Oklahoma Bar Journal
Wind Energy - A Primer
By William H. Whitehill Jr.
Wind energy and other alternative energy sources are the future. Production of wind energy has increased substantially over the past decade. Since 2004, wind energy production in the United States has grown from less than five GWh to more than 190,000 GWh by the end of 2015.1 The United States currently leads the world in electricity production from wind.2 On at least one day in 2015, it has been reported that Germany, Scotland and Denmark each produced enough electricity from wind and solar to supply 100 percent of their electricity needs for that day.
In the United States, Oklahoma is the fourth largest producer of electricity from wind and one of only eight states that currently produce more than 15 percent of its electricity generation from wind.3 Iowa produces more than 30 percent of its electricity supply from wind. And, the first wind turbines to be installed off the United States coasts were constructed this year off the coast of Rhode Island.4
The growth in wind energy production continues in Oklahoma. In the first quarter of 2016, Oklahoma led the United States in wind capacity installed.5 Because of the continued and foreseeable growth of wind energy production in Oklahoma, lawyers will increasingly come in contact with clients who have been approached regarding the installation of a commercial wind energy project (commonly called a wind farm) on or near their property. The purpose of this article is to give a general background and information with respect to wind energy production and the agreements associated therewith.
In a nutshell, the generation of usable electricity from a completed wind energy project first involves the wind turning the blades of the turbines. The turbines spin generators to create electricity. The electricity is then transmitted to a transformer located at a substation. The substation collects the generated electricity and increases the voltage to match the power grid. The transformed electricity is then delivered to the power grid for transmission to end users.
A wind energy project is carefully planned, takes several years from concept to construction and requires significant capital. A project recently completed in central Oklahoma involving about 50 sections, is expected to produce 300 MW of electricity, has more than 100 wind turbines and was estimated to cost into the hundreds of millions to complete.6
A wind energy project will typically have an evaluation phase, a development/construction phase, a production/operations phase and a decommissioning phase. During the evaluation phase, the developer will conduct wind studies and gather various data to determine the feasibility of a wind energy project. This will likely be the first contact between a developer and landowner. The developer may want to place wind measuring equipment on the land and perhaps conduct other studies such as environmental studies. To do so, the developer will usually offer to either enter into a lease or an option to lease agreement with the landowner to allow the equipment on the land and to obtain rights of ingress and egress.7 The provisions of the lease will not be limited to the evaluation phase. The lease will also cover the other phases. Otherwise, the studies by the developer would be for naught if the landowner later refused to enter into a lease. The same holds true for an option to lease. Either the lease will be attached to the option or the major provisions of a proposed lease will be included in the option agreement. Thus, it behooves a landowner seeking advice to do so in the early stages of the process.
The lease will contain many provisions with which attorneys are familiar. A number of provisions or considerations, however, will be unique to a lease for a wind energy project. For instance, in order to make a project financially feasible to develop, lease terms often run 30 years or more from the date a project is completed. The key word is “completed.”8 It will take several years for the developer to determine if the project is economically viable. Thus, the 30-year period will not begin until the project is constructed and producing electricity.
Until the wind and other studies are completed, the developer will not know whether a wind energy project is feasible or, if so, the location of any turbines for the wind energy project. The optimal location of wind turbines is somewhat of an exact science requiring precise engineering, and the developers will often be unable to deviate significantly from the locations determined from the studies. It may be important to the landowner to have a turbine installed on the landowner’s land because the financial incentives are greater for land on which a turbine will be located. On the other hand, a landowner may not want a turbine on their property because of the aesthetics or size of the turbine,9 the roads required for access to the turbine, current or intended future uses of the land or other reasons.
Even if the developer’s studies determine that no wind turbine is to be located on the landowner’s land, the land might still be useful for the wind energy project for such things as transmission lines, a substation, roadways, operations and maintenance buildings, storing construction materials or simply as a buffer from other wind energy projects. The transmission lines between turbines are usually buried and do not significantly affect the usability of that portion of the land. Typically, these items are handled through easements. However, the developer may also be interested in purchasing part of the land for the substation and any needed operations and maintenance buildings. If a lease is entered into with the developer, but it is later determined that turbines or other physical facilities will not be placed on the land, the landowner may want a provision in the lease providing that the lease will convert to an easement that affects only the needed portion of the land for the specific purpose it is needed.
The payments to the landowner will vary from project to project and among developers. During the evaluation phase, there may be offered an amount per acre and a one-time fee for placing any testing equipment on the land. Other than placing testing equipment on the land, there is not much physical use of the property during the evaluation phase. The amount of land used for any testing equipment is not significant. As a result, the payments during the evaluation phase will be lower than payments during subsequent phases.
If the project proceeds to construction, a one-time payment will typically be made for any turbines placed on the land, and the amount per acre leased will also increase. For the production/operations phase, the developer may offer an increased annual rent, fixed royalty per MWh of electricity produced, a percentage of gross production revenue or a combination thereof. Whether any payment is based on the turbines located on or electricity produced from a landowner’s land, or is based on a pro-rated portion of the entire project, should be addressed. A developer may also consider a minimum rent that must be paid regardless of whether electricity is being produced for whatever reason. Due dates for the payments should be established in the lease.
A lease may also provide for one-time payments for a substation, any temporary improvements and the placement of transmission lines. These may or may not be in addition to the other payments discussed above. Payments should also be considered for any crop damage, for any increase in ad valorem taxes because of the project or to compensate the landowner if the project results in the land being removed from the federal Conservation Reserve Program.
Because of the lengthy term of a wind energy project, fixed or annual payments should be indexed to the Consumer Price Index or another appropriate index. Currently, the federal government and the state of Oklahoma offer tax credits for the production of wind energy. The developer will likely not share the credits with landowners because they can form an integral part of the financing transactions the developer requires to fund the wind energy project.
The lease should contain provisions that allow the verification of any royalties that may be owed to the landowner. Oklahoma statutes provide certain rights for the landowner in this regard.10 The lease can provide greater rights than those required by Oklahoma statutes.
Because many developers are not in the business of operating completed wind energy projects, the lease will allow the developer to assign the project to third parties. Those developers will sell all or part of the ownership of the project upon completion. At a minimum, the lease should provide that the developer will notify the landowner of the assignment, and the contact information for the new owner of the wind energy project.
Indemnification and insurance provisions will be important to the landowner. Relatively speaking, the developer will have a better financial ability to absorb liabilities and the turbines have significant costs. The landowner should consider trying to limit the dollar amount of any liability resulting from the nonwillful negligence of the landowner. The developer should be responsible, and indemnify the landowner against loss, for violations of zoning or other governmental regulations and for any third-party claims against the landowner regarding the wind energy project (such as a lawsuit seeking to prevent the wind energy project). Oklahoma statutes require that the developer provide insurance “consistent with prevailing industry standards” and that the landowner be named as an additional insured.11 The landowner may want to consider a set minimum amount of insurance indexed to the Consumer Price Index or other index. The lease may provide that the developer is entitled to self-insure. Waiver of subrogation clauses are commonly agreed to as are waivers of exemplary, incidental or consequential damages.
The landowner should also consider the landowner’s current and future use of the land. For engineering and financial modeling reasons, a lease will typically have a nonobstruction clause providing that the landowner cannot construct any improvement that would interfere with the wind flow for the project unless the developer agrees. Thus, the developer will not agree to a catch-all provision stating that any rights not expressly given to the developer are retained by the landowner. However, the developer will consider agreeing to the landowner’s retention of specific rights such as the right to use the land for grazing, to plant and harvest crops, conduct other agricultural activities,or to hunt as long as they do not interfere with or create a risk of damage to the wind energy facilities.
Other lease provisions, e.g., regarding hazardous materials, default, liens, condemnation, confidentiality, arbitration, choice of law and forum selection are typical of commercial leases generally. Fence repair, weed control, favored nation and lender protections may be addressed as well.
Once begun, the development/construction phase typically takes six months to a year. Upon completion, the production/operations phase will entail the generation of electricity, payment of royalties to the landowner and the maintenance of the facilities.
Decommissioning is the final phase. Basically, this involves removal of the turbines and other improvements and the restoration of the land after the wind energy project has run its course; similar to the plugging of an oil and gas well. Minimum guidelines for the decommissioning process are set forth by statute.12 These provisions should be reviewed to determine whether the landowner has reason to pursue specific standards in the lease.
Attorneys who represent mineral owners and are concerned about a wind energy project affecting the exploitation of the mineral rights should review the Exploration Rights Act of 2011,13 which generally provides that the developer may not unreasonably interfere with the mineral owner’s right to make reasonable use of the surface estate including the right of ingress or egress, severing, capturing and producing minerals. Notices to certain operators and lessees are also required.
In conclusion, wind energy projects are now an integral part of the generation of electricity in Oklahoma and will continue to be so in the future. The lease is the document that establishes the relationship between a landowner and a developer. The lease proposed by the developer will contain many provisions familiar to attorneys who review commercial leases. There will be other provisions, however, that will be unique to wind energy project leases. The Oklahoma lawyer reviewing these leases should become familiar with these types of provisions and take into account the long-term relationship that will be established between the landowner and the developer.
ABOUT THE AUTHOR
William H. Whitehill Jr. is a shareholder with the Oklahoma City law firm of Fellers Snider. He practices in the areas of taxation, civil tax controversies, real estate, commercial transactions, commercial litigation and general business law. He is also a certified public accountant (CPA).
1. 2015 Wind Technologies Market Report, U.S. Department of Energy (August 2016).
4. Fortune, fortune.com/2016/08/08/first-us-offshore-wind/.
5. U.S. Wind Industry First Quarter 2016 Market Report, American Wind Energy Association (April 28, 2016).
7. The Airspace Severance Restriction Act, 60 Okla. Stat. §820.1 restricts the “permanent severing of the airspace over any real property…for the purpose of developing and operating commercial wind or solar energy conversion systems” and requires a written lease for wind energy project purposes.
8. The lease will likely include an option to renew for a specified term exercisable at the discretion of the developer.
9. The height of wind turbines that may be placed on the land can reach 400 feet at the top of the rotor sweep. The rotor blades can be up to 150 feet in length. The nacelle housing the turbine, generator and related equipment at the top of the tower has been described as being the size of a typical school bus.
10. 17 Okla. Stat. §§160.16 and 160.17, part of the Oklahoma Wind Energy Development Act, 17 Okla. Stat. §160.11 et. seq.
11. 17 Okla. Stat. §160.16.
12. 17 Okla. Stat. §160.14.
13. 52 Okla. Stat. §801 et seq.
Originally published in the Oklahoma Bar Journal -- OBJ 88 pg. 271 (Feb. 11, 2017)