Milestone 02


Poole Harbour Nutrient Management Scheme


Identify and Work with Sellers


Project Overview

The Poole Harbour Nutrient Management Scheme (the Scheme) aims to reduce nitrogen pollution from agricultural activity across the Poole Harbour catchment, delivered through measures such as planting cover crops and improved nitrogen efficiencies. The Scheme requires farms to work to the glide-path nitrate reduction targets set by the Environment Agency (EA) and allows those farms to trade nitrate ‘credits’ between themselves and any excess credits to other sectors, including water companies and developers. It is a voluntary and farmer-led collective with backing from the National Farmers Union (NFU), Natural England, the Environment Agency, Wessex Water, Triodos Bank and others. In December 2021, it established a Community Interest Company to host the Scheme’s operations. In Summer 2022, it began its second pilot with c.70 farmers to test the Scheme’s tools and processes.

Milestone 1: Initial Project Scoping

The initial task is often 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,  i.e. carbon credits, flood reduction cost savings, 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.

Introduction

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 lease arrangements. In some cases, there may be a sole seller of ecosystem services. This would be the case with a site or landholding large enough that it delivers the volume of ecosystem services needed to cover the costs of the project.

However, in order to achieve scale and impact, a project will likely involve multiple sellers, such as neighbouring land managers and landowners. 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.

Introduction

At this point, you will have understood the vision for the project and you’ll have chosen 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.

Introduction

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 financing.

 

 

Introduction

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.

Introduction

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.

Introduction

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).

 

Introduction

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.

Introduction

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.

Introduction

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 for this case study:

Louise Stratton, Development Manager, Poole Harbour Nutrient Management Scheme

 

 

Natalie Poulter, Dorset Catchment Partnerships Co-ordinator

 

 

Date published: 08/12/2022

Next Milestone

Identifying and mapping sellers

It was apparent that the Scheme would need a landscape-scale approach to meet the nitrate reduction targets it was tasked with (See Milestone 1). Overall, it aims to reduce the agricultural nitrate run-off by 600 tonnes per year by 2030. To give a sense of scale, previous scientific estimates showed that an average hectare of farmland in the catchment leaches 0.027 tonnes of nitrogen per hectare per year.

The Scheme is therefore being designed to include all farms within the catchment to give the best chance of meeting this goal. The project team – led by the NFU, and including the Poole Harbour Catchment Partnership, Wessex Water, Environment Agency, Natural England (including Catchment Sensitive Farming, and farmer representation at every level) – also agreed that this approach was preferable to prevent the exclusion of any farmers capable of nitrate reduction from the financial benefits of the Scheme.

A map of all the farms in the catchment, including farm type, farmer profile and other relevant information, was created with data held by the NFU and the Dorset Catchment Partnership. Of the 550 farm businesses within the 820sq km catchment, there is a mix of arable, livestock and dairy farms, with one pig farmer and a handful of poultry farmers.

There was one practical restriction around site eligibility for the Scheme. Because of the administrative advantages, the project team decided that any participating farmer would need to be a Basic Payment Scheme (BPS) claimant. This is because each farmer claiming BPS must register their  parcels of land as part of the process, updating this information on a yearly basis. to identifying sites, having identified the need for updated and field specific data to help set farmer targets.

As a note on register access. The latest version of the register has restricted (paywall) access, with previous versions being publicly available. A number of partners have access for various reasons – EA for its regulatory activities; organisations which work with farmers in advisory capacities (e.g. Natural England Catchment Sensitive Farming, Wessex Water, NFU) have paid for access to the current database to facilitate their work. The Catchment Partnership is hosted by Wessex Water and has access under their licence.

While the ambition of the Scheme is to include as many farmers in the catchment as possible, the project team realised that extensive farmer-facing processes, tools and structures would need to be developed to make the Scheme work. It therefore decided it would need to start with a smaller group of farmers to help develop and pilot these, first starting with the Nutrient Accounting Tool that would determine how much each farmer would need to  reduce emissions to reach the EA’s target (See Milestone 1). The team planned to stage a series of pilots to do so, starting with a group of 20 farmers in 2021.

 

Approaching sellers

In 2018, the project team organised in-person meetings to draw in farmers from across the catchment. Four meetings were organised over a 10-day period, all at different times of day and across the catchment, to best accommodate different schedules.

The project’s farmer-facing partners the NFU, Country Land and Business Association (CLA), Catchment Sensitive Farming (CSF) and Wessex Water, have extensive reach across the farming community of the catchment, and used their various networks, newsletters, events and contacts to extend the invite as widely as possible. Farmers were also encouraged to invite their farming neighbours. Louise Stratton (Development Manager for PHNMS) comments that even with the extent of this contact data, it is possible that some farmers could have been missed off of this list. For the Scheme’s full launch, the project team may use contact information that is linked to BPS data, though the project may have to pay for access.

Over 100 farmers attended these initial meetings. To determine what farmland was being represented, the project team asked attendees to give their County Parish Holding number (CPH) if they had one. Farmers who own any livestock are issued a CPH number, the number of hectares that farmer owns or rents. Using this as a proxy, the project team determined that over 75% of the farmland in the catchment was represented.

The pitch delivered at these meetings was split into two parts. Firstly, the project team explained why the Scheme was being proposed, namely the Consent Order that was being drafted by the Environment Agency and Natural England, the potential use of a Water Protection Zone, and why the team were considering a voluntary and market-based approach may deliver better outcomes. This thinking was aligned to the feedback the NFU initially received from the Catchment Partnership Agriculture Sub-group in initial project scoping (See Milestone 1). Stratton comments that dedicating time to explain the driver for this change – the Consent Order – was important as there was virtually no common knowledge of this document and its regulatory significance.

The second part of the pitch was focused on the headline details of how the Scheme would work. This included how farmers would trade nutrient reduction outcomes between them, with the surplus credits sold outside the sector, in order to ‘balance’ the overall nitrate run-off from the agricultural sector and keep it under a certain limit. The project team clarified that this Scheme was a proposal in early development that would need to be backed by the majority of the farming community in order to work, and that the alternative could be a Water Protection Zone or other blanket regulation on farmer activity.

Opening to Q&A, farmers in these meetings were broadly supportive of the proposal. Most agreed this Scheme would be preferable to blanket regulation but there was also a moral motivation to work together as an industry in order to restore water quality in the catchment. There were a few discussions around potential financial benefits, but as there were no firm data points on the volume of reductions or potential prices, this was regarded a topic for later consideration.

There was some initial pushback on the proposal. Farmers across these meetings pointed out that there are other significant sources of pollution in the catchment, such as water companies and developers. They expressed the idea that farmers were being unfairly burdened with the Consent Order. To address this, a representative from Wessex Water, as part of the project team, attended all meetings to outline how the Consent Order would place requirements on the water sector and other industries, and what Wessex Water were doing in this space to address their impact.

Overall, these meetings showed the farmers had a strong willingness to develop the Scheme as an alternative to facing a WPZ. This meant the project could continue with its development and the team decided to seek development funding for the next stage (See Milestone 1)

 

Ongoing engagement

After this initial engagement, the project team and its core partners spent the two next years (2018-2020) developing the processes of the Scheme, including its governance, compliance with regulations, development of the Nitrate Leaching Tool methodologies, trading and reporting processes. It also designed an initial pilot to test all of these processes, which launched in 2021.

Throughout this period, the project team kept the farming community engaged in and informed about the scheme’s progress. Activities have included one-on-one specialist advice as needed, regular bulletins and talks, farmer engagement days and the launch of a project website with forthcoming membership portal.

Stratton comments that some farmers were able to give more time than others to feedback on important design features of the project. For example, the NFU and Natural England to develop a practical list of farm intervention measures and practices to reduce N emissions, with agreed nitrate values attached from scientific baselining. The farmers were integral to drawing up a list of measures that were practicable, reflected and/or fitted alongside modern farming practice etc. Some of the original measures proposed by NE were outdated or incompatible with current good practice, or not relevant to the farming methods and types in catchment.

One challenge identified was the possibility of ‘double funding’ these interventions through the Scheme and other funding sources, including Government sources such as agri-environment schemes. Additionally, the scheme could not fund measures required to bring farmers practice to legal minimum standards. To avoid this, the list excluded sustainable practices that farmers already employed, either to comply with regulations or to access public funds such as Countryside Stewardship payments.

In Spring 2021, the project team launched the first pilot of the EA’s Nitrate Leaching Tool (NLT). Running the tool allows farmers to see how far off the EA’s targets they are based on current practice/plans, and therefore how much work they need to do, and whether they’re likely to need to trade etc, rather than setting the target. A group of c.20 farmers registered their interest in initial engagement. This number was chosen to keep numbers low enough so that they could offer ample support to the pilot group. However, they also needed a representative sample of the catchment in order to make sure the tool would be fit for wider use.

Stratton says that farmers understood this would be a time-intensive process, and while there were enough willing farmers to make up the group, the team only had to turn away a few farmers. Before the beginning of the pilot, each farmer signed an identical Memorandum of Understanding (MoU) that clearly set out the expectations from the farmers and also the one-year timeframe. These MoUs were not legally binding though, and were used as a tool of communication.

The pilot started with virtual meetings every three to four weeks for four months, where the farmers were taught how to use the NLT. Farmers then were tasked with filling in the NLT with their data and reporting their results back for validation, with support given by the project team throughout. Actual measurement of nitrate reductions were taken at the end of the year by Wessex Water, anonymised  and shared with the project team.

Farmers gave extensive feedback on the useability of the NLT and its ability to capture the full range of measures that they wanted to use. The project team captured this feedback for the next pilot phase, which began in Summer 2022 with c.70 farmers.

 

Outcome and pricing discussions

At the end of the pilot, 18 farm businesses had fully trialled the EA’s Nitrate Leaching Tool, covering 6,100 hectares. 15 of these farms were able to reduce their nitrate losses to below the targets set by the EA. This left 52.2 tonnes of surplus nitrate reduction ‘credits’ available for trading.

While this was a positive result, the project team acknowledged some limitations of the pilot. Firstly, the fact that as these farmers had volunteered for the pilot indicated there was likely a ‘self-selection bias’ in terms of their greater ability to reduce their nitrates and their motivation to stick through testing of the NLT. It also meant that it wasn’t possible to model trading or prices accurately based on the trial figures, as this surplus of nitrates would depress prices in a commercial trading system and remove the incentive to make farm improvements.

Thirteen farmers opted to sell their surplus nitrate credits. The farmer steering group, now established as an independent Community Interest Company then negotiated with Wessex Water on behalf of the farmers. A single price (£/Kg/N) was agreed with sales contracts drawn up for each farm business. This generated tens of thousands of pounds of income for those environmental leaders.