Author: | Contracts
Wind power is a clean and increasingly cost-competitive source of electric energy. With policy makers and the public at large demanding cleaner alternatives to fossil energy, the construction of wind turbines has increased in recent years. With this trend expected to continue, many landowners—particularly those who own agricultural land—may have the opportunity to grant developers limited access to their property to construct wind turbines. There are numerous legal considerations regarding the siting, permitting, construction, and operation of a wind power facility on privately owned property. This article examines some of these issues from the perspective of a lawyer representing a landowner who is considering whether to allow the construction of a wind farm on his property.
This article attempts to familiarize lawyers with some of the principal issues affecting landowners in granting access for wind farms. For each proposed project, however, lawyers will have to identify and resolve the unique issues facing their client, the subject property, and the proposed development.
Wind power is on the rise across the nation. Owing to state and federal programs promoting renewable energy, wind projects have proliferated, and are likely to continue on this path for the foreseeable future. Indeed, the American Wind Energy Association (AWEA) recently reported that the total installed wind capacity nationwide was 11,603 megawatts (MW) at the close of 2006, and that the industry will construct over 3,000 MW of new capacity during 2007. To put this into perspective, AWEA explains that one MW of electricity can power 250 to 300 homes.
In order to curb the production of greenhouse gases and to reduce the nation’s dependence on fossil fuels, policy makers have enacted a variety of requirements and incentives aimed at increasing the production of renewable power. For their part, state legislatures across the country are promoting wind development through a number of measures. Many states have adopted Renewable Portfolio Standards (RPS) requiring electric utilities to ensure that a minimum share of their delivered electric power is derived from renewable resources such as wind, solar, biomass, and geothermal energy. According to the Database of State Incentives for Renewables and Efficiency, there are over 20 states with RPS requirements. Some states, Texas, for example, also have adopted property tax exemptions for wind and solar facilities. Federal lawmakers, on the other hand, have enacted a production tax credit for certain renewable power facilities, including wind. With these and other incentives, there are numerous unique opportunities for landowners and developers, as well as the lawyers who represent them.
Wind power is generated on a commercial scale using large turbines. These turbines typically consist of a three-bladed spinning rotor that can extend over 250 feet in diameter. This rotor is connected to a generator and a computer-controlled motor to direct it toward the wind. The generator, in turn, is located atop a tower, which can range from 180 to over 300 feet in height. Turbines are generally placed sufficiently far apart from each other to ensure that one turbine does not block another’s access to wind. The number of turbines on a given wind farm can vary and depends on a variety of factors, including the availability of the land, its geography, the adequacy of the wind, and the availability of financing. Some of the world’s largest wind farms utilize thousands of turbines. For example, the wind park in San Gorgonio Pass, California, outside of Palm Springs, contains several thousand turbines.
There are a number of factors that determine whether a site will make an ideal location for a wind farm. Chief among these is the quality of the wind, which is measured by its speed and consistency. In this regard, developers avoid sites that are prone to sudden powerful wind gusts. A second important factor is the wind farm’s proximity to electric transmission facilities. Finally, market location is considered—an ideal location is one that is close to electric consumers.
Based on these and other factors, many developers have sought to construct wind farms on agricultural land in wind-rich areas such as the Plains states, western New York, and the Pacific Northwest. In addition to these onshore sites, developers also have proposed large offshore wind farms in areas along the Northeast coast. This article, however, focuses exclusively on onshore facilities on privately owned farm land.
Assume you have a new client who is a farmer with substantial acreage in a wind-rich area. The client has been approached by a project developer proposing to build a wind farm. How can your client grant the wind developer access to his property in order to generate additional income without taking on unnecessary liability, and without granting more rights to the property than necessary?
resource studies. These studies determine the technical and economic feasibility of the proposed project. Typically, this involves granting the developer a temporary easement to access the property and set up measurement equipment to gather critical wind and meteorological data. This data-gathering phase can take up to a year. Assuming adequate wind resources are found, the developer also will require access to conduct the environmental review for construction.
While a property owner may grant a stand-alone easement for this preliminary assessment, it is customary for wind developers to insist upon an option in conjunction with the easement. Options grant the developer the exclusive right to enter into a long-term agreement for project operation if the project moves forward. Developers occasionally choose not to exercise the option despite finding adequate resources. In the event that this happens to your client, a guidebook for landowners prepared by the Pace Law School Energy Project advises property owners to negotiate for a copy of the wind data collected in order to show future developers.
If the data support the construction of a wind farm on your client’s property, it is likely that a developer will exercise its option to enter into a long-term agreement with your client. At this stage, the parties will enter into negotiations concerning the myriad issues that arise in such a transaction. Here, lawyers can expect to utilize concepts from a variety of legal practice areas, including real estate law, commercial law, and state oil and gas law, to name just a few.
As an initial matter, it is important to understand that the terms “lease” and “easement” are used somewhat loosely in the available resources describing these transactions. In practice, wind agreements involve elements of both. For the sake of clarity, this article will simply refer to such arrangements as wind “agreements.”
The key provisions of a wind agreement describe the following: Who gets access to your client’s property? For what purpose may these entities access this property? What portion of your client’s property does the developer have the right to access? And how long may the developer operate the project?
The agreement must grant access to not only the developer, but also the project operator and its contractors for the purpose of constructing, operating, maintaining, and eventually removing the turbine. Next, the agreement must indicate clearly what property is included. To facilitate this, and to avoid later disputes, it is important to identify precisely the number and location of the turbines to be built on the property. In addition, it is crucial to identify the means for accessing each of these turbines. This is particularly important where your client wishes to continue farming operations on the property during the construction and operational phases of the project. Likewise, it is important for the agreement to specify that the underground transmission cables connecting the turbines to the electric grid be buried deep enough to avoid being severed by farm equipment. On this point, the Pace Law School guide recommends burying such cables at least three feet below ground. From your client’s perspective, the paramount goal should be reducing the footprint and impact of the wind project to the greatest extent possible.
The next key component of an agreement addresses the duration of the agreement. Generally speaking, the operating life span of a wind farm extends from 25 to 50 years, depending on the nature of the project. In addition, many agreements include options for the developer to extend the agreement for one or more multiyear increments.
Naturally, the compensation aspect of the agreement is of paramount importance. There are two pieces to the compensation package. First, there is the fixed fee your client should receive during the preconstruction, construction, removal, and site remediation phases. These are times during the project life span when the turbines are not in service and, therefore, not generating revenue. The agreement should specify that the property owner’s compensation during these phases will be on a fixed-fee basis.
The next piece of the compensation package addresses how your client will be paid during the operational phase of the wind project. There are a number of approaches. The most typical arrangement involves a royalty payment calculated as a fixed-dollar amount per unit of energy produced and sold. Other approaches include a flat or fixed fee, a royalty plus a minimum fixed payment, and a one-time lump-sum payment. Each arrangement involves a different combination of risk and timeline for payment. Which one is best for your client depends on several factors, including the quality of the wind resource, the projected demand for electric power, and the developer’s ability to sell the power into the electricity markets. For example, where electricity demand from the wind farm is projected to be high, a property owner may prefer a royalty arrangement, which offers greater upside potential. However, where demand or production is in doubt, clients may prefer the security of a fixed fee. Lump-sum payments may be appealing in some respects, but such an arrangement may prove to be problematic if your client later sells his interest in the property during the project life span.
In evaluating the various compensation schemes, it is helpful to obtain information concerning the projected changes in regional electricity supply and demand. It is advisable to hire an independent consultant with expertise in the regional electricity markets, as electricity markets are extraordinarily complex.
With regard to royalty payment schemes, the New York State Energy Research and Development Authority (NYSERDA) suggests that landowners whose land makes up only a portion of a wind farm should insist that the energy sold from the entire project be averaged to compute royalty payments. Besides making for simpler accounting, NYSERDA explains that this protects individual property owners from reduced compensation associated with an underperforming wind turbine on their property. NYSERDA also suggests including a provision to compensate agricultural property owners for crop damage or other interference incurred during the operational phase of the project. Finally, the agreement should include a mechanism for increasing fees to account for inflation. Failure to do so could be costly over the course of a 20- to 50-year project.
With the inclusion of the turbines, your client’s land may face an increased property tax assessment. Thus, it is essential to include a property tax provision in the agreement. Since the developer actually owns the turbines, it is not uncommon for the developer to agree to reimburse the landowner for increased property taxes resulting from the installation of turbines. In some agreements, this provision may be called a “tax gross-up.”
Another critical element of a wind agreement is the indemnification provision between the parties. From your client’s perspective, this provision will offer protection from claims of liability arising from the conduct of the project operator and its contractors. In many cases, such a provision will require the developer to purchase and maintain appropriate liability insurance coverage for any physical damage or injury caused by the project operations. In addition, the indemnification should protect the property owner from any liens on the property resulting from the developer’s financing arrangements.
From the developer’s perspective, there are additional provisions that establish a number of essential rights. First, developers will likely insist upon a clause stating that they hold the exclusive right to harness wind energy on the subject property. Under this provision the developer also is assured that the property owner will not engage in any activity that would obstruct the wind, including building any structures without prior authorization by the developer.
Another common clause provides that the landowner will not convey any interest in the property that interferes with the developer’s exclusive right to operate a wind farm. However, this does not preclude your client from conveying the remaining interest in the property. Instead, it simply means that whatever interest is later conveyed may not include the rights granted in the wind agreement. This is where an understanding of oil and gas law might be helpful. Generally speaking, subsurface rights in minerals are severable from the surface rights in a given tract of land. As far as wind development rights are concerned, a California appellate court considered the issue in Contra Costa Water District v. Vaquero Farms, Inc., 68 Cal. Rptr. 2d 272 (Cal. Ct. App. 1997), and found that wind power rights, like the rights in subsurface oil and gas resources, are severable from the underlying land.
There are other important terms of any wind agreement. These address assignments, force majeure, the developer’s financing arrangements, and default and termination, among others. An excellent resource for lawyers is the sample annotated land lease agreement posted on NYSERDA’s Web site (see sidebar). The model agreement provides an excellent point of departure for any lawyer advising clients in this type of transaction.
With an agreement finalized and executed, the approval and permitting phase of the project is next. This is where you and your client can expect a great deal of uncertainty over whether the project will actually move forward.
The first step is determining whether any local ordinances will hinder facility construction. Here, it appears that local ordinances are often at odds with state and federal policies promoting wind energy development. Obstacles ranging from restrictive zoning ordinances to moratoria limit, and often completely prevent, wind project development in many communities. For instance, in Ecogen, LLC v. Town of Italy, 438 F. Supp. 2d 149 (W.D.N.Y. 2006), a federal district court in New York upheld the town of Italy’s moratorium prohibiting the construction of wind turbine towers, relay stations, and other related facilities in the town. In Ecogen, the court found that the moratorium was rationally related to the purpose of maintaining the aesthetic character of the town. Aesthetic concerns were also at the heart of the dispute in In re Petition of Tom Halnon, 811 A.2d 161 (Vt. 2002). In Halnon, the Vermont Supreme Court upheld the Public Service Board’s denial of a petition for a wind turbine net metering system on account of the project’s perceived negative aesthetic impact.
However, local zoning ordinances may favor wind developers. Take, for instance, a Wisconsin county zoning board’s decision to issue a conditional use permit allowing a smaller setback for a wind turbine than what was required under the ordinance. The board’s decision, which a Wisconsin appeals court upheld in Roberts v. Manitowoc County Board of Adjustment, 721 N.W.2d 499 (Wis. Ct. App. 2006), was based on a county ordinance concerning the siting of wind turbines. In Roberts, the ordinance authorized the board to issue a variance in certain instances.
In addition to local land use restrictions, projects often face significant opposition from a number of other sources. Environmental concerns are likely to pose an issue in the permitting phase. Opponents may point to the danger wind turbines pose to migratory birds and other avian species, or they may argue that construction will impact ground water quality. In addition, opponents also may bring challenges marshaled under state and local historical preservation laws.
Neighborhood organizations and adjacent landowners sometimes challenge wind facilities based on safety grounds. In response to claims of potential “ice throws” from turbines during the winter, NYSERDA posts on its Web site two statements from insurance companies stating that neither was aware of any claims of injury or property damage resulting from falling ice. Additionally, neighbors may point to restrictive covenants as a basis for barring construction.
With permits and approvals in hand, a developer may commence construction. Depending on the number of turbines and overall scope of the wind farm, this process can take up to a year. With the construction of the turbines and interconnection facilities complete, the property owner should expect to begin receiving royalty checks from the project shortly thereafter.
Once the turbine is placed into service, there is still a possibility of complaints by adjacent landowners concerning the operation of the facility. A potential complaint may arise from the noise created by wind turbines. Turbine manufacturers have made tremendous advancements in reducing the noise from rotors. Nevertheless, there have been several reported cases addressing private nuisance claims concerning wind generators on neighboring properties. For example, in Rassier v. Houim, 488 N.W.2d 635 (N.D. 1992), the North Dakota Supreme Court affirmed a lower court’s dismissal of a nuisance claim based on the noise produced by a wind generator. However, in Rose v. Chaikin, 453 A.2d 1378 (N.J. Super. Ct. Ch. Div. 1992), a New Jersey appellate court reached the opposite conclusion and granted an injunction to stop the operation of a “wind mill” found to be unreasonably noisy. While both cases appear to address noncommercial wind turbines, they illustrate a possible issue facing wind projects. To ensure that your client’s royalty payments are not jeopardized by such an action, it is advisable to include a provision in the agreement stating the maximum permissible noise level from the turbines, including regular testing.
Mustafa P. Ostrander
Business Law Today
Volume 16, Number 6, July/August 2007
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