Milestone 03


The Wyre Catchment Natural Flood Management Project


Baselining and Estimating Ecosystem Services


Project Summary

The Wyre Catchment Natural Flood Management project is the first example in the UK of private investment enabling the delivery of natural flood management. The project will deliver more than 1,000 targeted measures to store, slow and intercept flood water and prevent peak flow in a catchment in England, with the interventions hosted by local farmers. Beneficiaries of the reduced flood risk are paying for the interventions, and the Project’s Community Interest Company has successfully raised a nine-year £850k private loan facility to help fund the interventions.

Milestone 1: Initial Project Scoping

Often the initial task is to understand the site(s) you want to use and the land use change needed for nature restoration or creation. This includes considering the goals of the land managers involved, the vision within the wider catchment or neighbouring area, and whether there are permits or planning consent needed for any proposed changes.

At this stage, you can also conduct a high-level assessment to determine which revenue streams can be generated from ecosystem services , e.g. carbon credits, flood reduction cost savings, or biodiversity units, which will be crucial for identifying buyer interest.

Finally, it is useful to have an idea of the costs of the project and potential grant funding that may be available to support initial development.

Milestone 2: Identify and Work with Sellers

Initial ownership of the ecosystem services will belong to the landowners or, in some cases, the tenants of the sites that the project is using. However, these can be passed onto others, such as third-party project developers, with appropriate legal arrangements and compensation. In some cases, there may be a sole seller of the ecosystem services, where the site or landholding is large enough that it delivers the volume of ecosystem services needed to cover the costs of the project and attract buyers.

However, in order to achieve scale and impact, a project will likely involve multiple sellers, such as neighbouring farmers and estate managers. Scale of land is often needed to deliver significant environmental outcomes, and also to attract private finance. Project developers must plan how they initially contact and engage with these sellers going forward, building their wants and needs into the project.

Milestone 3: Baseline and Estimate Ecosystem Services

At this point, you will have understood the vision for the project and identified a particular ecosystem service or set of services to be sold. The next step will be to carry out detailed analysis – baselining each ecosystem service and quantifying what will be able to be delivered from the interventions, as well as planning how to monitor and maintain these interventions. You will need to rely heavily on ecological expertise for this more scientific Milestone.

At this step, standards, verification and accreditation methods will be considered in more depth.

Milestone 4: Identify and Work with Buyers

Based on your earlier market analysis in initial project scoping, you will have identified one or more groups of beneficiaries who may be willing to ‘buy’ or pay for the ecosystem service(s) to be created, restored or maintained. Buyers vary – as do their requirements – but at this step, greater buyer engagement is now needed to develop a deal that channels money towards the nature-positive outcomes that your project wants to deliver.

 

 

Milestone 5: Develop Business Case and Financial Model

You’ll have started building your business case and financial model in earlier steps – laying out your vision, the market proposition and estimating costs and income. This step offers a review, in addition to providing details on information needed to build out the financial model and business case more fully. Both of these key documents will be iterated throughout project development, and may be altered during project delivery as new information emerges. These documents are interlinked and, if developed correctly, will ensure your project’s viability and also help you with discussions with stakeholders including sellers, buyers and future investors.

The financial model will also enable you to better understand the type of structure your project may take to attract investment (i.e., an environmental bond, a loan, an equity investment) and what sort of returns you can afford to pay/offer.

Milestone 6: Develop a Governance Structure

A governance structure will inform the way in which the project is run when fully operational and for what purpose. It identifies appropriate decision making processes, who is responsible for what actions, and what controls are in place to make sure that the project is meeting its stated goals, all while abiding by the risk appetite of its engaged stakeholders. The legal entity to host the project will be a key driver in this, and the appropriate choice of entity will be dependent on several factors that are outlined below.

Your governance structure should align with and underpin your business case, as a necessary component of how the project will deliver its environmental outcomes and other strategic targets.

Milestone 7: Identify and Work with Investors

It is important to note that not all projects will need up-front investment, but for those that do, this section provides a framework for thinking around the development of the investment model. This does not constitute financial advice – as the GFI is not licensed to do so. However these considerations are based on the insight offered by project developers and other market stakeholders.

An investor will be a new core stakeholder in your project, and it’s just as important to think of what you require from investors, as much as what they require from you – so that you can build a positive and collaborative relationship with them.

This entails defining the investment ask (in line with the financial model), the strategy for approaching the right investors, and the negotiation of terms that can then be formalised in contract development (Milestone 8).

 

Milestone 8: Establish Legal Contracts and Closing

When all relevant stakeholders have been engaged and their terms of engagement are clarified as much as possible, this is the time to develop the legal contracts and close the deal. This stage is last because legal fees are expensive, and it is generally advised to determine as much as possible in previous stages before

Note: The information in this Milestone does not constitute any form of legal advice but instead serves as practical advice on how to manage engagement with lawyers and the process of contract development.

The Green Finance Institute is not a firm of solicitors or connected in any way with the courts. The information and opinions we provide in this section and across the Toolkit do not address your individual requirements and are for informational purposes only. They do not constitute any form of legal advice. We recommend that appropriate legal advice should be taken from a qualified solicitor before taking or refraining from taking any action.

Community Engagement

Community engagement is highly advisable for any project that aims to sell ecosystem services, to ensure fair outcomes for local communities and the long-term success of the project. Project developers can build connections with local stakeholder groups early on to spot both risks and opportunities.

Policy and Regulation

Project developers and enterprises will need to keep a continuous check on how current and future policy may affect the project, and also opportunities for the project to inform policy. The role of private finance for nature across the UK is being encouraged by the UK government and its devolved administrations, and new rules, standards and markets are being developed.

 

Acknowledgements 

With many thanks for their time and insight on this case study:

Dan Turner, Technical Lead, Land Management and Market Creation, The Rivers Trust

 

The Rivers Trust - Wildlife and Countryside Link

 

Dan Hird, Principle and Founder, Nature Finance

 

Thomas Myerscough, General Manager, Wyre Rivers Trust

Wyre Rivers Trust - Environmental Organization - , England

 

Date published: 08/12/2022

Next Milestone

Formation of a modelling workstream

In 2020, upon first review of the hydrological model, the Wyre Catchment NFM project team formed a modelling sub-workstream to review the scientific modelling done thus far. This included technical directors and engineers from The Rivers Trust, Wyre Rivers Trust, FloodRe, United Utilities and the Environment Agency.

The workstream’s goal was to quantify the NFM impact that the project would have on the catchment. The hydrological model developed by Viridian Logic beforehand (see Milestone 1) gave a set of locations and interventions that would be most effective and gave some quantification for the reduction in flood risk. To support the use of private finance and investment, the team knew it had to quantify the predicted impact of these interventions. The key metric used was a reduction in peak flood flow in a 1-50 year flood event at Churchtown.

The workstream also needed to quantify the damages avoided at a physical asset level, such as houses in the catchment area. Damages to assets were relevant because of the some of the buyers engaged, who were concerned with commercial and residential properties in Churchtown – the nearby town – and water pumping stations.

Overall, the modelling phase took around one year to complete, from the formation of the modelling workstream to reaching full commercial agreement with buyers on how their benefits were quantified. Dan Turner, Technical Lead at the Rivers Trust, comments that this latter aspect took time to achieve, as every stakeholder needed to be comfortable with the modelling approach of the overall flood risk reduction, before moving onto how this would affect the buyers’ assets.

 

Modelling on a catchment scale

In 2021 the project team hired JBA Consulting, which had extensive experience with NFM modelling, to examine the workstream’s findings and quantify the predicted impacts of the interventions on peak flood flow.

JBA modelled the impacts of the proposed NFM interventions over nine- , 20-, and 50- year time horizons, in line with the commercial time frames that had been agreed with sellers, buyers, and investors (see Milestone 5). It included predicted changes in flooding frequency and intensity from the impacts of climate change.

The model found that the planned interventions could deliver a reduction of peak flow between 5 – 15%. Some of the interventions were predicted to reduce peak flow by as much as 20%. The overall project team, including the buyers, agreed that this method was an acceptable proxy for flood risk reduction for the catchment as a whole. A estimate of 5% was taken forward for the project’s overall NFM delivery agreement.

 

The adaptive management phase

Though it successfully estimated the flood risk impacts of the interventions, the workstream’s final model rested on several assumptions which created a degree of uncertainty in its predictions. Turner comments: “in the case of NFM, regardless of the amount of modelling and prior design, the effectiveness of the intervention can only really be assessed once implemented. Therefore an adaptive management process will ensure the NFM features are performing optimally.”

To address this, the modelling workstream recommended that an ‘adaptive management phase’ be adopted, whereby the interventions can be modified during the first five years to optimise their performance. Modifications will based on the performance data that is taken from the two monitoring sites (see ‘Monitoring plan’ below) and regular site visits from the Wyre River Trust. Provisional funding of £100k was included in the financial model for adaptive management – effectively forming a sort of “CAPEX contingency” within the project.

At the end of this five-year monitoring and adaptive management phase, the buyer contracts contain a provision that should the monitored interventions fail to meet their key performance indicators (KPIs – see below), the buyers have the right to exercise a contract revision clause which will see their annual payments reduce to 25% of the baseline annual payment. The triggering of this clause will effectively mean that the Wyre NFM interventions are not working to plan. The inclusion of a five year monitoring and adaptive management phase therefore gives the project team time to ensure that the sub-catchment monitoring stations are meeting their agreed KPI targets.

In designing the adaptive management phase, the team examined learnings from a £15 million NFM programme run by Defra, which piloted an evaluation framework and tool that can be used to track and adapt the performance of all NFM assets. This programme concluded in early 2020.

Taken with the monitoring and maintenance plans, the adaptive management phase will allow the greatest possibility of the project team delivering effective natural flood management.

 

Monitoring plan

It was agreed that once the interventions are put in place, measurement of the performance data will be undertaken post-weather events by the Wyre Rivers Trust, which has experience with flood measurement and local knowledge. It will use various equipment, including flumes, level loggers and timelapse photography.

The performance metrics that measure the efficacy of the interventions are divided into two broader categories:

  • The practical function of the interventions as designed. For example, storing water during smaller flooding events.
  • The perceived reduction or delay in peak water flow delivering flood risk reduction during major flood events.

 

This will inform reporting on effectiveness of the interventions at reducing peak flow during a one-in-50-year flood event. It will also build an evidence base for natural flood management projects in other areas.

In line with the modelling approach, the monitoring will take place in two small sub-catchments as a proxy for the wider area. Turner comments that monitoring costs are often the most difficult to justify to buyers and other cost-sensitive stakeholders. As the interventions will be placed on 10-15 sites, it was agreed that monitoring on two of these sites would be an acceptable balance between monitoring performance and managing costs.

 

Maintenance plan

The land managers will be responsible for day-to-day maintenance of the interventions. The maintenance plan was developed mainly between the land managers and the Wyre Rivers Trust, which has extensive practical knowledge of how these interventions are best maintained and of maintenance costs.

Turner comments that land managers were happy to accept the responsibility of maintenance as this would take minimal time and cost. However, they highlighted the need for a clear maintenance standard and clarification of what ‘day-to-day’ maintenance involves, as opposed to heavier maintenance activity. To address this, the Wyre Rivers Trust developed a maintenance manual for land managers to use. Heavier maintenance activities, such as the replacement of fences, will be undertaken by the Wyre Rivers Trust when the land managers report the need

The maintenance requirement was included as a standard clause in the MoUs and contracts between land managers and the Wyre project, including considerations around mitigating circumstances like force majeure (see Milestone 8). Land managers are also responsible for the costs of maintenance, though these costs are built into the annual payment figures that are agreed with each land manager, again included in their contracts.

 

Inclusion of other ecosystem services

Though the main ecosystem service that this project focused on is flood risk reduction, other benefits include woodland and peatland carbon sequestration, water stewardship benefits and biodiversity uplift.

The project interventions include up to 40 hectares of woodland creation and peatland restoration. To bring in additional sources of revenue, the project team plan to submit these relevant interventions as separate projects under the Woodland Carbon Code and the Peatland Code. This will allow them to ‘unitise’ the tons of carbon dioxide that will be captured by these interventions and sell them onto separate buyers who want to offset their own emissions. (See case studies for examples of how this is done under these codes). The project team plan to do this in Years 2 and 3 of the project, when the relevant land managers are officially signed up to the project and ready to implement these interventions.

Water stewardship benefits will be delivered in the project, which Turner says is often a multiple benefit from natural flood management solutions. Water stewardship relates to how the quality and quantity of water is preserved, for example through wetland creation and leaky dams, but also sustainable water use practices adopted in business operations. These measures are captured under Replenish, which is a methodology of volumetric water based accounting, often used by large corporates which have regulatory obligations relating to water stewardship. The Rivers Trust have previously worked with several corporates using the replenish approach and intends to calculate the replenish value of the intervention to approach  corporate in the local area who have an interesting in offset water usage.

Finally, the project team explored the potential revenue streams from biodiversity uplift that is expected across many of the interventions, including the creation of 42 ponds and scrapes, and the planting of 10km of hedgerows. However, due to the lack of an approved code or standard, this benefit was instead built into the repayment plan of up-front capital with investors. Investors agreed to reduce the rate of interest they were charging on their loans, if the project can demonstrate a quantified uplift in biodiversity nine years into the project (see Milestone 7). The project team developed the methodology to confirm this, using Defra’s BNG 3.0 Metric 3.0, which was under development at the time.