However, within the agricultural industry, there is a new game in town. Wind Power!
But how does a property owner know how to make money at the wind energy game, if they do not know the rules? Who wins…the developer, utility company…landowner?
Players soon find that there are many dilemmas and pitfalls associated with wind power land option contracts or lease agreements.
Over the past few years, the wind power energy market has accelerated rapidly since the Department of Energy (DOE) found that wind power could supply the U.S. with 20% of its electricity needs by 2030.
Most recently, in 2008, the American Wind Energy Association (AWEA) reported that the United States dethroned Germany as the world leader in aggregate wind generating capacity. This market boom has developed into the hottest ticket for property owners and economic development as many of us see the fruits of these large commercial wind farms dot the American rural landscape in real time.
Conversely, wind developers may be exploiting American landowners for the advancement of wind energy farms as they eagerly try to lease up hefty land plots (e.g. - 10,000 to 40,000 acres). Many of these companies are currently in a feeding frenzy mode for buying up lease agreements at low rates (i.e. - known as option contracts) for the future development of large-scale wind projects. Therefore, landowners need to exercise caution and understand all aspects of the wind power game before signing or entering into any option or lease agreement.
The following is a short list of pertinent concerns and things to remember:
- All contracts are negotiable but most developers tend not to negotiate. The best way to negotiate wind power contracts is to form a Wind Energy Association since all wind energy contracts are written to progressively protect the developer. Lengthy contract requirements are normally 30 pages or more.
- The first 10 years are the most profitable time for wind farm developers due to the frontloading and issuance of generous tax incentives. The normal the payback period for a wind turbine is 9 to 11 years, just about the time the manufacture warranty expires. Also, keep in mind that wind contracts are like a marriage, if fully executed, most contracts are written to last 60 plus years.
- Ensure that fixed or royalty payment options adequately increase with the proper rate of inflation. Some contracts use the Consumer Price Index (CPI) to forecast future revenue increases. This representation does not adequately gage the rate of inflation over time.
- The number one mechanical problem associated with wind turbines is the gearbox issue. Replacement occurs every 2 to 4 years.
Lastly, property owners also need to understand what rights are lost or what hidden protection clauses are in lease agreements or option contracts.
A short list is as follows:
- Confidentiality clause – this prevents a discussion with other area landowners over specific contract terms.
- Length of the lease clause – the developer’s term limits or extensions rights of the contract may prevent other future business opportunities with other developers.
- Compensation clause – This is dynamic because there are many payment options for the developing parcel of land for wind energy production (e.g. - percentage of revenue from electric sales, lump sum payouts, fixed land payouts or a combo of each). Also there are tax consequences for each payment type including land improvements. Renewable energy credits (RECs) and federal tax credits may also be negotiated as part of the compensation package for land owners of large-scale projects if the developers gets as additional compensation from the government.
- Assignment clause – This clause may permit the wind developer to sell or transfer the lease rights to another party.
- Choice of law/Venue clause – Any litigation that arises under the contract must apply to the laws of the state in which the developer is located and/or heard by the court in the developer’s home state.