A lot of people have a hydro site with great potential, but don’t have the available cash to develop it. This page tries to explain the options available to you to make best use of your hydro asset to produce a long-term income.
There are three main ways of funding hydropower projects: self-financing, bank (loan) finance and by leasing the site to a third-party developer. The advantages and disadvantages of the different options for financing hydro projects are outlined below:
|Self / Bank Finance||Leasing the Site|
|You keep control||You have financial liability||You are completely ‘hands off’||You have no control over the project|
|No tenants with rights on your land||You have to manage the project,
or appoint a suitably qualified consultant to do this
|You have no financial risk at all||Smaller proportion of the financial benefit once operational|
|100% of the financial benefit once operational||You carry the risk if the project fails||A regular income without having to do anything||Tied-in with an exclusivity/option-to-lease agreement|
|(Bank Finance only) Loan may be secured against land or property|
|(Bank finance only) normally only funds the ‘capital’ (i.e. post-consenting) stage|
If you are interested in self-financing your project, please get in touch for a quote for the engineering consultancy services you will need to move your project ahead.
If you are interested in leasing your site so that you can get a risk-free long-term income, read the wind or hydropower ‘site leasing’ section and then get in touch so that we can complete the initial site checks and match you up with one of our currently available leasing offers.
If you are interested in bank (loan) finance, we have provided the information below on the ‘loan finance’ tab, but this is for information only. We don’t offer loans directly so you will have to contact a bank to discuss more details. Once you have obtained a loan we would be very happy to discuss providing the necessary services to deliver your project.
Hydro site looking for investment
Although common in the wind industry, leasing-deals for hydropower projects are not as common, mainly because there are fewer hydro sites compared to wind sites so the industry hasn’t developed as quickly.
That said, Renewables First works as consultants and installers for several hydro investors, and if you have a good hydropower site we could find an investor who would offer to lease it.
The actual process is similar to that for leasing a wind site, so read the Wind site leasing for more details. The percentage of the gross income offered to landowners is lower for hydropower sites because the capital costs are proportionately higher, so the return on investment is less. Typically site owners are offered between 3 and 5%, though this can still result in a substantial income, so is worth investigating if you have a good site.
Investors are generally interested in sites with the potential to produce 50 kW to 500 kW, though larger sites may also be of interest. If you are interested in leasing your hydro site in return for a risk-free long-term income, this is what most investors are looking for:
- Decent head (change in water levels). The minimums would depend on the average flow rate, but is likely to be around 2.5 metres, but more head would always be preferred.
- No aquatic environmental sensitivities (not an aquatic SSSI, SAC etc.); note this wouldn’t be a show-stopper, but adds to the environmental licensing and construction costs
- Preferably not on a migratory-fish river; again not a show-stopper, but adds to the environmental licensing and construction costs
- Good site access for construction and ongoing operation
- A suitable grid connection point nearby
If you think your site is suitable please get in touch using the enquiry form, and make sure you select ‘Hydro site looking for investment’ as the ‘Enquiry type’. Alternatively call us and we will discuss the options currently available.
Financing hydro projects – Bank (loan) finance
Loan finance for financing hydro projects can be provided by several of the well-known high street banks or from specialist finance providers.
Please note that Renewables First does not offer loans, so please contact your bank direct for more information. We would be keen to discuss providing the consultancy and delivery services once you have secured a loan.
The offers available are similar overall, though they all have their peculiarities. Fundamental to all of the deals available is that generally they only fund the installation stage and not the pre-planning and consenting stages. This means that the site owner will have to fund the pre-installation stages, which can typically be £100k. Remember that if for any reason your site fails to obtain the necessary consents then all costs incurred up to that point would have to be written-off.
Assuming the you have the £100k to fund the pre-installation stages and can accept the risk, then the approximate terms offered by banks typically are:
- Normally banks will fund 75 – 90% of the total project cost. So, if the total project cost is £1M, a loan of £750 – 900k would be available. Assuming you have already obtained the consents, then the cost of these can normally be offset against the site owner’s contribution to the project.
- Precise terms vary, but typically the interest rate on the loan is 3.5% above LIBOR (London Inter-Bank Offered Rate), which currently means an overall interest rate of around 4 – 5%.
- Often the interest is around 1% less during the build stage, before the system is generating revenue.
- Some banks require security, others do not. Some require the entire loan amount to be secured against alternative assets such as land or property, and want to see that the business (or individual) has sufficient alternative income to repay the loan in the event of a problem with the wind or hydropower system.
- Others require no additional security other than the wind or hydropower system; in these cases the institutions are confident that the system will produce the forecast revenue for the duration of the loan.
- Exactly how much security is required (if any) and the interest rate on the loan are negotiable to a certain degree.
- In addition most loans have a set-up fee of around 2.75%
- Loan terms are typically 8 to 15 years.
Are you considering a hydropower project in the UK, Ireland or overseas?
The first step to develop any small or micro hydropower site is to conduct a full feasibility study.
Contact us about a feasibility study today!
Once complete, you will understand the site potential and be guided through the next steps to develop your project. You can read more about hydropower in our Hydro Learning Centre.