Rating Manual section 6 part 3: valuation of all property classes

Section 530: power generators

This publication is intended for Valuation Officers. It may contain links to internal resources that are not available through this version.

1. Scope

This Section of the Rating Manual deals with those hereditaments occupied wholly or mainly for the purpose of the generation of electrical power, either exclusively or in connection with combined heat and power schemes and, in certain circumstances, refuse destruction, whether in connection with the sale of electricity or otherwise.

It does not deal with generating plant which is installed for purposes ancillary to the main occupation of a hereditament. This would include standby generators and micro generation plants (i.e. where the installed capacity is 50kw or less) where the majority of power produced is consumed by the rateable occupier (i.e. 50% or more), etc.

These should be valued with reference to the Plant and Machinery Guide.

2. List description and special category code

All power stations and generators are shown as individual hereditaments in local rating lists.

The description code for this type of property is FE.

This will generate a generic description of power generator and premises, which must be overwritten to specify the type of power generator being valued.

These include:

Anaerobic digestion plant and premises

Biofuel plant and premises

Biomass power station and premises

Coal fired power station and premises

Combined heat and power generator and premises

Diesel power station and premises

Gas fired power station and premises

Hydro power station and premises

Nuclear power station and premises

Oil fired power station and premises

Photovoltaic installation and premises

Wind farm and premises

Wind turbine and premises

The Special Category Code for this type of property is 219

3. Responsible Teams

The vast majority of these properties will be valued by the Utilities and Transport Team within the National Specialists’ Unit, and will therefore have the Special Category Code suffix of U.

Generators powered by landfill gas, by coal mine gas or by municipal and industrial waste (MIW) are dealt with by the Mineral Team within the National Specialists’ Unit, and will therefore have the Special Category Code suffix of M.

4. Co-ordination

The Power Generator Class Co-ordination Team has overall responsibility for the co-ordination of this class.

The team are responsible for the approach to and accuracy and consistency of power generator valuations.

The team will deliver Practice Notes describing the valuation basis for revaluation and provide advice as necessary during the life of the rating lists. Caseworkers have a responsibility to:

  • follow the advice given at all times

  • not depart from the guidance given on appeals or maintenance work, without approval from the co-ordination team

  • seek advice from the co-ordination team before starting any new work

Prior to privatisation, the generation of electrical power for sale was largely confined to the former Central Electricity Generating Board (CEGB), although a few private undertakings existed which supplied electricity to a restricted number of customers, usually within the confines of an industrial estate. Additionally, large consumers of power sometimes erected power stations to generate electricity for their own consumption. Such power stations were connected to the public supply principally for technical reasons, and although surplus electricity could be sold to the public supply system, it was not normally commercially advantageous to do so.

Following privatisation, the electricity market in England and Wales was stratified into four distinct licensed functions: generation, transmission, distribution and supply as described below. The whole industry is regulated by the independent regulator OFGEM.

i) Generation comprises physical production of electricity at power stations by nuclear fission or by combustion of fossil fuels or biomass to raise steam for steam turbines, or by using the power of water or wind to spin direct turbines. More recently this includes generation from solar photovoltaic (PV) cells. Sites are operated by a mixture of organisations from large, vertically integrated companies to smaller ‘independent’ operators.

ii) Transmission is the means of transporting bulk electricity away from major power stations or national interconnectors towards the main areas of electricity demand via grid supply points. Electricity is transmitted at very high voltage (400kV or 250kV) to minimise transmission losses. The transmission network in England and Wales is owned and operated by National Grid Electricity Transmission (NGET).

iii) Distribution comprises the physical act of transporting electricity from the grid supply points to consumers. This is achieved using a regional distribution network operating at 132kV and progressively transforming power down to 33kV and 11kV at a series of substations until it is finally delivered to customers at 415V or 240V via a service cable and meter. The distribution networks are owned and operated by twelve distribution network operators (DNOs).

iv) Supply comprises the purchase of electricity (from a generator or elsewhere) and sale to the ultimate consumer. The supplier incurs use of system charges in respect of both the National Grid transmission system and the regional distribution system. These charges are passed on to the consumer and ultimately form part of the retail price of electricity.

6. Survey Requirements

To assist in identification, the following outlines the physical characteristics of the most commonly encountered plant, and the information that is required for each.

i) Steam-driven turbo-alternators

Perhaps the most commonly encountered type of large-scale generation plant. The generator itself consists of a three phase alternator driven by directly coupled steam turbines. The steam is generated within an external boiler and passed through two or more stages of turbines (high and low or high, medium and low pressure). It is then passed through a condenser before being returned to the boiler to be heated once more. The condensers are cooled by a separate water circuit which may employ cooling towers, river or sea water dependent upon the location of the station.

Steam turbo-alternators may employ a number of different fuels to fire the boilers. Some may be capable of utilising more than one type of fuel. The most commonly encountered are:

a) Coal (sometimes referred to as pulverised fuel). Such power stations require extensive plant to handle and process the fuel prior to combustion, and also to dispose of the waste products, both in terms of ash handling plant and (on new stations) desulphurisation plant fitted to the chimneys. The station also requires large amounts of storage land to hold fuel stocks.

b) Oil and “Orimulsion” burning stations are similar in core plant to coal-fired, but do not require the associated fuel and waste handling facilities, or such sophisticated environmental protection. They are accordingly cheaper to construct. There are currently no Orimulsion stations in operation.

c) Nuclear power stations work upon a similar principle, except that the steam passing through the turbines is generated in a secondary circuit, separate from the water (or gas) which passes through and cools the reactor. Heat is transferred between the primary and secondary circuits via a heat exchanger. Three types of reactor can be encountered:

Magnox – this is the earliest type, being a gas-cooled reactor and at 2015 only Wylfa remains in operation.

Advanced Gas-cooled Reactors (AGRs) – the majority of the more recent reactors in this country are of this type.

Pressurised Water Reactors (PWRs) - in this type the reactor is cooled by water rather than gas. A design frequently found elsewhere in the world, but as at 2015 there is only one in England and Wales – Sizewell B.

d) Other fuel sources will also be encountered from time to time. These fall within the group sometimes known as renewable energy resources and include refuse, straw, chicken litter, wood pellets and wood chips.

Thermal efficiency lies in the range of 33-50% dependent upon modernity and fuel type, but overall efficiency is affected by the varying demands of ancillary plant. Oil fired stations are the least demanding in this respect, and coal-fired ones the most, especially where desulphurisation or selective catalytic reduction plant is installed.

Because the basis of valuation will usually be on the Receipts and Expenditure method, normally it is not necessary to carry out a full survey of any large scale power generators. Exceptionally, where it is decided that detailed surveys of any particular plant is required, for example to carry out a full contractor’s basis valuation approach, individual arrangements will be made within the NSU referencing team.

ii) Open Cycle Gas Turbines (OCGTs)

Not to be confused with Combined Cycle Gas Turbines. These are based upon aero-engine technology and normally are found in the role of standby plant, either fixed in situ or containerised. They do occasionally occur as main generation plant, either as auxiliary gas turbines (AGTs) providing “black start” capacity at main power stations or in groups as main gas turbines (MGTs) in a system support role. They burn gas-oil (aviation fuel) or natural gas and are highly inefficient (17-25%), but have the advantage of being able to be started rapidly in response to changes in demand.

A variation which is occasionally encountered as an “independent” installation is adapted to run on landfill gas and will be associated with landfill operations.

OCGTs are usually valued on a contractor’s basis approach, and new sites are referenced by the NSU referencing team.

ii) Combined Cycle Gas Turbines (CCGTs)

The generation set consists of a gas turbine driving an alternator direct. The hot exhaust gases are employed to raise steam in a boiler, which then generates further electricity via a steam turbo-alternator.

Early examples utilised modified aero engines, and employed a secondary combustion stage by injecting fuel into the exhaust stream. More modern CCGTs are much larger and designed specifically for power generation. The usual fuel source is natural gas. The high fuel cost is justified by the greater thermal efficiency of the plant.

Plants built in the early 1990s are in some cases nearing the end of their life and many have been mothballed, demolished or converted to OCGT. From 2008, larger capacity stations operating at higher efficiencies (such as Marchwood, Langage, Pembroke and Severn) have been developed.

All gas turbines have an output which varies seasonally, since they are more efficient when the ambient temperature is low.

CCGTs are usually valued on a receipts and expenditure approach and capital costs are obtained both to assist with confirming the rateable/non-rateable split of assets and to enable the consideration of a valuation approach on a contractor’s basis – site surveys may also be undertaken by the NSU referencing team in order to carry out a contractor’s basis valuation.

iii) Hydro electric schemes

These involve the utilisation of the natural head of water afforded by mountainous country to drive alternators by means of water turbines. Hydro electric schemes are capital-intensive, but the type encountered in England and Wales, which are of modest output, have a relatively long plant life, which tends to counteract the effect of initial high cost upon financing. The hereditament will normally include the gathering grounds, reservoirs and dams, aqueducts and pipeline as well as the turbine house itself.

Hydro electric schemes are usually valued on a receipts and expenditure basis – site surveys may be undertaken by the NSU referencing team in order to carry out a contractor’s basis valuation.

iv) Pumped storage schemes

These are a development of hydro electric technology in which the large upper level gathering grounds are dispensed with and instead water is cycled between an upper and lower reservoir. The original purpose of the schemes was to utilise unwanted electricity being generated at off-peak times by pumping water from the lower to the upper level. At times of peak demand the direction of flow was reversed, and a high proportion of the energy reclaimed by generation in a manner similar to a conventional hydro-electric scheme.

Much of the economic justification for such schemes has been removed by the development of more flexible CCGT power plant and the way in which the New Electricity Trading Arrangements operate. Pumped storage retains one valuable feature from the point of view of maintaining the system security of the National Grid, which lies in its rapid response time. The station at Dinorwic can increase its output from zero to 400 MW (one third its total capacity) in ten seconds, compared with a CCGT of around twenty minutes.

Pumped storage schemes are usually valued on a receipts and expenditure basis – site surveys may be undertaken by the NSU referencing team in order to carry out a contractor’s basis valuation.

v) Wind Farms & Aero generators

Traditional windmills have been employed on occasions to generate electricity since the late 19th century.

Individual modern wind turbines, with a rated output sufficiently high to be practicable as a commercial power source (sometimes referred to as aero generators), started to be erected on an experimental basis in the late 1980s.

Since 1990, a number of commercial wind farms have been developed. Favoured situations are largely on the western coastline or on exposed high ground inland.

Each aero generator consists of a tapering steel column mounted upon a reinforced concrete foundation pad. The rotor, gearbox and turbine are mounted in a rotatable head on top of the column. Contained within the column, at its base and accessible via a door, is the computer control equipment which regulates the rotor speed and keeps the rotor headed into the wind.

The individual generators are connected by a system of cables, normally on a radial pattern, via transformers and voltage regulators to a suitable point for the delivery of the electricity to the distribution network, normally via a meter located at or adjacent to one of the DNO’s sub-stations. It is possible to find installations where there is a transformer associated with each turbine, and others where they are shared between two or more, or indeed all the turbines on the farm. Notwithstanding the separation of individual turbines, all the turbines on a wind farm, plus the associated cables, transformers, regulators and meter should normally be regarded as forming a single hereditament.

Wind farms are usually valued on a receipts and expenditure basis – site surveys may be undertaken by the NSU referencing team in order to carry out a contractor’s basis valuation.

vi) Tidal Generation schemes

Until recently, no commercial exploitation of tidal energy had been attempted in the UK. The first such station was opened in Scotland in 2000.

Care should be taken regarding the rateability of these schemes as the majority of the property could be beyond the low water mark, where rateability ceases.

The rateable onshore assets of these schemes are valued using the contractor’s basis of valuation – site surveys may be undertaken by the NSU referencing team in order to carry out a contractor’s basis valuation.

vii) Solar Power

Photovoltaics (PV) are a method of power generation which converts solar radiation into electricity via the use of solar panels. These panels comprise cells containing photovoltaic material, most commonly silicon. An electrical charge is generated when the silicon is exposed to light and this is then conducted away by metal contacts as direct current.

Commercial PV is a relatively new concept in the UK as historically schemes have been costly to install and relatively inefficient by comparison with other types of renewable energy. However, the introduction of Feed in Tariffs (FiTs) in April 2010 has led to a sharp increase in the development of solar power projects, particularly in the South West of England.

New photovoltaic developments will usually comprise either field mounted arrays (ranging generally from a few hundred kilowatts capacity up to as much as 50 megawatts), or roof systems (typically at the lower end of this scale) which are either integrated into buildings, or much more commonly retrofitted to existing structures.

Photovoltaic schemes are usually valued on a receipts and expenditure basis – site surveys may be undertaken by the NSU referencing team in order to carry out a contractor’s basis valuation.

viii) Combined Heat and Power Schemes (CHP)

This term refers to schemes whereby the waste heat from the generation process, instead of being dissipated through cooling towers or other devices, is utilised via a heat exchanger for heating or process purposes. Schemes are not limited to any particular fuel type or generator, so long as combustion forms part of the generation process, but rely upon the existence, close at hand, of a suitable customer for the heat produced.

For this reason, many schemes comprise what is often referred to as “embedded” generation. This indicates that the generation plant forms part of a larger site where the energy is consumed. Typically this will be an industrial complex, but other sites, such as hospitals, may also involve embedded generation.

With embedded generation, care must be taken to correctly identify the unit of occupation. The CHP station may often be in the occupation of a different person from the remainder of the site. In such circumstances it will form a separate hereditament and it will be necessary to consider which method of assessment should be applied.

A small number of schemes have been in existence for many years, but environmental considerations have led to a recent upsurge of new schemes. Such growth is likely to be encouraged by legislation such as The Valuation for Rating (Plant and Machinery) (England) (Amendment) Regulations 2001 [SI 2001 No. 846] and its Welsh equivalent. This provides for the exemption from rating of certain generating plant when installed in Good Quality CHP stations.

Differences in fuel type and potential heat customers result in most schemes being “tailor-made” for particular situations, but as a generality they will be observed to fit into one of three types:

a) The simple waste heat scheme. These tend to be the older installations and function simply as described above. They tend to be inflexible in operation and will generally be found with the power station and the heat customer (usually a single concern, but may be an industrial estate) in close proximity.

b) The variable output scheme. This is typical of the more modern scheme, and enables the proportions of energy produced in the form of heat and energy produced in the form of electricity to be varied in response to changes in demand. The two-stage generation process makes CCGTs particularly suitable for CHP schemes of this type.

c) The high heat output scheme. The main characteristic of this type of scheme is that the boilers are designed to produce a quantity of steam well in excess of anything that the associated generation plant can consume. Such schemes will only be found where there is a steady demand for the excess steam produced. This will either be an industrial user or, more typically in the case of an independent generator, a large district heating scheme.

CHPs are usually valued on a contractor’s basis approach and new sites are referenced by the NSU referencing team.

x) Energy from Waste

Energy from Waste sites accept the residual municipal solid waste (MSW) which is collected and taken to a facility which must comply with the Waste Incineration Directive (WID).

The waste is taken to the tipping hall and stored in a bunker before being transferred by crane to the furnace where it is burnt ensuring the gases are maintained at a temperature in excess of 850˚C for at least two seconds. In many instances there will be two or more parallel lines each with its own furnace, boiler, Flue Gas Treatment (FGT) unit and flue in the chimney.

After the tipping hall the main buildings on site will be the furnace/boiler hall, the FGT hall and the Turbine Hall. Ancillary buildings will included the weigh office and administration unit

Boilers with their superheater and economiser zones capture the heat and the superheated steam is passed through a turbine to generate electricity. Whilst there may be more than one line it is unusual to have more than one turbine. After the parasitic load is taken off for the site’s own use the electricity is stepped up to 132kv via a transformer for distribution to the national grid. On a few sites the heat is also captured and used in a District Heat System.

The combustion gases need to meet stringent requirements of the WID and are treated in the FGT plant before being discharged via a chimney. An Air Cooled Condenser cools the steam to allow water to be returned to the boiler via the Economiser which is heated by the hot gases and so improves the efficiency of the closed loop system.

The incinerator bottom ash (IBA) is collected from the base of the furnace by quenching conveyors. The IBA is then transferred to the IBA bunker before being shipped to an Ash Processing plant which is usually located off site.

Energy from Waste facilities are usually valued on a contractor’s basis approach and new sites are referenced by the NSU referencing team.

xi) Anaerobic Digestion

Anaerobic digestion (AD) is a natural biological processes whereby organic waste material – known as feedstock – is broken down by micro-organisms and converted into energy, known as biogas (a mixture of carbon dioxide and methane).

This methane rich biogas can then be used in a CHP to generate heat and electricity, or cleaned and upgraded for injection directly to the gas grid.

AD has been used to process sewage sludge as far back as the 19th century, but in recent years, the increase in government support for renewable energy, and the need for farm diversification have led to an upsurge in the development of small AD schemes in the UK.

The feedstock can include waste products such as farm slurry, but increasingly, dedicated crops such as maize may be grown to fuel the process. At the end of the digestion cycle a nutrient rich residue remains which can be used as a fertilizer or soil conditioner.

Anaerobic digestion plants are usually valued on a receipts and expenditure basis – site surveys may be undertaken by the NSU referencing team in order to carry out a contractor’s basis valuation.

xii) Microgeneration

Microgeneration (or Micropower) is the production of energy on the smallest of scales, for individual buildings or communities. Microgeneration technologies emit low amounts of carbon dioxide (CO2) or in some cases no carbon dioxide at all, whilst allowing users to generate their own heat and/or electricity.

Microgeneration capacity includes plant and machinery for both the generation of electricity and the production of heat providing the source of energy or the technology is mentioned in section 26 of the Climate Change and Sustainable Energy Act 2006. These are defined by both being named, and having a capacity that does not exceed specified figures.

The technologies covered by Section 26 are biomass, bio fuels, fuel cells, photovoltaics, water (including wave and tidal), wind, solar power, geothermal sources and combined heat and power systems. In addition it is provided that the Secretary of State may, by order, add additional technologies if he considers that the use of that source of energy would cut emissions of greenhouse gasses in Great Britain.

The capacity limits outlined in the legislation are 50 kilowatts in relation to the generation of electricity, and 45 kilowatts thermal in relation to the production of heat.

Microgeneration schemes would most commonly involve installations to domestic, commercial or agricultural properties where the power generated is consumed on site rather than sold on for distribution to consumers.

Appendix 1 provides more details regarding the rateability of microgeneration schemes, including the information required to enable this type of property to be valued

7. Survey Capture

Information gathered from inspection and/or research needs to be captured in a word document, and utilising generic electronic survey sheets where appropriate.

This documentation should be saved within the property folder on the VOA Electronic Document Record Management (EDRM) system.

8. Valuation Approach

Power generators are almost invariably owner occupied and so a rentals valuation is not possible. At best there is some site rental evidence available for new wind farm and hydro electric schemes. A site rent may be available at some CHP installations; but in these cases the site rent forms part only of a raft of agreements between the CHP developer/operator and the site owner, who will usually be the main power and steam customer.

Since privatisation power stations are commercial undertakings and are occupied with a view to making profits. The tenant’s rental bid is likely to be based upon a consideration of the receipts and expenditure arising from occupation of the hereditament. It is certainly possible to identify the costs of generating power at an individual power station and the earnings from sale of that power and other services. Many operators of power stations are currently vertically integrated so that electricity output from their own power stations can be sold by their electricity supply businesses to domestic and industrial consumers of electricity. In these circumstances the value of the output from an individual power station is lost within the performance of the entire fleet and can be accounted for in different ways by the portfolio operator. However there is also a well developed wholesale market for electricity and this is available to merchant plant who can forward sell their output to supply companies and other market participants.

It is therefore possible to construct a receipts and expenditure valuation model assuming merchant operation, with the power station buying fuel at market prices, converting it to electricity and selling on wholesale markets with a view to making profit. This activity can only be achieved by occupiers of the specialist power generating hereditament having the benefit of s36 and s37 consents to operate.

A bespoke form of return VO 6056 has been created to obtain specialist operating data and accounts information for this class and should be issued as required.

Details of this valuation method are included in the Rating Manual: section 4 part 2.

Following Hardman (VO) v British Gas Trading Limited [2015] UKUT 0053 (LC) it is important to be aware that should any method of valuation produce an unexpected result, there is a need to consider whether that result should be tested appropriately by using another method of valuation, such as deriving a rent from capital expenditure (sales evidence) or by application of the contractor’s basis of valuation.

Details of the contractor’s basis of valuation are included in the Rating Manual: section 4 part 2.

This can be a valid method of valuation for those generator types being developed actively at or around the relevant antecedent valuation date (AVD).

Where utilising the receipts and expenditure method of valuation the basic approach is:

Gross receipts from all sources, less

Working expenses

leaving

A divisible balance, from which is deducted

The tenant’s share, leaving

The rental value

These individual stages are examined below with special reference to their application to power stations:

a) Gross Receipts

This forecast may include any or all of the following depending on plant type:

Income from electricity sales: this will be the product of electricity output in MWh and average forward wholesale price per MWh. Electricity output will vary widely for different generator types and there are seasonal variations in wholesale price.

Income from ancillary services: varies with plant type and location and includes contracts with NGC for black start, standing reserve, frequency response and reactive power.

Income from balancing market: ability to participate in bids and offers varies with plant type.

By-product sales: typically sale of ash by coal stations and also gypsum sales where FGD-equipped. Includes steam/heat sales by CHP plant, and digestate sales from anaerobic digestion plants.

CCL certificate income: from qualifying renewable energy generators and CHP.

Renewable Obligation Certificates (ROCs): from qualifying renewable energy generators and co-fired biomass.

NFFO Contract Income: for those qualifying renewable generators retaining a residue of their original Non Fossil Fuel Obligation contract.

Embedded benefits such as TRIAD s

Capacity Payments

b) Working Expenses

This forecast is split into direct costs, operating costs and renewal of tenant’s assets.

Direct Costs

Fuel costs: this is determined by electricity output in MWh, generator efficiency and average forward fuel price per MWh. The fuel requirement has to be adjusted to be consistent with the assumptions regarding bid and offer activity in the balancing market. For gas power stations there are seasonal variations in fuel price.

Network Use of System and Connection Charges: these will vary with location.

For generators connected directly to the National Grid there are 13 different tariff zones across England and Wales which determine the level of charges.

Operating Costs

Most operating costs at power stations tend to be fixed (determined by plant type and generating capacity) rather than variable (determined by electricity output) in nature. Evidence of the cost of repairs to landlord’s hereditament and repair/maintenance of tenant’s non rateable assets must be examined over a number of years to ensure that a reasonable year to year average figure is adopted. For example large coal generating sets are taken out of service for a major outage every four years, with the interim annual outages requiring much less work and expense.

Rating liability is treated as an operating cost.

Renewal of Tenant’s Assets

The preferred means of calculating depreciation is to take replacement cost of the asset, at the antecedent valuation date and divide by expected total life.. Alternatively it is possible to divide present market value of non-rateable assets (reflecting physical state at the material day and value at the AVD) by remaining life.

If the asset register of the power station is made available this can be analysed to provide guidance on asset replacement cost and working lives. Analysis of the asset register will also reveal whether any assets still in use have been fully depreciated in the accounts; this would mean the actual accounting charge may be understated. Rating Manual: Section 4 part 2 - paragraph 13, stresses that actual depreciation charges in accounts should be treated with caution, being determined by company policy and historic events.

c) Divisible Balance (DB)

The Divisible Balance is the sum available to be shared between the landlord and the tenant. It comprises two main elements:

  1. The Tenant’s Share - to provide a return on any tenant’s capital employed and a reward to the tenant for his venture reflecting the extent of the risk and need for profit. This is deducted from the Divisible Balance to leave:

  2. The Landlord’s Share i.e. the rent payable (which becomes the rateable value)

d) Tenant’s Share

The preferred approach for power generators is determining the tenant’s share as a fixed proportion of the divisible balance based on the percentage split of assets between the tenant and the landlord.

The percentage split between the landlord’s (rateable) and tenant’s (non-rateable) assets varies between generator types.

e) Rateable Value

Deducting the tenant’s share from the divisible balance leaves the sum available to be paid as rent – the “landlord’s share”.

Although the tenant’s share may be regarded as the first charge upon the divisible balance, it does not follow that the landlord’s position should be ignored. In determining the tenant’s share, and hence the rateable value, the relative negotiating strengths of the two parties and the quantum of their respective investments will be relevant. The hypothetical landlord will have invested significant capital in the property, and will expect an adequate return. Where there is insufficient profit available for both the tenant and landlord to achieve their desired level of return a compromise will be required.

As with other forms of valuation, it is necessary to “stand back and look” at the final figure and consider whether in all the circumstances it correctly shows the rent which would be paid under the statutory terms. In this regard it may be helpful to analyse proposed rateable value in terms of generating capacity, total receipts and gross profit (income less direct costs).

9. Valuation Support

The valuations for this type of property utilise standalone spreadsheets.

Appendix 1: rateability of microgeneration schemes

This appendix provides specific guidance in relation to the rateability of small power generators (up to 50kW installed capacity) supplying domestic or non-domestic property.

1. Domestic property

Domestic property is not subject to rates, but is liable to council tax. The definition of domestic property is contained in Section 66 of the Local Government Finance Act 1988, which was amended in April 2013 to specifically address the issue of domestic microgeneration installations. Currently this legislation applies to England only.

The Non-Domestic Rating and Council Tax (Definition of Domestic Property and Dwelling)(England) Order 2013 inserted new paragraphs 6(1)A and 6(1)B, and now reads as follows

(1A) Property in England is also domestic if –

(a) it is used wholly or mainly for the activity mentioned in subsection (1B), and

(b) it is situated in or on property which is –

(i) used wholly for the purposes of living accommodation, or

(ii) a yard, garden, outhouse or other appurtenance belonging to or enjoyed with property used wholly for the purposes of living accommodation.

(1B) That activity is the generation of electricity or the production of heat by a source of energy or a technology mentioned in section 26(2) of the Climate Change and Sustainable Energy Act 2006(a), where –

(a) the majority of the electricity or heat is generated or produced for use by such persons as may be in the living accommodation, or

(b) the plant or equipment used to generate the electricity or produce the heat has a capacity not exceeding 10 kilowatts or 45 kilowatts thermal, as the case may be.

Installations covered are therefore any system of up to 10kw electrical or 45kw thermal or larger installations where the majority of the electricity or heat is used by the occupiers of the living accommodation. Please note that this living accommodation may comprise more than one residential unit e.g. where the installation is for the benefit of a block of flats

The effect of this legislative change is that the site of such installations in England will be domestic property, either forming part of the dwelling (where the householder owns the installation and retains the Feed in Tariff), or comprising domestic property outside the dwelling (where a third party operates the installation and retains the Feed in Tariff)

From a valuation point of view, installations in the former category should normally give rise to a possible ‘material increase’ which may affect the Council Tax banding, however in practice there is no evidence that in the 1991 market in England or the 2003 market in Wales, such equipment would have materially increased the freehold or leasehold value of properties. Further guidance is given in the Council Tax Manual Practice Note 8 Section 4.26 and 4.27 which also provides guidance in respect of installations in Wales.

Installations in the latter category will not be subject to council tax or non-domestic rates in a similar fashion to domestic garages or domestic stores

It is at least theoretically possible that a generator could be so oversized relative to the domestic demand that it actually exports most of the power produced. In this scenario the generation of electricity or production of heat would not be domestic and would require assessment.

2. Non-domestic property (power mainly or exclusively consumed on the premises)

In the case of non-domestic hereditaments the unit of assessment will follow occupation. Microgeneration plants (which include micro Combined Heat and Power (CHP), wind turbines, micro hydro and PV cells) installed and maintained by the existing rateable occupier for the principal purpose of supplying power to the host hereditament will rarely pass the test of a separate hereditament. Such plant would therefore be assessed with the host hereditament and reflected in its value. Where the host property is exempt from non-domestic rating (e.g. agricultural land or buildings) the Plant & Machinery (P&M) itself would only benefit from exemption where it wholly satisfied the requirements of schedule 5 of the Local Government Finance Act 1988.

In either case however, it should be noted that for microgeneration installations in England, any increase in a hereditament’s value would be subject to the provisions of The Valuation for Rating (Plant and Machinery) (England) (Amendment) Regulations 2008 which provide a temporary exclusion from a hereditament’s value for P&M with “microgeneration capacity”. Microgeneration capacity in this instance covers the generation of electricity up to 50kw from all renewable sources, or the production of heat up to 45kw thermal.

The practical effects of this legislation are as follows –

(i) For new microgeneration P&M installed to an existing hereditament on or after 1st October 2008, whose main purpose is to supply the host hereditament, the P&M is treated as excepted plant and machinery for rating purposes, for the remainder of the life of the list in which it is installed. For example, if microgeneration equipment was installed on 1st January 2009, it would be excepted up until 1st April 2010, if it were installed on 1st January 2012, it would be excepted up until 1st April 2017, and if installed on 1st January 2018, it would be excepted up until compilation day for the subsequent Rating List.

(ii) Microgeneration P&M installed prior to 01 October 2008, would not benefit from exception from valuation under the regulations and should be subject to assessment from the date of initial installation.

The equivalent Welsh legislation is The Valuation for Rating (Plant and Machinery) (Wales) (Amendment) Regulations 2010. The scenario here is slightly different in that the temporary exemption provisions outlined above only apply to relevant P&M installed on or after 1st April 2010, rather than 1st October 2008.

3. Non-domestic property (power generated mainly or exclusively for sale to the grid, or export to a third party or host hereditament(s))

Where the power generated from a generation plant is wholly or mainly for export it will normally constitute a separate hereditament which will require assessment. Such scenarios may arise in the following circumstances:

(a) A new stand-alone hereditament, for example a developer renting a field and assembling a solar array to exclusively generate electricity for the Grid

(b) Where an existing occupier allows a third party to install generating P&M to a hereditament. For example, an energy company installs PV panels to the roof of a factory with the power generated wholly or mainly exported to the Grid. In return the factory owner receives rent and/or cheap electricity

(c) As (b) above but the factory owner installing the PV himself, again with the power generated being wholly or mainly exported to the Grid. In this scenario, rating law suggests that the two separate hereditaments may exist, even if there is only one occupier, due to the wholly different nature and purpose of the two occupations.

4. Survey requirements

The following details are required in order to determine rateability and value:

  • What is the installed capacity in kilowatts?

  • What date was the scheme fully commissioned?

  • Does the occupier receive the Feed in Tariff (FiT)? If not, please provide details of any third party who maintains & operates the generator and retains the FiT.

  • Is the majority of power consumed on site rather than exported to the Grid. If so, is it used mainly for domestic, non-domestic, or agricultural purposes?

Using this information, the flowchart below will provide guidance on rateability and who is responsible for valuation.

Where valuations are required, please refer to the relevant list practice note.

Practice note: 2017: power generators

Market appraisal

In the years preceding the AVD, a number of large efficient gas stations has been commissioned and renewable generation such as wind, solar, biomass and anaerobic digestion had expanded significantly as a result of substantial government incentives.

Set against this increase was the closure or reduction in operating hours which applied to the bulk of the coal station fleet, together with the mothballing, conversion or closure of older CCGT plant. It was announced by the government on 18 November 2015 that all coal fired power stations would close by 2025, with their usage restricted from 2023.

The net effect on capacity at the AVD is to be determined but reports indicate that plant margin (i.e. excess of capacity over demand) shrank from 20% in the days of the Central Electricity Generating Board (CEGB) to less than 2% in the winter of 2014 - this was a very mild winter.

On 8 July 2015 the government announced that the exemption from Climate Change Levy for renewable source electricity, which is supplied to business or public sector consumers under the terms of a renewable source contract, would cease.

Against this background it might be expected that electricity prices would rise, but the conundrum faced at the AVD is that the electricity market was towards the lower end of the electricity commodity cycle.

Another factor relevant to the Revaluation is the effect of the Industrial Emissions Directive (IED) which will greatly reduce the load factors of the whole (excepting Ratcliffe) of the coal fleet. This reduction is equivalent to around 10% of the total generating capacity available from all sources and the effect of this legislation on electricity prices needs to be carefully considered.

2. Changes from last practice note

There are no major changes from the practice note issued for the 2010 rating list

3. Ratepayer discussions

Early meetings are taking place with the trade body Energy UK together with each of the interested agents to narrow areas of difference and ensure that the VO has a detailed understanding of the industry view of the market at the AVD.

4. Valuation scheme

The Utility and Transport (U&T) team of the National Specialists’ Unit (NSU) will prepare a valuation model for each of the various types of generator reflecting the importance of differing inputs which enables a measure of agreement to be reached.

4.1 Microgeneration

Microgeneration schemes as outlined in Appendix 1 to RM Section 530 where the power produced is wholly or mainly consumed on site are to be dealt with by local offices.

For schemes identified by the flowchart which no longer benefit from microgeneration exemption, the following levels of value will apply in the 2017 Rating List.

For Wind and solar PV Installations forming part of larger rateable hereditaments should be valued using the cost guide, and included in the main hereditament’s value search on 206S9 within the 2017 cost guide.

For advice in respect of all other types of generation forming part of larger rateable hereditaments, or where installations form part of otherwise exempt farm hereditaments which require valuation, please contact the Utilities & Transport Team.

Any problems or difficulties in interpreting the flowchart should be referred back to the U&T Team.

Practice note: 2010: power generators

Microgeneration

Microgeneration schemes as outlined in Appendix 1 to RM Section 530 are to be dealt with by local offices.

For schemes identified by the flowchart for valuation in this way, the following levels of value will apply in the 2010 Rating List.

Solar power installations forming part of larger rateable hereditaments - Value at Rateable Value of £8 per kilowatt of installed capacity (e.g. 50kw PV installation £400 RV, and include in the main hereditament’s value. )

All other types of generation forming part of larger rateable hereditaments where the power produced is wholly or mainly used on site, should be valued using the cost guide, and included in the main hereditament’s value.

Where installations form part of otherwise exempt farm hereditaments, please refer to the Utilities & Transport Team

Please refer any problems or difficulties in interpreting the flowchart should be referred back to the U&T Team.

Practice note: 2005: power generators

1. Preliminary

Generators powered by landfill gas or by coal mine gas or by municipal and industrial waste (MIW) are dealt with by the Mineral Valuers. This practice note applies to all other stand alone electricity generators including nuclear, coal and gas fired power stations, wind farms, hydro electric schemes and separately assessed combined heat and power (CHP) plants.

This is a National Class dealt with by Utilities Rating Team (URT). Responsibility for ensuring effective co-ordination lies with the Specialists within the URT.

In the 1990, 1995 and 2000 rating lists the rateable value of qualifying power generator hereditaments was prescribed by Order. No equivalent Order has been made for the purposes of the 2005 rating lists and power stations should now be valued using conventional valuation methods.

2. Unit of assessment

Since April 2000 all power stations and stand-alone power generators have appeared in local rating lists. The identity of the occupier, the purpose of occupation and the extent of property occupied is normally quite straightforward.

However potentially difficult issues could include treatment of substantial gas pipeline links to the NTS (these may justify assessment as a separate pipeline hereditament) and sports clubs at power stations (depends on facts of occupation). Unit of assessment might be problematic for CHP plant, and it will be necessary to obtain full facts regarding occupation to determine whether a CHP installation should form part of a single hereditament (as in-house CHP) or if it satisfies the requirements of separate hereditament (as stand-alone CHP). For the purposes of the 2005 compiled rating lists no reconstitutions were made to existing units of assessment.

The Non-Domestic Rating (Electricity Generators) Regulations 1991 [SI 1991 No 475], which for previous lists determined the extent of the hereditament in a limited number of cases where a generator was associated with a particular source of fuel, were revoked for the purposes of the 2005 and subsequent rating lists by the Central Rating List (England) Regulations 2005 [SI 2005 No 551] and the Central Rating List (Wales) Regulations 2005 [SI 2005 No 422] with effect from 1st April 2005.

3. Plant and machinery

See Rating Manual: section 6 part 5 for general advice on identification of rateable plant and machinery forming part of the hereditament. Rateable plant and machinery is identified in accordance with the provisions of SI 2000 No. 540 in England and SI 2000 No. 1097 (W.75) in Wales. Under the 1994 Regulations almost all plant and machinery found in or on a power station would have been rateable under Class 1 (including the List of Accessories), Class 2 or Class 4. The 2nd Wood Committee came to the view that power generating plant at power stations should be regarded as “tools of the trade” and, to be consistent with the treatment of other industries for rating, this plant should be rateable only if it was in the nature of a structure. The committee recommended that the existing form of Class 1 should not apply to power stations. To clarify matters they recommended also that turbines and generators should be named in Class 4, Table 3 and that reservoirs and reactor pressure vessels should be named in Class 4, Table 4.

Power stations and stand-alone CHP plant will generally have the benefit of the exception under Class 1 (d)(i) of the 2000 Regulations, since plant which is used or intended to be used mainly or exclusively in connection with the generation, storage, primary transformation or main transmission of power is not rateable under Class 1 where the power is mainly or exclusively for distribution for sale to consumers.

Some stand-alone CHP plant may additionally qualify for the exception under Class 1 (d)(ii) of the 2000 Regulations, as introduced by SI 2001 No. 846 in England and SI 2001 No. 2357 (W.195) in Wales. This exception applies to qualifying good quality CHP plant which holds a valid Secretary of State certificate. However this is of no practical effect for stand-alone CHP plant because it offers only a partial exception, and the plant will already have the benefit of full exception from Class 1 where the power is mainly or exclusively for distribution for sale to consumers.

Some items of plant at power stations will still be rateable under Class 1. This may include storage batteries, diesel generators and gas turbines used mainly or exclusively to serve the internal needs of the hereditament itself. This will certainly include ‘black start’ plant. This is plant which is designed to enable the main generation units to start up in the absence of any grid connection, which in normal circumstances is used to power ancillaries (pumps, compressors, fans, conveyors, mills), turn the units over, and supply current for generator exciter gear. In addition, the hereditament may have a point of supply from an external grid feeding the station electrical systems. This will be rateable as “main transmission of power” from the point of supply to the first distribution board. Normally station electrical systems will be powered by the station’s own generating units via a unit transformer, but a point of supply from the grid is also required for all times when the station is not generating.

From inspection of power stations it will be apparent that there are significant amounts of civils and infrastructure plant such as foundations, settings, supports, pipe racks, fixed gantries, platforms, chimneys, conduits, ducts and cooling ponds. These are all clearly rateable. Also rateable is service plant under Class 2 including water supply and treatment works, and effluent treatment, and Class 3 items such as railway tracks, lifts and hoists.

There will also be a mass of obviously non-rateable items including computers, telemetry and control equipment, pipework, pumps, gas compressors, fans, electric motors, transformers, switchgear, cables, cranes, mobile plant etc.

Large numbers of “chambers” such as boilers, economisers, condensers, tanks, hoppers, silos, filters, heat exchangers, and precipitators may or may not be rateable depending on the nature of the plant. The main issue regarding plant and machinery at power stations is identification of those items of plant which are rateable under Class 4 by virtue of their structural nature. This includes not only the general category of “chamber” type plant mentioned above and named in Table 4 but also specialist generation plant such as turbines and generators named in Table 3. Rateability will depend on the facts of the case and Rating Manual: section 6 part 5 - practice note 6:2005 contains advice in this regard.

4. Valuation approach

4.1 Background

Power stations are almost invariably owner occupied and so a rentals valuation is not possible. At best there is some site rental evidence available for new wind farm and hydro electric schemes. A site rent may be available at some CHP installations; but in these cases the site rent forms part only of a raft of agreements between the CHP developer/operator and the site owner, who will usually be the main power and steam customer.

Since privatisation power stations are commercial undertakings and are occupied with a view to making profits. The tenant’s rental bid is likely to be based upon a consideration of the receipts and expenditure arising from occupation of the hereditament. It is certainly possible to identify the costs of generating power at an individual power station and the earnings from sale of that power and other services. Many operators of power stations are vertically integrated so that electricity output from their own power stations can be sold by their electricity supply businesses to domestic and industrial consumers of electricity. In these circumstances the value of the output from an individual power is lost within the performance of the entire fleet and can be accounted for in different ways by the portfolio operator. However there is also a well developed wholesale market for electricity, and this is available to merchant plant who can forward sell their output to supply companies and other market participants.

It is therefore possible to construct a receipts and expenditure valuation model assuming merchant operation, with the power station buying fuel at market prices, converting it to electricity and selling on wholesale markets with a view to making profit. This activity can only be achieved by occupiers of the specialist power generating hereditament having the benefit of s36 and s37 consents to operate.

It is also possible to use the contractor’s basis of valuation for power stations. This can be a valid method of valuation for those generator types being developed actively at or around the AVD. This includes CCGT and renewables. However, for many generators (such as nuclear, coal and oil) there was no prospect whatsoever at the AVD that a substitute hereditament would take the same form. For these hereditaments the method will require significant allowances at stage 2 or stage 5, which can affect the credibility of the method. Even for modern CCGT plant it was clear at the AVD that market price of traded generation assets was below construction cost.

The URT has devised a valuation model for power generators based on the receipts and expenditure method. However an assessment the subject of appeal should be valued by reference to a full receipts and expenditure valuation.

4.2 Application of a receipts and expenditure valuation

See Rating Manual: section 4 part 2 for guidance on the receipts and expenditure method of valuation. The basic approach is:

  • Gross receipts from all sources, less

  • Working expenses, leaving

  • A divisible balance, from which is deducted

  • The tenant’s share, leaving

  • The rental value

These individual stages are examined below with special reference to their application to power stations.

4.2.1 Gross receipts

This forecast may include any or all of the following depending on plant type:

Income from electricity sales: this will be the product of electricity output in MWh and average forward wholesale price per MWh. Electricity output will vary widely for different generator types and there are seasonal variations in wholesale price.

Income from ancillary services: varies with plant type and location and includes contracts with NGC for black start, standing reserve, frequency response and reactive power.

Income from balancing market: ability to participate in bids and offers varies with plant type.

By-product sales: typically sale of ash by coal stations and also gypsum sales where FGD-equipped. Includes steam/heat sales by CHP plant.

CCL certificate income: from qualifying renewable energy generators and CHP.

Renewable Obligation Certificates (ROCs): from qualifying renewable energy generators and co-fired biomass.

NFFO Contract Income: for those qualifying renewable generators retaining a residue of their original Non Fossil Fuel Obligation contract.

4.2.2 Working expenses

This forecast is split into direct costs, operating costs and renewal of tenant’s assets.

Direct costs

Fuel costs: this is determined by electricity output in MWh, generator efficiency and average forward fuel price per MWh. The fuel requirement has to be adjusted to be consistent with the assumptions regarding bid and offer activity in the balancing market. For gas power stations there are seasonal variations in fuel price.

Network Use of System and Connection Charges: these will vary with location. For generators connected directly to the National Grid there are 13 No. different tariff zones across England and Wales determining the level of charges.

Operating costs

Most operating costs at power stations tend to be fixed (determined by plant type and generating capacity) rather than variable (determined by electricity output) in nature. Evidence of the cost of repairs to landlord’s hereditament and repair/maintenance of tenant’s non rateable assets must be examined over a number of years to ensure that a reasonable year to year average figure is adopted. For example large coal generating sets are taken out of service for a major outage every four years, with the interim annual outages requiring much less work and expense.

Forecast rating liability is treated as an operating cost. For the first two years of the forecast rateable value is known and NDR increases in line with inflation. Beyond revaluation assumptions need to be made regarding NDR and likely transition arrangements.

Renewal of tenant’s assets

See Rating Manual: section 4 part 2 paragraph 13. The preferred means of calculating this annual non-cash charge is to divide present market value of non-rateable assets (reflecting physical state at the material day and value at the AVD) by remaining life. Alternatively it is possible to take replacement cost of the asset and divide by total life. Straight-line depreciation of historic cost is likely to be the approach adopted by operators for major groups of assets in power station accounts. If the asset register of the power station is made available this can be analysed to provide guidance on asset replacement cost and working lives. Analysis of the asset register will also reveal whether any assets still in use have been fully depreciated in the accounts; this would mean the actual accounting charge may be understated. Rating Manual: section 4 part 2 paragraph 13 stresses that actual depreciation charges in accounts should be treated with caution, being determined by company policy and historic events.

4.2.3 Tenant’s share

Rating Manual: section 4 part 2 paragraph 16.5 provides general advice on determination of tenant’s share. It will not be possible to arrive at a reasoned conclusion without exploring the percentage on tenant’s capital approach, particularly given that at most power stations the hypothetical tenant would need to make significant investment in non-rateable assets. In the case of China Light and Power Co. - v – Commissioner of Rating and Valuation (Hong Kong) (1994) [1996 RA 475] involving an integrated electricity generation, distribution and supply business in Hong Kong both parties agreed that tenant’s share be determined by the weighted average cost of capital (or WACC, a rate of return) applied to tenant’s capital.

4.2.4 Rateable value

Deducting the tenant’s share from the divisible balance leaves the sum available to be paid as rent – the “landlord’s share”.

Although the tenant’s share may be regarded as the first charge upon the divisible balance, it does not follow that the landlord’s position should be ignored. In determining the tenant’s share, and hence the RV, the relative negotiating strengths of the two parties and the quantum of their respective investments will be relevant. The hypothetical landlord will have invested significant capital in the property, and will expect an adequate return. Where there is insufficient profit available for both the tenant and landlord to achieve their desired level of return a compromise will be required.

As with other forms of valuation, it is necessary to “stand back and look” at the final figure and consider whether in all the circumstances it correctly shows the rent which would be paid under the statutory terms. In this regard it may be helpful to analyse proposed rateable value in terms of generating capacity, total receipts and gross profit (income less direct costs).

4.2.5 Form of return

A bespoke form of return VO 6056 has been created to obtain specialist operating data and accounts information for this class and should be issued as required.

5. Entry and description in rating list

The description to be used for a hereditament to which this Practice Note applies should be “Power Station”, “Wind Farm”, “Hydro Electric Scheme” or “CHP Plant” as appropriate. Special Category Code 219 should be used. As a URT class the appropriate Scat code suffix is U. The primary description code FE has been retained for Revaluation 2005.