Monday, September 28, 2009

Wind Farm Exit Strategies

At the start of this year, there were a total 626 large-scale U. S. wind projects scheduled for development. However, the current commercial banking climate and the world financial situation have also lead to a downturn in the wind power market. Throughout the world, wind turbine orders fell by 50% in the first half of 2009 as compared to last year. Current economic pressure has also forced many large wind manufacturers to slash jobs (e.g. - Vestas Wind Systems is laying off about 1,900 employees and LM Glasfiber, the world largest maker of turbine blades, is laying off more than a 1,000 workers).

In addition, the largest voice for wind energy - Mr. T. Boone Pickens, has scraped his largest wind energy farm in the U.S. due to a tight financial market and cheap natural gas prices. The Pickens’ plan was to invest $12 billion for wind power throughout 200,000 leased acres in northern Texas.

As a result, farmers must be aware of the current trends within the wind industry market as wind power is always changing directions, especially related to capital investment. Therefore, it is essential that farmers negotiate their wind energy contract carefully before a signature appears on an option contract/lease agreement. Key elements must be in place that best represent the interest of the landowner. Just signing the contact without negotiating any wiggly room out of a binding contract is ludicrous. It may lead to undeveloped land use and no future income potential for the landowner.

Therefore, establishing a wind farm exit strategy offers the best opportunity (tool) that can be used to insulate the farmer from the loss of land rights to productive ground. This tactic is designed to make the wind developer perform a site-specific arrangement within a mandated time frame or the contract is null and void.

In short, this type of performance-base approach offers the greatest course of action if the developer does not to develop the land for wind power. There are numerous ways to implement these types of various exit strategies; a short list of examples is as follows:

First of all, it is wise to counter the original agreement with protective clauses that can shorten the life span of the written contract offered by the wind developer. Farmers must protect their wind rights that tie up land rights. For example, it is best to include a clause in the contract that terminates the written land lease agreement if the wind project is not in commercial operation within 3 years.

Secondly, farmers should be also aware that some states set mandatory time limits on wind option contracts or wind easements. For example, North Dakota State law terminates wind option agreements if wind development has not occurred within 5 years after the agreement commences.

Finally, Farmers need to be careful of wind energy checkerboarding. There may be many wind developers offering wind power contracts within the same locality. This may cause confusion to the land owner if he/she happens to sign an agreement with developer X and find out that he/she is land locked by other landowners who signed with another developer (known as developer Y). This creates a checkerboard pattern that is worthless to the landowner who exercises his contract with developer X.

In summary, there are a lot of issues associated with option contracts/lease agreements related to wind energy. The wind industry is always changing with the political climate and financial market system. Landowners must protect their assets with proper negotiating tools and expert advice that can promote a win/win situation for a sufficient payment of royalties.


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