Wind Energy Leasing Issues for Agricultural Landowners

Photo source: Stephanie Buway

Dr. Shannon L. FerrellAssistant Professor – Agricultural Law

OSU Department of Agricultural Economics

Video of High Pressure Wind Leak, Hammon Wind Farm – 3/8/2010

Computer Modeled Spread of Wind in Oklahoma following Hammon Event

Environmental Impacts

Hypothesis:

You’re a country lawyer, dealing primarily in country law matters.

A farmer comes to you with a 60 page legal document that, if executed, has the potential to impact his farm’s operations for 50 years (and is likely cut across at least two generations of your farm) but could also contribute hundreds of thousands of dollars to his bottom line.

He gives you thirty minutes to explain it to him...

...what do you tell him?

Our topics today

• Understanding the industry

• Five questions you gotta ask

• Knowing what you don’t know

Understanding the industry

Power is a function of air density, swept area, and wind speed

• Doubling rotor length gets us 22 = four times the swept area and thus four times the power

• Since power increases as a cubic function of velocity, we see 23 = eight times the power.

23

2

1rvP

Source: http://www.windpower.org/en/tour/wres/enerwind.htm,

Source: Paul Gipe, Wind Energy Basics (Chelsea Green Publishing Co., 1999)

A sense of turbine scale

The Wake Effect(diagrams grossly not to scale)

h = 140 ft

20h = 2,800 ft(or over ½ mile)

2h = 280 ft

2h = 280 ft

Source: http://www.greenspec.co.uk/html/energy/windturbines.html

Location, location, location

Interconnections and Regional Transmission Operators (RTOs)

Source: SPP

Profitability in Wind

• It’s a function of several variables:– Quality of the wind resource– Available incentives– Market for power– Costs incurred in capturing and selling power

• Transmission costs?• Landowner payments?

– Financing (not much in the news about credit markets lately, though)

The Developer’s Dilemma:

Resource

Quality

Project

Revenue

s

Transmissio

n Buildout

Project

Costs

http://comics.com/speed_bump/2010-06-02/

Five questions you gotta ask

Five questions you gotta ask...

1. How will your current uses of the property be

affected by the project?

2. How long will agreement last?

3. What are your obligations under the

agreement?

4. How will you be compensated?

5. What happens when the project ends?

How will your current uses of the property be affected by the project?

• American Wind Energy Association estimates total area of ≈ 60 acres/MW of capacity.

• ≈ 3 acres (5%) to actual physical occupation of land.

• ≈57 acres (97%) to exclusion area for windflow preservation.

¼ section (160 acres)

Image from Google Earth

The Exclusion Zone:Not entirely exclusive

How long will the agreement last?

• Agreements typically run from 30 – 99 years (150!) BUT– Leases have to be carefully reviewed for

renewal clauses• Is renewal automatic?• Will notice of renewal be provided?• Is there any opportunity to re-open

lease terms at renewals?

What are your obligations under the agreement?

• Surface uses – what will be required to satisfy “non-obstruction” requirements?

• Indemnity(!)– Will increased insurance be required?– What about third-party waivers?

• Property taxes?• Subordination issues?• Compliance with government programs

(CRP, EQIP, WHIP)?

How will you be compensated?

• What are your payments for easements?– One-time, up-front, or periodic?– What unit is used?

• What are your lease payments?– Per turbine, per megawatt, or a “royalty?”– Definitions matter!– How will accuracy be verified?

Example(Note – an addition to your program)

• Example: Assume one 2.0 MW capacity turbine, a capacity factor of 35%, a PPA price of electricity at $0.03/kWh, and a royalty of 4% of gross revenues.

• Electricity produced in a year=2 MW x 8,760 hr/yr x 35% = 6,132 MWh or 6,132,000 kWh

• Gross revenues = 6,132,000 kWh x $0.03/kWh = $183,960

• Royalty = $183,960 x 4% = $7,358.40 or$3,679.20 per MW of turbine capacity.

What happens when the project ends?

• After project term is completed, will the agreement provide for: – disassembly and

removal of equipment?– restoration of grades

and soils?– replacing vegetation?

• What assurances are in place?

Assurances for project cleanupC

os

t

Time

Salvage Value

Reclamation cost

Decommissioning Security

Knowing what you don’t know

Do oil and air mix?

What’s wind, and what are wind rights?

• What’s wind?– “Air in a hurry”

• What interests would be part of the “wind estate”– Access– Capture (which is a

misnomer)– Conversion– Transport– ????

Severance:Can you inherit the wind?

• Authority for:– Contra Costa Water Dist. v. Vaquero Farms,

Inc., 58 Call. App. 4th 883 (1997).

Severance:Can you inherit the wind?

• Authority against:• North Dakota: N.D. Cent. Code §17-04-04 (but

allows assignment of payments)• South Dakota: S.D. Laws §43-13-19• Nebraska: Neb. Rev. Stat. § 66-911.01 (revised

by LB 568, signed 5/22/2009)• Minnesota: Minn Laws. Ch. 136, Art. 1, § 15,

amending  Minn. Stat.  § 500.30• Oregon: Or. Rev. Stat. § 105.905• Oklahoma: Okla. Legis. SB 1787

There oughta be a law!

• Issues of condemnation power for transmission lines?

• Spacing and setback requirements?• “Can I get force-pooled?”• Standard terms of payment and audit privileges?• Decommissioning indemnity funds?• Insurance requirements?

Thanks!

Shannon L. Ferrell,OSU Department ofAgricultural Economicsshannon.l.ferrell@okstate.edu

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