Agents Eye Column – November 2013
Diversification into energy sector comes at a risk – understand and plan for worst case
I’ve been thinking about diversification risk this last week; many in Yorkshire over the past 4 years have been looking at energy as a way to reduce cost to the business and create additional income stream. It’s highlighted to me the massive risk that some farming businesses are taking and the consequences if it goes wrong. I’m amazed at the faith bestowed upon the retailers/sales men selling this kit by the farming community. Anyone can produce a glossy brochure, spend money advertising in the farming press, state that their kit can produce paybacks in 3 years, most cost effective etc…but it’s the underlying contracts and security that is more important.
There isn’t much independent advice around, probably only 2 that I know of and we are one of them, and whilst it may cost for that advice, (unless I’m feeling generous that day!), we’ll tell you how it is, explain the pros and cons, identify the issues, look at warranties, ask the question what if it stops working or what if it doesn’t produce what the seller is telling you at the outset. Even if you don’t want to pay for that advice, ask those questions yourself, or speak to your bank manager, accountant or solicitor, they also have a vast experience of what works and what doesn’t.
The risk can be minimised by selection of equipment/generators that have a strong company backing, warranties that are more than just parts and labour (why would you take the risk on a turbine that only offers parts & labour warranty for 5 years, as opposed to one that is fully covered for all loss of output for 15 years? Surprisingly some do), a contract that has specific performance obligations, maintenance contracts and most importantly a contract direct with the manufacturer. I don’t always advise to buy from retailers, all they do is add margin on to the price and you end up with another kink in the chain. It’s normally these retailers producing the glossy brochures and pushy salesmen wanting you to sign a cheque and hand over a deposit (refundable of course, whilst they are still in business…)
Perhaps I’m overly cynical, but we now have several instances of renewables projects done by others that have gone wrong. It’s only when there is a problem that the issues come to light and I can guarantee that the retailer will be nowhere to be seen or seek to blame everyone except themselves.
You also don’t need to take all the risk, understand where you lie on the risk scale and seek the best development option. That might just simply be to look at your energy contracts for savings, or if you’re up for the risk and the reward that should follow, you may look at spending significant capital, but the reward needs to align to the investment and most importantly you need to make sure your spending it wisely and on something that will deliver what it says on the tin.