Farming off the grid

John Hudson, head of agriculture at Nedbank Business Banking, discusses the financial implications of farmers’ evolving need for sustainable energy.

CIARAN RYAN: South Africa has been plagued by power-supply issues for many years, largely as a result of an over-reliance on the Eskom grid. Many businesses, individuals, and farmers are now looking more seriously to alternatives, such as renewable energy. For many people around the world energy efficiency and energy independence are becoming critical issues.

To help us explore the subject, we are joined by John Hudson, head of agriculture at Nedbank. Hi, John. As head of agriculture at Nedbank, what are some of the trends you’re observing? For example, are farmers moving off the grid – and how prevalent is this?

JOHN HUDSON: Hi, thank you very much. Certainly we are seeing people moving off the grid. The reason for it, though, is due to climate risk, really. If you look at climate risk – and it’s one of the major business risks that is facing farmers currently – it makes sense to look at sustainability in its broader sense as well. So it’s not only about renewable energy, but also about water, soil health, and many other factors. But quite honestly we are seeing a move towards sustainability, and it’s more from a business-risk point of view. It makes absolute sense, if your business is facing these risks, to look at ways to mitigate risk. This is taking hold.

Certainly we often see that technology tends to be a big play; so many of these trends that we’re seeing are supported by technology, whether solar panels, water efficiency or other factors facing the business. Technology is playing a major part.

CIARAN RYAN: Okay, explain what is meant by ‘farming off the grid’. And then, following on from that, what is Nedbank’s offering in this regard, particularly to the agricultural sector?

JOHN HUDSON: When we talk about farming off-grid, that tends to be partially misleading, I suppose. There are certainly some farmers who are going totally off-grid, but going off-grid totally is very different to, say, [adopting] a grid-tied system. I think what is also really important to take note of is that farmers need to do their homework because, before you decide to go off-grid, you need to look at your business and see what works for you.

If you look at it in terms of the different circumstances that play out, it might not make sense for all farmers to go totally off-grid. But it may well make sense to go grid-tied or, in fact, just start by looking at the best way to address the efficiency around the energy mix.

I think what is really important from a Nedbank point of view is our having this type of discussion with our clients to unpack the reason that they’re looking to go off-grid. If that reason is sound, then certainly we have financial products to back that up. So, from a renewable energy point of view, we finance a whole range of the equipment that goes into it. So whether it’s water and solar, for example, there are many ways to go off-grid, and that needs to be well thought through.

What we do then from a financing point of view is to match your repayment ability to the funding need, and look at whether it is a cash flow-neutral situation – because we do offer an extended funding period of up to 10 years. But what we are finding now is that the payback period is probably far less than that. This means that clients need to do their homework really well, then engage with their bankers, and then put a funding structure in place.

CIARAN RYAN: Just talk about the break-even period there. You said you do offer finance over up to 10 years, but the repayment period can be a lot less than that. What kind of period are we talking about?

JOHN HUDSON: What we are seeing is that repayment periods have come down, and there are probably a multitude of factors for that. What certainly plays a part is the increasing cost of coal-fired electricity. If that continues at, say, 10% to 16% a year, or 15% to 16% a year, that is a major cost for certain businesses, and some businesses that use a lot of energy will start to look at that. They need to be really competitive.

So I think what you are starting to see is various factors playing out. The environmental aspect of this is critical, but it’s also from a business-sustainability point of view that we see a much greater take up. What that means is that farmers are looking to contain costs. For example, if they’re looking to expand their farming businesses, they will need more electricity in terms of energy. They’ve got to look at all of those factors in terms of the total picture. But what is critical – and what is clear to me – is that if you take a business-risk approach, we are seeing farmers move to a partial mix in terms of their energy mix, or totally off-grid.

We are seeing repayment periods come down. Some are well under four years now. But again, it depends on whether you add batteries to your system. If you add batteries, that is essentially a doubling up of the cost. So you got to look at that. You’ve got to look at that sort of energy demand. You’ve got to look at when the sun shines, does your energy demand match up, for example? So there is a lot to consider, but certainly the payback periods have come down.

CIARAN RYAN: The idea of relying entirely on natural resources for electricity supply across sectors can have high cost implications if it’s not done correctly. How can farmers still manage energy demand and be more energy-efficient before they install systems that generate alternative energy, as these can be quite costly?

JOHN HUDSON: This is a good point. I think before people decide to go off-grid or to grid-tied systems, energy efficiency is your starting point. Your farming business must be really efficient from an energy perspective. If you get that right as your starting point, and it still makes sense to go off-grid, for example, then one hundred percent, do so. But what it does need is for farmers to really think through it and make sure that their starting point is as good as it can be, because it doesn’t help to go off-grid if you’re not really being energy efficient in the first place. That’s a critical part in the whole thought process.

I think the second part of it is that once you’ve decided to change that mix of energy and include renewable energy [in] it, it does become extremely important to ensure that the system that you put into place can actually deliver what it’s set up to do. For me this is critical because, from a funding point of view, we do a lot of our sums and we look at the repayment ability. That is based on certain assumptions, the assumptions being that this solar plant can deliver what it’s meant to do. Because if it can’t it could place that business at risk. That’s key. Do your homework, find the right installer, get the right advice. That is critical. We are seeing the emergence of installers who really know the game well and can add value to a farmer’s business and, in some circumstances will actually provide a guarantee in terms of performance.

That’s critical because, at the end of the day, the reason that you’re going off-grid is to make your business better and more sustainable and be really productive in its biggest sense. To do that, you have to get all of this right. These systems can be quite expensive. It is quite a big cap expense and hence, if you’re going to invest in this, you’ve got to do it right.

CIARAN RYAN: When is the best time to consider moving your business or, if you’re a farmer, your farm off the grid?

JOHN HUDSON: Circumstances do differ. But if you answer that in a broad sense, it’s really when you have a significant energy-security issue. So if you are concerned about security of supply, or if you’re looking to expand your business and the supply of electricity could be a constraint, then you have to look at this because it makes sense to do so.

The second component of this is, if you’re looking to reduce costs in your business and become a cost-efficient business, electricity could be one of your costs that you would focus on. For many farmers, the cost of electricity is a major issue. If you’re looking then to become really efficient, energy cost could be part of that. And so I think from a financial sustainability point of view it makes sense as well.

So, to sum up, if you face an energy-supply security issue, and you’re unsure of your secure supply of energy, that is certainly the starting point. Then a lot of the other factors like cost competitiveness start to come into it as well.

CIARAN RYAN: If you go off grid, as we’ve been discussing, what are the benefits operationally that you could experience, and also the economic benefits to the business or the farming operation through sustainable farming?

JOHN HUDSON: I think part of the benefit is the environmental aspect. That’s certainly very important. I think most farmers and also individuals have this personal drive to look at the environment, and that is always going to be a critical component. If you look at the savings in greenhouse gases compared to coal-fired electricity, that is quite staggering. You do have to look at the whole lifecycle to really do a fair comparison. What I mean by the lifecycle is that solar panels and so on have upstreaming costs, or startup costs – the making of the panels, the installation and all of that. Then in the middle you’ve got the operational cost. At the end of the last cycle are the decommissioning or downstream activities. You have to compare that to, let’s say, coal-fired Eskom. But the comparison, even if you look at the full lifecycle, is that solar power, in terms of greenhouse-gas emissions, is just a no-brainer. If you add that to the mix – from a personal point of view, you can see the benefits of doing that, and it also makes business sense – then you’ve got a great mix that is not only ‘good for the environment’ but also ‘good for my business’. That’s an important factor, I would think.

CIARAN RYAN: We’re going to leave it there. That was John Hudson, head of agriculture at Nedbank.

Brought to you by Nedbank Business Banking.

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