Wind Energy Leasing Issues for Agricultural Landowners

1. Wind Energy Leasing Issues for Agricultural Landowners Dr. Shannon L. Ferrell Assistant Professor – Agricultural Law OSU Department of Agricultural Economics Photo source: Stephanie Buway

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

3. Computer Modeled Spread of Wind in Oklahoma following Hammon Event

4. Environmental Impacts

5. 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?

6. Our topics today • Understanding the industry • Five questions you gotta ask • Knowing what you don’t know

7. Understanding the industry

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

9. A sense of turbine scale Source: Paul Gipe, Wind Energy Basics (Chelsea Green Publishing Co., 1999)

10. The Wake Effect(diagrams grossly not to scale) 2h = 280 ft h = 140 ft 20h = 2,800 ft (or over ½ mile) 2h = 280 ft

12. Location, location, location Source: http://www.greenspec.co.uk/html/energy/windturbines.html

13. Interconnections and Regional Transmission Operators (RTOs)Source: SPP

14. 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)

15. The Developer’s Dilemma: Transmission Buildout Project Costs Resource Quality  Project Revenues

17. Five questions you gotta ask

18. Five questions you gotta ask... • How will your current uses of the property be affected by the project? • How long will agreement last? • What are your obligations under the agreement? • How will you be compensated? • What happens when the project ends?

19. 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

20. The Exclusion Zone:Not entirely exclusive

21. 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?

22. 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)?

23. 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?

24. 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.

25. 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?

26. Assurances for project cleanup Salvage Value Cost Decommissioning Security Reclamation cost Time

27. Knowing what you don’t know

28. Do oil and air mix?

29. 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 • ????

30. Severance:Can you inherit the wind? • Authority for: • Contra Costa Water Dist. v. Vaquero Farms, Inc., 58 Call. App. 4th 883 (1997).

31. 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

32. 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?

33. Thanks! Shannon L. Ferrell, OSU Department ofAgricultural Economics shannon.l.ferrell@okstate.edu