How wind turbines generate huge profits for landowners

I had a look at a community wind farm project last week. It has now been postponed, so whether you should invest in it or not is by the by. But while researching its figures I began to see just why so many UK land owners – big and small – are so into renewable energy.

Let’s say you apply for planning permission to put one 500kw turbine up on your land. You get it, and you put the thing up before October (when subsidies are to be cut slightly). Then it operates at about 35% of capacity.

Getting it up will cost you something in the region of £800,000 – £1m, based on providers I’ve asked (depending on the turbine and the terrain). Let’s say £900,000 for the sake of argument. But you’ll then get paid 20.6p per kilowatt hour of energy produced, something that will bring you revenues in the region of £310,000.

Obviously, you’ll have costs – an annual service and maintenance contract will cost you £12,000 – 18,000 a year. Let’s say £15,000. Then, if you borrowed the money, you’ll have financing costs. Assuming you are running a repayment deal of some kind, those will come in at about £85,000 (I’m assuming a 7% interest rate here).

Your annual take? It is well over £200,000, even if there are expenses I haven’t thought of (or been told about). But it gets better. Your income is inflation linked. So as the real value of the debt falls, the real value of the payments you’ll get will stay the same. For 20 years. That means your take, in real terms, over the lifetime of your subsidy guarantee, is going on £4,500,000. 
 
And that’s just from one turbine. Why stop there? Big landowners can make more from putting up several turbines. And really big landowners can go for broke by teaming up with a big energy company to make a proper wind farm.

Alice Thompson, writing in the Times a few weeks ago, pointed to one UK landowner making “nearly £2m” a year, and another who is “expected to make £1.5m a year from his development”.

Shocked? You should be. After all you are paying for all this. The subsidies that facilitate this huge transfer of wealth are paid via a charge on your utilities bill. 

I’ve written here several times before about land taxes, but it seems to me that wind farms exemplify the point pretty well. Those on whose land they stand experience huge positive land value – they do nothing, but they make money. So why aren’t those gains subject to a land tax, or at the very least a windfall tax?

And what of those who have to look at their neighbour’s turbines (and new Range Rovers) from their front rooms? They are experiencing severe negative land value. Why aren’t they compensated? Doesn’t make much sense does it?

Regular readers will also know that I have written here many times before about the need for some kind of income redistribution to help us out of crisis (preferably via less state rather than more state). This isn’t quite what I had in mind.

  • Big Bert

    The subsidy which we are all forced to pay on our electricty bills and on those of British industry is a huge bone of contention. It raises the cost of energy bills and make British goods less competitive on the open market. There are 5.5 million British people in fuel poverty.
    This subsidy should be scrapped. There is a brilliant petition which calls for a reduction in the subsidy please sign it, and circulate. Just Google Petition 22704. Thanks.

  • luke

    “…or at the very least a windfall tax?”

    Boom Boom

  • Jerseylil

    Anyone reading this might think that the nuclear industry isn’t subsidised and that having a nuclear reactor built next door would enhance land and property values. I know which I’d rather live next door to.

  • Adam Bell

    Hi Merryn – it seems you’ve missed out grid connections in your calculations, which can up to £500k to capex, depending on the location of the turbine with respect to existing distribution networks. You’ve also picked a high capacity factor at 35% – typical capacity factors for medium onshore turbines are in the region of 25-27%. Only a select number of sites will have the kind of average wind speed you’d need to get 35%.

    We (RenewableUK) have found that returns to turbine owners are around 8% for wind speeds in the 6m/s range. Of course, turbines on better sites can be higher, as you outline. However, it’s not clear that neighbouring property values are severely affected, as you claim – RICS studies and work from the US doesn’t seem to find a clear correlation between wind farm proximity and property prices.

  • its yourself

    No business rates? No insurance? No community fund? No grid connection? No removal and site restoration fund?=No truth in the article.

  • Phil Chapman

    Consider that once built a wind turbine will generate a predictable amount of electricity for the next 25 years for a very low marginal cost. Thus ‘subsidies’ to renewables such as wind are in effect a hedge against future price rises due to shortages or other constraints on fossil fuels. By building a wind turbine now (or solar array etc etc) in effect we are locking in todays price for wind generated electricity. Although that might currently be higher than from other sources, over 25 years it is very possible that it will actually become lower. Either way it is as least known, whereas the future price of fossil fuels is very much unknown. We pay a premium for fixed rate mortgages, to guard against future rate increases, why not pay a premium for fixed rate electricity? When thought of in these terms its not such a bad deal.

  • Merryn

    @ Adam, i asked the providers/owners i spoke to to give me an all in cost – the answers ranged from £800k to £1m with a large bit of that being the connection. Clearly the more remote the location the higher the cost. The average in the UK is I am told 30% but I used 35% as it was the number used in the recent community project (now pulled) from Abundance so I was/am assuming that’s the number the industry likes to work with. Thanks for your comments.

  • Agnostic

    Your all-in capex cost is a stab in the dark and doesnt take into account planning application costs (can be around £150,000 if an EIA application) or grid costs.
    I don’t know any sites doing 35% of capacity outside of the Hebrides.
    You miss out most of the opex costs, eg distribution use of system charges (GDUoS charges), rates, community payments, etc. As well as those listed by a previous contributor.
    Also, have you heard of asset depreciation? No one gives you the £1m investment back at the end of 25 years do you need to write it off. That knocks 4-5% off your returns.
    The average ROCE investment return is around 8-10%. If you leverage it up you can do a bit better.
    Typical ignorant ill-informed twaddle. Glad you’re not managing my money!

  • Agnostic

    Dont you think the bigger scandal is landowners who receive £millions in ‘agricultural’ subsidies for doing nothing except owning land????
    The richest people in the country are on benefits. That’s a real scandal.
    I even know ex-dairy farmers who gave up farming years ago but still receive annual subsidy payments in excess of £1m.
    Investors getting an 8% return for investing huge sums in providing the country with a long term source of secure, renewable energy is assuredly not.

  • Merryn

    @agnositic: if you look at the numbers again you will see that the turnbine is completely depreciated in that its value is not included at all in the returns. I’m assuming that at the end of the 20 years its value is zero. MY capex is not a stab in the dark – it is the average of the range given to me by providers. I’m happy to accept that wind farms are less efficient than many think so let’s take it down from 35%. Let’s take it down to 27%. Annual rev is now £240k. Total take is now £2.8m.

  • Joe-Busta House

    27%??? 35%??? Check out efficiency of Burradale Wind Farm in Shetland. 5 Turbines all over 50%, 1 hitting 56% some years. At present no connection to the national grid but plans for a larger (100+) will justify cable costs. And before anyone speculates on power loss over distance, 4 to 5% is the actual loss over such distances, not much more than occurs over much shorter runs. Location, location, location, ’twas ever thus

  • Merryn

    Hi Joe! Shetland is the place for wind of course. But on the matter of negative land value there is surely a case for the people of say Aith getting more compensation than the rest of the island?

  • Joe-Busta House

    Merryn, Not specifically Aith, but the principle of ‘polluted receives’ should of course apply. They who are demonstrably most adversely affected should receive appropriate compensation. Remember land value on Shetland is measured in much more than financial terms. Heritage and ancestry are still alive up here, as you are no doubt very aware.

  • Dave Smith

    Merryn’s comment that electricity bills are higher to pay for the cost of electricity from wind turbines is only part of the story. On the wholesale market unit rates for wind electricity are fixed, however for gas and hydro there’s a bidding process and prices fluctuate with supply and demand, high wholesale prices coincide with periods of high demand, ie cold winters. An extreme example: hydro electric dams in Scotland can be brought into production within minutes after a bidding process to cover an ad break in Corrie when the nation’s kettles are boiled and a profit of £160,000 can be made. Gas fired power station owners hate wind because if it is windy demand from their power stations is reduced. In Germany wind has actually flattenned the peaks in wholesale electrcity costs.
    If anyone is interested, this site is a useful live overview of the electricity system in the UK, scroll down to see how utterly dependent on coal we are:
    http://www.bmreports.com/bsp/bsp_home.htm

  • realisticgreen

    Adam Bell/lobbyist. RenewableUK .
    Facts rather than sales talk ?

    Survey UK areas overshadowed by these machines & talk to estate agents ?
    True cost of green measures on bills – don’t put up your appointee T Juniper on BBC to claim “2p per day, £7 per year”. Industry’s portion ALSO gets passed on to consumers … so true figure is at least 3x higher – & set to climb.
    Result … fuel poverty & damage to industry.
    Germans (+ Swedes) realise this ‘renewable’ is “massively expensive” & “devoid of economic & environmental benefit” RWI
    Tell farmers & public about mutagenic & carcinogenic chemicals in black smoke from turbine fires ? Fires left to burn themselves out – no fire brigades can tackle them. Inform & warn the public about release of deadly dioxins when PVC insulation is burnt. Dioxins entering human food chain via grazing animals & water courses ? Would you eat animals from chemically contaminated land ? Has RUK advised DEFRA on this specific risk ?

  • Mariella

    i am new reader to Moneyweek but i can say well done to the editors and Toby Bray for the clear and simple explanation in a”Four minute warning” i do not have savings or bonds in UK But i invested 7 years ago in land in Bulgaria,please give us some opinion about the european land and house markets for the next years .Thanks!

  • Martin

    Arguing over the exact amount of electricity generated or money paid to the landowner misses the point. It is not a fair transfer of financial resources period.
    I am not against renewable schemes, but “conventional generating capacity” has to be provided along side them due to the unpredictable nature of wind and solar.
    The real green benefits of these types of scheme would only be of benefit if energy storage techniques were employed.
    For every watt generated by a green method a corresponding watt of “conventional electricity” would not have to be generated.
    Energy storage research by our universities and industry is where the money should go.

  • Mr B

    Unfortunately this is what you get when the government rigs a market…

    Wind turbines are designed to have a 20 year lifespan.
    20 years ago the energy pay back was almost 20 years, so you needed subsides as a green incentive to develop the technology.
    Nowadays the energy pay back on 100m+ diameter turbines is only a few years..

  • Pete Comley

    I’d thought I’d my personal experiences here as a real windfarm (Westmill) investor over the last 5 years. To me investing in them was mainly on ideological grounds. However what pushed me into getting my cash out was the projected returns, ie projected return for 2011 = 5.9%, rising to 19.3%pa in 2020. However the actuals have turned out to be just 3.1% in 2011 and not anything like those estimated by the share offer prospectus. If this is related to payments to land owners I’m not sure. Either way, invest with real care in such schemes is my advice.

  • Disko Troop

    There must be a huge department in Renewables Uk charged with trawling the papers and internet to catch any dissenters and urge the politically correct attitudes on people. However they try and spin these worthless chunks of machinery the result is that my 92 year old mother subsidises Camerons father in law. If that is by one penny or by one million pennies it is criminal and should be stopped. If you want wind power, pay for it yourself and leave us pensioners out of it.

  • Stephen Lowe

    More redistribution of wealth required, sure: but that can mainly come from removing allowances and tax breaks, affecting the top 2%. Current policies are going in that direction, but have been rather poorly explained.
    Completely disagree with the land tax idea: land in the UK is a public good- we all like a nice view and public access and appreciate that our sprawl compares well with the US, Brazilian or Belgian countryside. And if we want to reward people for keeping the countryside the way we like it, we can’t tax people for owning it: they aren’t free to do what they want with their land.
    Some kind of incentive is needed to pursue the worthwhile policy of replacing fossil-fuel power generation. I’d go with nuclear power, but whatever we do we must make sure CO2 emission targets are exceeded.

  • David wannabe farmer

    Please don’t upset Lord huff and puff with a land tax he has enough to winge about with the weather and counting his area payment monies he can still claim on the areas round the turbines.

  • Beasties

    I normally find your articles interesting Merryn but this one is full of inaccuracies. I’ve spent two and a half years trying to get a 500kw project off the ground and have only just got it into the planning process in Feb. This will take months, whether permission is granted or not. I’ve spent getting on towards £20k of my own money so far which could well turn out to be “dead money”.

    If we get planning then the expense really starts. You make no mention of the fact that the Feed in Tariff isn’t accredited until AFTER the turbine is commissioned. Do you realise just how big a gamble this is?

    Turbines wouldn’t be built if it wasn’t financially attractive. Simples. Your capital costs are way under. Your annual costs are way under. But the most important point of your article, taxation is just bizarre. Income tax will be paid, so why the windfall tax? The land won’t increase in value, the turbine’s gotta come down in 20 years. Poor article Merryn.

  • Jack

    Beastie
    “£20k of my own money so far” & “Do you realise just how big a gamble this is?” & “Turbines wouldn’t be built if it wasn’t financially attractive.”
    If you really think it is a big gamble you are either a fool or you have to much money, if you do have to much money why not give £1k to 20 pensioners for a year’s energy? I take it you are financially attracted to a wind turbine so you can increase your wealth by taking money off the pensioners. Hope you feel good as another person dies of hyperthermia!

  • Alex

    The one thing the article does not mention is the gamble in obtaining planning permission, I have just spent £60k (not write off-able, so more like 120k pretax earnings) and are now in a position to place the order. So it’s not all gravy, however that’s not the point of the above article.

  • Billy Lewis

    If the people were asked…you know…the people our government are supposed to represent, I would have thought the main vote would be to plough that money into reducing the price on PV panels so everyone can afford them.
    They don’t whirr or strobe with the sun behind them. They are installed without maintenance buildings or land.
    It’s quite obvious there is a tax scam going on.

  • clairerussel

    Personally don’t see the problem with a ‘green tax’ being added to my utility bill. Its about building a new infrastructure that doesn’t rely on heavily polluting fossil fuels and I would gladly contribute.
    Every piece of wind viable land in the uk should have a turbine and of course the costs are prohibitive to private land owners without a subsidy. The whole wind industry needs a boost to get it going, the technology will improve and hopefully start to reduce our dependence on nuclear & gas. Turbines are drops in the ocean, but they are clean renewable ones and we need as many as possible.
    Does anyone have any figures on how nuclear/gas/coal was or is subsidised?