As more and more people realize the importance of switching to alternative energy, wind farms become more and more popular. If you want to generate electricity, the wind is one of the best sustainable resources.
However, to generate power, you need to construct wind power turbines that will convert the kinetic energy into electricity. Having a single turbine is usually not enough so companies and individuals install multiple turbines. A set of turbines is called a wind farm, and in this article, we will consider some important aspects of building a wind farm, including the legal issues.
Usually, wind farms are located near the ocean or across the landscape because the success of a wind farm to a large extent depends on the location. The winds should be strong and steady.
However, even if you choose the right location and design a wind farm that meets all the environmental standards, you should also make sure that you have all the necessary documents. Building a wind farm is not an easy task.
You must have the necessary infrastructure, estimate possible risks, plan costs, and obtain the necessary permissions. Nevertheless, harnessing wind energy is rewarding. In the U.S. alone, wind power helps avoid the release of 62 million tons of greenhouse gases annually. Besides, it also helps save about 20 billion gallons of water.
Tax Credits for Wind Farm
In the U.S., wind farms might pay production tax credits on the electricity output. These credits can only be claimed on the electricity that has been sold to unrelated parties during the first 10 years after a wind farm started to operate. Currently, the production tax credit is 1¢–2¢ per kilowatt-hour, and this amount is changed annually based on the inflation rate.
The contract for construction should be binding on the parties even before the work actually starts. If you have a right to cancel the contract, it must include a termination fee, which must be at least 5% of the remaining price of the contract. Make sure that all subcontracts are also binding so that it will be possible to evaluate physical work. According to the U.S. tax rules, the project must be completed within four years after the construction started, or you will have to prove continuous work. Sometimes, developers try to get more time to buy more time for projects where physical work has already started. In this case, they discard the physical work and start over. However, they must have clear business reasons why they haven’t used previous work.
Contracts for Wind Farm
Power purchase agreements constantly evolve. They become short-term but get longer merchant tails. Owners should rely on uncontracted revenue, and many companies create tracking accounts so that they can determine to what extent the price for electricity described in a contract exceeds the current market price. Customers get the overage.
Many contracts include provisions regarding the change of control. In this case, it’s important to determine whether the potential buyer can be considered an exception. The transaction may also require the consent of the buyer of electricity, and you should keep in mind that such consents can take time to get.
There are also many wind projects that don’t have traditional power contracts. In this case, the power is sold to the local grid. Owners rely on swaps or hedges to support the electricity price so that such projects can be financed. The most common types of hedges are virtual PPAs with corporate off-takers, which are financially settled so the volume corresponds to the actual output, fixed-volume price hedges, where fixed outputs for each period are hedged, and proxy revenue swaps, where you can hedge price and weather risks.
You need to analyze hedges carefully before making a choice.
We recommend that you figure out whether a certain hedge is financially and physically settled, and what credit support is required by the hedge counterparty. Electricity is sold to the grid at a floating price determined at a node on the grid. The hedge counterparty gets a floating amount and pays a fixed price. The project under the hedge pays a floating price determined by a hub. Hubs are different from nodes, and the difference in price can reach up to $14 per megawatt. For instance, this is the case in the Texas panhandle. This difference in price is called basis risk.
Land Agreements for Wind Farm
Most often, developers choose not to buy land but to use easements on the property. There are different types of land easements, which is a reason why landowners often get confused. The majority of easements have some common features. However, landowners may deal with different lengths of contracts, financial terms, and protections.
Quite often, landowners are not familiar with the standard contract terms in the wind industry, which is why we recommend that you do your research and check out examples of standard contracts on the internet.
Sometimes, landowners can check a template agreement. The use of pre-approved agreements, however, is not necessary. Developers can have different opinions on how a particular type of easement should be financed. The standards and requirements regarding easements constantly change depending on the latest judicial decisions so landowners and developers often have to renegotiate easements. However, there are some features that different guidelines and easements have in common.
- Landowners should know that standard operational periods in most locations are 30-40 years. Although longer periods are not prohibited, they need additional consideration.
- Feasibility, evaluation, or option periods must be reasonable. In most states, five to seven years are common periods but they can increase in some areas, such as California or Northeast. An additional option period should involve higher compensation.
- Landowners shouldn’t have legal liability for the work done by a project owner or developer and vice versa.
- Decommissioning is the project owner’s responsibility unless the landowner doesn’t agree with this. The agreement should include all the details regarding this issue. It’s also appropriate to include a specific pledge of funds for decommissioning but it must be reasonable. If the landowner fails to remove the facility, the decommissioning funds should be paid to them first, and then to the jurisdiction, if the landowner doesn’t take action.
- If the easement includes royalties or production-based payments, the landowner should have a right to check the necessary documentation, and the project owner should make sure that the records are accurate.
Environmental Permits to Build Wind Farms
Environmental permits depend on the ownership of the land where a wind farm is constructed. The land might be private, federal, or state-owned. If your project is located on state or private lands, the developer should consult the state agency that protects animal species and plants at the beginning of the development process. Such agencies may require you to collect some data to formulate their opinion. If you’re dealing with federal lands, there will be federal agencies like the U.S. Fish and Wildlife Service and federal regulations like NEPA.
Developers should hire botanists and biologists that must assess the site. This stage is called the fatal flaw analysis. Professionals should identify any sensitive species, analyze the area, and talk to local experts. The developers can use the materials from fatal flaw analysis when working with federal and state enforcement agencies to understand whether or not there’s any need for further studies. Developers may also conduct studies associated with historic and archaeological preservation. Although such studies don’t involve local permitting authorities directly, they may require you to provide these materials as a part of the local permit application. In some cases, you may also need to provide a letter from the state agency with comments on the project.
Representations and warranty insurance becomes more and more common when people purchase wind farms. Sellers often suggest that buyers rely on this insurance to avoid claims against sellers. If a bidder offers to purchase R&W insurance, it can improve its position in a competitive auction. R&W insurance can also help if a seller becomes a part of the management team. The cost of the insurance is usually below 3% of coverage limits. Usually, the buyer pays for the insurance, but sometimes, the seller and the buyer may split the cost.
An R&W policy can be bound even in a week. However, two or three weeks are more common. It may also take longer if you’re dealing with a large portfolio that requires a lot of diligence. During the underwriting phase, the underwriter should review the agreement between a seller and a buyer, along with due diligence memos or reports. “Usually, the underwriter may want to contact the buyer or their advisors to consider the diligence in more detail. Obviously, you should prepare for this call,” explains Ann Graham, an in-house counsel at a writing services review website Pick The Writer.
If you’re going to construct a large wind farm, the permitting process might take a lot of time. However, it won’t be too complex. Usually, such projects involve the special use or conditional permitting process. Developers are responsible for getting the necessary federal, state, and local permits, and they should also comply with the development standards. The planner should coordinate the whole process and make sure that both developers and local authorities understand the standards. Developers may not know about certain standards used in a particular state. Local officials and developers should agree on the impact mitigation and development standards during and after the construction process through a development agreement or list of conditions.
Now let’s take a look at the legal document checklist. Large wind farms require a lot of documentation from federal, state, and local sources. For instance, the permitting documentation might include:
- Landowner lease-agreement documentation
- A plan and site map of locations of turbines and other structures, utility infrastructure, roads, tree cover, etc.
- Environmental permits, including stormwater management and erosion control permits from state departments
- Lighting plans and FAA approvals
- Utility interconnection agreements
- Highway access permits from the state department of transportation
- Road condition repair and inventory agreements
- Wildlife impact monitoring agreements and impact studies. Usually, they are coordinated with the USFWS (U.S. Fish and Wildlife Service)
- Noise studies
- Shadow flicker analysis
- Decommissioning plans
- Viewshed or visualization studies
When purchasing a wind farm, you should make a number of government filings. Usually, filings are voluntary but not filing can lead to the government forcing your investment to be unwound later. Keep in mind that deals that involve critical infrastructure or critical technology can be subject to mandatory filing because they are subject to heightened scrutiny. If you’re going to locate your wind farm on farmland, a filing may also be required by the U.S. Department of Agriculture. “If you’re a foreigner, you will be required to report transfers of interests according to the Agricultural Foreign Investment Disclosure Act,” notes Adam Barnett, an in-house attorney at writing services review website Writing Judge.
The Federal Energy Regulatory Commission may also require a section 203 filing. Such filings are necessary to transfer any existing wind farm that is at least 30 megawatts in size. If there is a transfer of 10% of the direct or indirect interests, you’re obligated to file. Jurisdictional facilities that require such filings include interconnection facilities and similar physical assets, as well as on-paper facilities, like a FERC-approved tariff. Usually, the FERC clears transactions in 30 to 60 days.
You should also keep in mind that the Hart-Scott-Rodino Act requires you to notify the U.S. Department of Justice and the Federal Trade Commission if your transaction exceeds a certain size. This size is adjusted every year depending on the gross national product. Currently, filing is obligatory if a transaction exceeds $90 million, one of the parties has total assets or annual sales of $180 million or more, and another party has total assets or annual sales of $18 million or more. There are also many exemptions that may apply to wind farms. For instance, the exemption for unproductive real property applies to wind farms at the development stage.
Although constructing or purchasing a wind farm is a time-consuming process, you won’t have any problems if you prepare for it. We hope that our detailed list of legal documents and tips will help you obtain all the necessary permissions and contribute to the development of sustainable energy.
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