Wind Energy in Van Wert County Part Deux: Challenges

January 27, 2009 at 8:00 am 4 comments

On Monday, January 26, I attended another large-scale wind energy meeting in Van Wert.  The meeting featured Ohio Farm Bureau’s Dale Arnold as well as Iberdrola Renewables Wind Land Consultant Dave Dickson.  This post is more or less a followup to one of the first posts I did on wind energy (click here for that post).

There are essentially two major companies shopping wind leases in Van Wert, Iberdrola Renewables and Horizon Wind Energy.  Since Horizon Wind Energy was not at this meeting (due to an unavoidable conflict) I’ll focus on Iberdrola Renewables.  The company is based in Spain and has developed 29 windfarms in the U.S.

Iberdrola Renewables has one project in the area, “Blue Creek Wind Power Project”, with a stated goal to secure 40,000+ acres for wind energy turbines.  Mr. Dickson provided a general overview of the project, which is very similar to the Horizon Wind Energy project.  Both companies are looking to sign contracts with landowners in Tully and Union townships (northwest and northcentral Van Wert County), as well as parts of Paulding County and Allen County, Indiana.

If all conditions are met, Iberdrola Renewables has a timeline indicating that construction may start by 2010 with all turbines operational by 2011. Payments are similar to Horizon Wind Energy, providing $5,000+ per year to a landowner (assume one 1.8-2MW turbine for 80 acres).  Lease period is 30 years with an option for an additional 20 years.

I see a few challenges, and I’m not quite clear how these challenges will be met.  The issue of checkerboarding could present a significant obstacle to overcome. Checkerboarding is a term used in land development to describe what happens when two (or more) companies work independently and in competition to sign land contracts.  For example, two side-by-side land parcels could each have a contract signed by a different wind energy company.  From what I understand, if one wind energy company develops a large scale wind farm the competing company(ies) may leave the area and look eslewhere without building a single turbine.  The problem is that leases are typically not exchanged or purchased between the wind energy companies.  Therefore, if you sign a lease with the ‘wrong’ company you may not get any turbines.  Checkerboarding has already occurred in Van Wert County.  As I looked at the map provided by Iberdrola Renewables, I could identify areas of relatively close proximity where both Iberdrola Renewables and Horizon Wind Energy have lease contracts.

The current process seems to be lacking in community planning.  In a community planned system, parcels could be identified and leased by a single entity.  This single entity could represent one, two or more wind energy companies.  The goal being to unify the land development process so that maximum financial benefit is achieved for all parties: landowners, neighbors, school systems, community and the wind turbine companies.  A locally owned project may also alleviate the issue of checkerboarding.

ADDITION (February 2, 2009):

Dan Litchfield, Business Developer for Iberdrola Renewables provided some very helpful clarifications-

  • Heartland Wind, LLC is 100% owned by Iberdrola Renewables, Inc.
  • The LLC company form is used by us primarily to help organize our nationwide leasing efforts. We have separate legal entities for our west coast development and east coast development.
  • Another major wind developer, NextEra Energy (fka FPL Energy) also has a leasing subsidiary called Heartland Wind, LLC, but it is registered in a different state and is a totally separate company
  • If any landowners are uneasy about leasing to Heartland Wind, LLC, we are happy to add on their contract that Heartland Wind is a wholly-owned subsidiary of Iberdrola Renewables, Inc. Also, later this year we may prepare leases directly with Iberdrola Renewables, Inc.
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4 Comments

  • 1. Rod Eagleson  |  June 18, 2009 at 12:18 pm

    FYI- I found this artilce for your review. Some one needs to protect the interest of the farmer.

    The Wind Energy Game and Protecting Farm Revenue Rights

    The old saying goes, “Bulls make money, Bears make money, and Pigs get slaughtered”. In today’s farming environment, market volatility speaks volume and rules on how to play the game define everything, especially profit and loss. As farmers, we play the game everyday with the commodity market.

    However, within the agricultural industry, there is a new game in town, being wind energy. The key issue is how, as farmers, we can make money in the wind energy game if we do not know the rules. Specifically, who will win with this part of the “Green Energy” boom? Will it be the developer, the utility companies, the landowner, or consumers?

    Most recently, in 2008, the American Wind Energy Association (AWEA) reported that the US dethroned Germany as the world leader in wind generating capacity. This market boom has developed into the hottest ticket for property owners and economic development. Many large commercial wind farms now dot the American rural landscape.

    Wind developers are currently actively courting farmers and landowners for land leases to install wind farms. Many of these companies are currently in a feeding frenzy mode for buying up lease agreements at low rates (i.e. option contracts) for the future development of large-scale wind projects. Thus, landowners should exercise caution and understand all aspects of the wind energy game before entering into any agreements. A few of the things a landowner should consider:

    • All contracts are negotiable, but most developers come with a “take it or leave it approach”. Thus, a landowner should know, especially groups of landowners working together, that a better deal can be negotiated.
    • Almost all wind energy contracts are written to progressively protect the developer and include lengthy contract requirements, often 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 payback period for a wind turbine is 9 to 11 years, just about the time the manufacturing warranty expires. However, most wind contracts are written to last 60 plus years.
    • A landowner should ensure that fixed or royalty payments adequately increase with the proper rate of inflation. Some contracts use the Consumer Price Index (CPI) to forecast future revenue increase. This representation does not adequately gate the rate of inflation over time.
    • Many contracts do not include provisions for project end and equipment destruction.

    Lastly, landowners need to understand what rights they lose under these agreements. Some terms to watch out for:
    • Confidentiality clause: prevents the landowner from discussing with other area landowners or the release of preliminary wind collection data for future use.
    • Length of the lease clause: limits or extension rights will limit the ability of the landowner to enter into new agreements new developers.
    • Compensation clause: There are many payment options, tax consequences, renewable energy credits, and tax credits that pertain to the compensation. A landowner must know all forms of compensation available so as to not leave money on the table.
    • Assignment clause: permits the developer to sell or transfer lease rights to another party. So, a landowner has no idea who they may be dealing with in the future.
    • Choice of law/Venue: Makes it so any disputes or litigation must happen in whatever state the developer chooses. How would you like to be an Indiana resident forced to bring legal proceedings in a state far away?

    Perhaps the largest drawback to a long term lease, whether it be for wind, oil & gas, or other, is the cloud it puts on the title of the land. Such clouds can make transferring of the property very difficult. A landowner may find themselves spending large sums of legal fees getting the title unclouded.

    Lastly, when faced with wind energy leases, it is wise to consult with an attorney who is knowledgeable of the industry so as to broker the best deal possible. A skillful attorney often times can negotiate a deal for a landowner that pays the cost to hire the attorney several times over. Most importantly, take note that the developers have armies of attorneys who have drafted the agreements and handle their legal affairs. Going up against such without legal counsel of your own is like going into battle with plastic sword; you just won’t get very far.

    John J. Schwarz, II, is a farmer and attorney in Steuben County, Indiana. He focuses his practice on agricultural law and legal issues important to farming communities. He can be reached at 260-665-9779 or jschwarz@cresslaw.com. These articles are for general informational purposes only. If you have a specific legal question, you should consult an attorney.

    • 2. andykleinschmidt  |  June 18, 2009 at 3:05 pm

      I agree with many points the author, John Schwarz, makes in the article. I am particularly bothered by the “30 + 10 + 10” clause in the contract. This cause gives the contractor the right to option the lease for two additional 10 year periods. There is no provision for the landowner to opt out after the initial 30 year contract. As such, I have been cautioning folks that they are signing up for a 50 year lease. Good points all around, thanks for sharing.

  • 3. Rod Eagleson  |  July 28, 2009 at 2:20 pm

    FYI – Here is another article that I wrote for “Farm World” on wind power.

    Any questions, call me at 574-3401248.

    Rod Eagleson
    EHS Energy
    1413 Garden St
    Kendallville, IN 46755
    Cell 574-340-1248

    Current Wind Power Trends and 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, framers 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 countermeasre 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 happen 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 and 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.

  • 4. Lease Vans  |  August 13, 2009 at 5:57 am

    Hello. Nice article. All must read this article to gain knowledge all about in this topic. I really agree to what John Schwarz said in this article. Thanks and have a nice day. :)


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