By Accounting for Energy – (4 min read)
There are over 500 landfill sites dotted around the UK, and the majority of them – more than 450 – produce renewable energy through landfill gas capture technology installed on site. Although the site itself will be owned by a waste management firm or local council, the gas capture equipment belongs to an energy company, which leases a part of the site for 20-25 years, generates electricity from the gas, and earns an income from exporting the gas to the National Grid.
Typically, the landfill operator receives a percentage of the gas income as a royalty payment, in return for allowing the energy company to operate from the site so, in theory, the inclusion of landfill gas equipment on a site is a win-win situation. The energy company gains an income, the site makes a valuable contribution to the country’s renewable energy portfolio, and the landfill owner benefits from a top-up payment. However, calculating royalty payments is a specialist task, which often results in mistakes.
Unlike a traditional firm of chartered accountants, Accounting for Energy’s auditors have a background in renewable energy. We specialise in recovering lost revenues for operators of landfill and other renewable energy-producing sites and regularly encounter the same types of discrepancies at sites across the country. We have produced a quick guide for operators on the five most commonly overlooked issues with royalty payments.
1. Equipment updates
Upgrading or replacing or installing new equipment is common in any business – especially over a period of 20-25 years. However, if the new technology is larger, or more efficient, than the kit in place at the time of the agreement, then it may produce additional income. If this is not declared, the landfill operator may lose out (this would also apply to other types of renewable energy-producing sites).
2. Historical discrepancies
Where royalty underpayments have passed under the radar for more than six years, claiming the funds may prove significantly more difficult.
3. Undisclosed income
Energy companies do not always disclose all of the income generated – this can happen for a wide variety of reasons, including (but not limited to) situations where the royalty accountant has not received all income data from its operations team, and / or where information has been incorrectly classified. In these cases, the landfill owner will be unaware of the additional sums owed.
4. Reduced royalty fees
In some cases, the energy company may sell the energy produced to a sister company which, in turn, sells it to end consumers at full market price. In this case, it will pay out a reduced royalty fee based on the initial – below market value – sales price.
5. A badly-drafted lease
The landfill gas lease may have been poorly drafted, allowing the energy company to interpret its royalty payment obligations in a way that is not in accordance with accepted industry standards, and which has negative implications for the landfill operator.
Where site owners are uncertain of their own arrangements, specialist auditors can help. At Accounting for Energy, for example, we conduct audits on behalf of landfill operators, free of charge. Where a discrepancy is found, outstanding fees are settled, with the energy company typically footing our bill. If payments are up to date and correct, no fee is incurred.
To check whether your land rent payments are accurate, get in touch with our specialists auditors today.