kW or if you think that your solar PV system will require planning permission, then you will want to contact the local Planning Officer to confirm what work will be required to make a planning application and the studies and fees that will be involved. The requirements of planning will vary with the size and location of the Solar PV array or arrays. For some projects the appointment of a planning or environmental consultant may be required and the cost of this will need to be estimated.
Renewable energy projects developed by the community may still be required to provide a Community Benefit payment. The need for this and the level may be part of local planning guidance. Solar PV projects supported by CARES would expect to provide £10,000/MW per year.
There are three forms of generation income:
- Savings in the electricity that would have been purchased (only applies if the solar PV is connected to a building that uses electricity).
- The value of the electricity sold to an electricity supplier.
- The value of the Government incentive for renewable energy.
The annual energy yield can be estimated in kWh based on the solar irradiation data for the site location. Although some consideration has been given to this at Step 4 it will need to be recalculated using the same tools, but for the specific size of array, type of panels and site conditions.
The actual yield from the panels will depend upon a number of factors and more detailed modelling can be provided either by a supplier at the time of detailed quotation (smaller systems) or by a suitably qualified consultant engineer (larger systems).
Step 10 – Secure project funding
If project funding has not been identified already, then it will almost certainly be required from this stage on. The separate Project finance module gives guidance on the types of finance that may be available and potential sources of that finance. Links can be found in the further information section of this module.
There are a range of finance options, each of which has different attributes and requirements. These include traditional bank loan finance, establishment of a co-operative (via the sales of shares), or by partnership with a developer.
Considerations that will influence the choice of finance route include:
- the appetite for risk and reward.
- the ability to find a share of the capital cost.
- the ability to manage the development and operation of the project.
Each form of funding will have specific attributes (interest rates, target investment types, loan conditions). Early discussion with the funders will establish if your project matches the funder’s criteria. Changing a project to meet funding criteria may be justifiable but care should be taken not to impair the core reasons for developing the project.
Solar PV is a well-established technology, leading to lower perceived technology risk. Other routes to local funding may be possible such as where members of the community group each fund part of the project rather than depending on a single loan.
Step 11 – Financial appraisal
The financial viability of any project depends on the cost of borrowing the money required to buy the solar PV panels, inverters, cables and the cost of installation relative to the income after operating costs. The schedule of incurred costs and the length of time to install and commission the project all influence the financial viability of the project. The CARES project finance model is available to download and use to complete a detailed financial appraisal of your project and the CARES Financial Model guidance document provides indicative costs taken from a number of different market studies.
In order to complete the financial appraisal as accurately as possible, the capital costs of the solar PV system, installation, connection and other capital works such as grid connection, civil works and installation should be defined as accurately as possible. The detailed feasibility study should outline all the potential costs associated with your project and provide an indication of the scale of these costs. If not done so already, quotes will need to be obtained to confirm the final costs. Operational costs such as maintenance, ground rent and insurance must be determined and other ongoing expenditure such as community benefit payments must be accounted for.
A potential lender will also want to see a full business plan for the duration of operation of the solar PV system with a detailed cash flow and balance sheet that includes repayment of loans provided. The Project Finance Model provides this facility and more detail on this is covered in the Project finance module and the CARES finance model guidance.
Break point 2 – Is the project viable?
The assessment process in Phase 2 is intended to:
- Identify capital costs in as much detail as is possible based on generic or model specific data.
- Estimate the additional costs involved (eg grid connection, planning permission.)
- Use the data on solar irradiation, area of the panels and their quoted performance to calculate the energy yield.
- Use the relevant export rates to estimate potential income from the predicted energy yield.
- Gain an estimate of annual maintenance/annualised inverter replacement costs to subtract from the income.
- Use the data above to estimate potential project financial performance.
- Investigate funding options.
If the predicted yield appears attractive, then the project can progress if the group is still committed to its development. If at this stage the scheme looks unviable it must be stopped or re-designed to reduce cost or boost income. One way in which this can be done is to look at the impact of changing the size of the scheme.
At this point, the scale of the project should be confirmed, and potential suppliers of solar PV technology identified as these details will be needed in support of achieving a suitable grid connection, applying for planning permission and securing funding. You should also progress with financing the project using whatever model you have selected.